Don’t Miss the Chinese Internet Mega-Trend

by Jim Woods | May 6, 2013 10:23 am

Investors are always on the hunt for the next mega-trend.

Mega-trends are the massive developments that change the game for entire industries. Along the way, they create hoards of wealth for investors who are savvy enough to recognize the trend and buy stock in the industry’s best companies.

China has been a mega-trend hotspot for about a decade, and despite a few struggles in recent years, the world’s second-largest economy is still ripe for investing opportunities. Right now, one of the biggest opportunities is in Chinese Internet stocks.

For a little context on how big this potential market is, consider that according to figures from the China Internet Network Information Center, the number of Internet users in that country was 538 million in 2012[1]. That figure represents an increase of more than 11% from 2011.

To put that number into perspective, consider that the entire U.S. population is only about 316 million. That means there are 70% more people on the Internet in China than are living in the U.S.

What’s even more compelling is that China’s Internet penetration rate is estimated to be about 40%, which means there is huge room for continued growth.

Several companies are vying for control in the Chinese Internet space — many of them with familiar U.S. counterparts. For example, “China’s Google” is search engine firm Baidu (NASDAQ:BIDU[2]) — though it’s coming under fire from upstart Qihoo (NYSE:QIHU[3]). “China’s Twitter” is run by Internet giant Sina (NASDAQ:SINA[4]), and “China’s Facebook (NASDAQ:FB[5])” is the province of social networking firm Renren (NYSE:RENN[6]).

These stocks are poised to grow exponentially over the next decade, and if you’re a long-term investor looking to ride the Chinese Internet megatrend, these are companies you should have on your watch list.

Other big players in the Chinese Internet space include mobile content and advertising firm Tencent Holdings (PINK:TCEHY[7]), diversified e-commerce and online gaming provider Sohu (NASDAQ:SOHU[8]), online dating website Jiayuan International (NASDAQ:DATE[9]) and online game maker Shanda Games (NASDAQ:GAME[10]).

In China, Internet access — particularly online gaming — is all about the mobile platform. That means mobile Internet service providers such as China Mobile (NYSE:CHL[11]) and China Unicom (NYSE:CHU[12]) are in a position where they too could see immense growth over the next few years.

For investors, it’s helpful to take a little step back from the day-to-day, week-to-week and even month-to-month machinations in Chinese stocks and focus more on the broader mega-trend in place.

If we look at things from a demographic and technologic growth perspective — two key ingredients that drive mega-trends — it’s easy to see the opportunity that most of these companies have.

Global smart money will likely find its way into these stocks as investors search for mega-trend-style alpha. That’s a tailwind for these stocks that can make you a lot of money if you’re prescient enough to begin building positions in the better companies.

Of course, the question now becomes which stocks represent the best?

For my money, I like Sohu, Sina and China Mobile. All three represent different areas of exposure to China’s Internet, and all three are dominant players in their respective space.

If you’re looking to build a watch list based on this mega-trend, start with these three stalwarts.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

  1. the number of Internet users in that country was 538 million in 2012:
  2. BIDU:
  3. QIHU:
  4. SINA:
  5. FB:
  6. RENN:
  7. TCEHY:
  8. SOHU:
  9. DATE:
  10. GAME:
  11. CHL:
  12. CHU:

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