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Major Chinese Internet companies haven't fared that well in the last two years, losing a big chunk of their value. Baidu (NASDAQ:BIDU), for instance, is down 40 percent, Sina (NASDAQ:SINA) down 60 percent, and Renren (NYSE:RENN) down 85 percent.

While part of the decline can be attributed to a sluggish performance of the Chinese market - iShares FTSE China (NYSEARCA:FXI) is down 18 percent over the same period - Chinese Internet companies had their own specific problems. Most notably, the majority of these companies suffer from a lack of profitability, and some had problems with regulators both in China and the U.S. that scared the momentum investment crowd away.

Alibaba-Sina's latest $586 million deal whereby Alibaba Group purchased an 18 percent stake in Sina's Weibo micro-blogging service - something like the Twitter of China - may be a game-changer for these stocks, as it confirms that there is plenty of value in the sector. What should investors do?

Be selective. Buy companies with sound financials, like Baidu and Sohu (NASDAQ:SOHU), in addition to Sina, but steer clear of companies with shaky financials like E-Commerce China Dangdang Inc. (NYSE:DANG), Renren Inc., and Youku (NYSE:YOKU) - see two tables below comparing the financials of all six companies for April 2013 and August 2011.

Here is a list of the most active Chinese web companies in late April 2013:

Company*

Business

Forward P/E (Dec. 2014

Operating Margins

Baidu, Inc.

Internet search engine

12.71

46.52 (%)

Sina Corp.

Media and mobile value-added services

36.19

22.30

E-Commerce China Dangdang Inc.

Business -to-Consumer e-Commerce

--

-9.42

Renren Inc.

Social Networking

--

-52.09

Youku

Internet TV

15.62

-25.02

Sohu.com Inc.

Brand advertising, on-line gaming

14.82

23.15

*These statistics should be interpreted with caution, as Chinese accounting standards are different from those of the U.S. - so they aren't comparable with those of their U.S. counterparts like Amazon.com (NASDAQ:AMZN) and Google (NASDAQ:GOOG).

Source: Yahoo.finance.com

Here is a list of the most active Chinese web companies in early August 2011:

Company*

Business

Forward P/E (Dec. 2012

Operating Margins

Baidu, Inc.

Internet search engine

30.88

52.18 (%)

Sina Corp.

Media and mobile value-added services

51.54

22.30

E-Commerce China Dangdang Inc.

Business -to-Consumer e-Commerce

121.57

0.32

Renren Inc.

Social Networking

187.50

5.42

Youku

Internet TV

1,312

-20.41

Sohu.com Inc.

Brand advertising, on-line gaming

13.29

37.50

Source: Yahoo.finance.com

The bottom line: There may be some value left in China's Internet companies, but investors must discover it the old way. Hype should never be a substitute for due diligence.

Source: Is There Any Value Left In Chinese Internet Stocks?