4 Chinese Internet Stocks Actually Worth Buying

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It is never a good thing when a stock “breaks” its IPO price shortly after the initial surge from its post-IPO fever is over. And that’s exactly what we saw happen with RenRen (NASDAQ: RENN), the so-called “Facebook of China.”

RenRen combines two of the hottest Internet stock concepts: social networking and group purchasing. It operates a large social network in China that is similar to Facebook, as well as a group purchasing site that provides daily deals on local services and cultural events similar to Groupon.

However, as I predicted, the RenRen IPO was too hot too handle. In the past few days, the stock has plummeted down below its IPO pricing of $14 — a steep 40%-plus drop from the $24 high it saw on its first day of trading just one week ago!

This is reminiscent of U.S. Internet stock performance back in late 1999 and 2000. At first, Internet stocks would surge on the first day of trading, and then continue those gains for the months ahead. But about a month before the market top in March 2000, Internet IPOs began to break below their IPO prices, sometimes on the first day of trading.

Game Over for Chinese Internet Stocks?

I don’t think that RenRen’s performance is necessarily a bad omen for Chinese Internet stocks, but it does emphasize the need to pick and choose rather than haphazardly buying just any Chinese IPO that happens to combine a few of Wall Street’s favorite buzzwords.

As I previously mentioned, there were several red flags here, including tepid growth, a lack of user engagement, and competition from more established Chinese Internet companies that has eroded the RenRen’s userbase.

None of this is what investors want to see when shares are priced at such high valuations. In fact, despite selling off more than 40% from its post-IPO high, RenRen still trades at 70 times sales. Compare that with the 25 times sales that Facebook shares fetch in the private markets!

So, rather than spending more time on RenRen, let’s take a look at four other more established and fairly valued Chinese Internet stocks that are likely to hand you significant gains in the next year.

Chinese Internet Buy #1: Baidu.com (BIDU)

Baidu LogoAlthough RenRen is overvalued at the moment, that doesn’t necessarily mean it won’t be a viable investment someday. I say this because Baidu.com (NASDAQ: BIDU) also had a tough time in the first couple of years of its post-IPO existence. It took Baidu a full two years to take out its post-IPO high, but when shares started moving, wow, did they move fast!

In the past five years, BIDU shares are up a whopping 2,100%, illustrating the potential gains to be had in the Chinese Internet stocks. Now, we didn’t get in quite that early to BIDU shares when I launched my China Strategy service, but we still managed to lock in an impressive 368% for our portfolio.

Really, success in the Chinese Internet space comes down to operational performance. Baidu understood their customers better than their competitors, and as a result, the company enjoys a monopoly on the online search business in China today.

Chinese Internet Buy #2: Ctrip.com International (CTRP)

Ctrip.com International (NASDAQ: CTRP)As I said, other more established Chinese Internet stocks offer plenty of growth at much more reasonable valuations than RenRen, and Ctrip.com International (NASDAQ: CTRP) is one of them. CTRP trades at 30 times forward earnings and 15 times sales. This is not a cheap valuation, but it is an outright bargain considering that the online travel company grew revenues at 39.1% and earnings at 58.9% with fabulous operating margins of 36.6%. In addition, China is itself ripe for a tourism boom, and Ctrip is the leading player in a very fragmented market:

  • On average, China’s 1.3 billion people each take just 1.3 trips a year. By 2015, the figure is projected to rise to 3.3.
  • The World Travel and Tourism Council expects the sector in China to expand by an inflation-adjusted 9% a year between 2010 and 2020, the fastest rate in the world.
  • Mainland Chinese made 47 million trips overseas in 2009, a figure that is expected to rise to 54 million this year. By 2015, the government expects 100 million people to venture abroad, making China the world’s biggest outbound tourism market.

Given all of this, I think we will be seeing great things from CTRP for many years to come.

Chinese Internet Buy #3: SINA Corporation (SINA)

SINA Corporation (NASDAQ: SINA)Internet portal company SINA Corporation (NASDAQ: SINA) is not as cheap valuation-wise as some of these other companies, but it does have a promising microblogging angle with a bright future.

Weibo — essentially the Twitter of Asia — continues to grow at an even stronger rate than I had expected just a few months ago. The microblog just achieved 100 million registered users, doubling from 50 million just six months ago, and is poised to surpass Twitter.

In addition, SINA recently launched its microblog PC-based client software, which provides microblog functions and instant messaging, so the company’s services can be used for information dissemination, as well as communication and sharing. I believe that this is a strategically important product for SINA to transform its current microblog into a social networking product, and e-commerce companies will be very interested in this huge user base to collect potential customer behavioral datapoints to develop marketing strategies.

As SINA continues to successfully implement its strategies on the microblog service, I think the share price has upside potential even after the stunning 100% run in the past six months. It is too early to say who will win the micro-blogging war in the Chinese Internet space in the way that Baidu won the search war, but SINA has a real shot.

Chinese Internet Buy #4: Sohu.com (SOHU)

Sohu.com (NASDAQ: SOHU) Another Internet portal Sohu.com (NASDAQ: SOHU) trades at 17 times forward earnings and 6 times sales, while it grew revenues at 34.7% and earnings at 48.8% in the latest quarter.

Although Sohu lags behind Sina in microblog and NetEase.com (NASDAQ: NTES) in online games, what I think sets Sohu apart from the competition is its online video portal. The company focuses on longer video streams, usually entire movies, rather than short clips. The business model here is closer to Netflix Inc. (NASDAQ: NFLX) than YouTube, and users have to pay per view or buy a Sohu membership to watch a movie online. In fact, Sohu’s focus on the online video market has helped take its market share from 3.4% a year ago to 13.4% today.

And Sohu is directly competing with recent IPO Youku.com (NASDAQ: YOKU), a Chinese online video provider that soared more than 160% on the first day of trading. However, Yoku’s current market cap at $5.3 billion is almost 50% greater than the highly profitable Sohu. And even if Youku delivers on its 100%-plus expected revenue growth and becomes profitable, at its current share price it would still trade at a P/E ratio in the hundreds, if not closer to a thousand!

In addition, Sohu has other profitable businesses to fall back and fund its online video ventures, including search, online gaming and advertising. So if online video becomes a moon shot, then Sohu is well-positioned to capitalize and dominate the sector.

Overall, Chinese Internet stocks are not created equal. While some may be overpriced, others offer real potential in the intermediate and long term. The opportunity here is extraordinary, and we’re capturing outsized gains in the China Strategy portfolio as we invest in the best opportunities in the Chinese Internet space.


Article printed from InvestorPlace Media, https://investorplace.com/2011/05/chinese-internet-stocks-to-buy-bidu-ctrp-sohu-sina/.

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