Top 10 Chinese Internet Stocks: Comparing P/E Ratios

Chinese internet stocks are the most dynamic segment among U.S.-traded Chinese stocks: In Baidu (BIDU), Ctrip (CTRP), and Sina (SINA) , investors have found the "Chinese Google (GOOG), Expedia (EXPE), and Yahoo (YHOO)." Online gaming companies such as Shanda (SNDA) and NetEase (NTES) have demonstrated the brilliant Chinese way of making money from video games.

This article compares the P/E ratios of 10 largest U.S.-traded Chinese internet stocks with at least $1 billion market cap (see table below), and discusses implications for investors.

Table: Top 10 Chinese Internet Stocks' P/E Ratios and Growth Rates

Source: Yahoo! Finance and Google Finance

The table above ranks 10 largest U.S.-traded Chinese internet stocks by P/E ratio, and lists their annual earnings growth for the next five years predicted by investment banks. The P/E ratio reflects two factors about a stock: potential growth and investment risk. Typically, a high P/E means high growth and low risks.

Key Findings

Baidu is the clear leader of the group. Ranking first in both P/E and growth, Baidu is a typical "high growth, high P/E" stock. What investors expect from Baidu is mainly lots of growth in the future. Adding to the high growth is Baidu's dominant 70%+ market share in China's internet search market. Baidu has maintained this dominance since it went public in 2005. Baidu's high growth and stable market leadership have won it the highest P/E among the top 10 U.S.-traded Chinese internet stocks.

Ctrip's second highest P/E seems to be inconsistent with its modest growth rate. However, its stock chart shows something other Chinese internet stocks do not have: a four-year uptrend with very low risks prior to the global financial crisis. Ctrip's excellent track record of "safe driving" has won investors' confidence. As the Chinese economy recovers, investors are betting that Ctrip will once again become a safe China play.

Online gaming companies' growth potential has not been fully recognized by investors because of its risks. Although accounting for six of the 10 positions in the table, none of the online gaming stocks ranks among the top three. Notably, Perfect World (PWRD) and Changyou (CYOU) rank high in terms of growth potential, but their P/E ratios merely rank in the bottom half. These inconsistencies show that investors believe online gaming is riskier than internet search (Baidu), online travel booking (Ctrip), and online advertising (Sina).

Despite the high growth rates estimated by brokerage firms, investors are concerned with the regulatory and product risks involved in the online gaming business. The recent regulation on virtual currencies is a perfect example for such risks.

Disclosure: No positions

Comments

[anonemouse:]

As much as I am a believer in the long term opportunities of the Chinese economy and the short term risks associated with a forced liquidity faked recovery, I have trouble with this statement:

"The P/E ratio reflects two factors about a stock: potential growth and investment risk. Typically, a high P/E means high growth and low risks. ".

Low risk are you serious? Btw I've held BIDU since early March so I am not adverse to Chinese stocks that have good future potential and are *under valued*. My interpretation of the phrase low risk in this context is:
- The stock price at this level has a low risk of decreasing

The PEs of some companies on the Shanghai and Hang Seng exchanges are at really high multiples, guess the author would see this as impling minimal risk. A word of caution do not drink the kool-aid being supplied in doses by Xinhua. From an economic perspective the 21st Century will 'belong' to China, but now is not the time it will take years to transform from a low margin export driven economy to a mixed economy.

But putting that aside BIDU is a great leading technology company, but at its current PE I would say it is risking opening up a position at this level.

A.

Jul 15 08:36 PM

[Alphameister:]

Anonemouse: There are many types of risk associated with an individual stock: economic, market, industry, debt leverage, etc. I believe the author's point is that investors are typically more willing to accept a high p/e when they see low risk of the stock disappointing with its earnings due to industry factors, debt risk, etc.

Jul 16 12:41 AM

[Glen Bradford:]

I agree with Anonemouse.

Risk comes from overpaying in the land of investing. By definition, the more you pay for a dollar of earnings, the more you are betting that it will outgrow anything else.

BIDU is significantly more risky than other investments out there, such as.. SOHU.

I don't think the author really has a point. I think he just found some stuff and wrote some stuff... and now, there's some stuff on this page.

Jul 16 01:40 AM

[anonemouse:]

Exactly Glen. The only way to mitigate the various risks is to buy something cheaply by whatever combination of metrics one chooses based on Earnings, Book, Sales, FCF etc.

In regards to Alphameither's statement I do understand why people accept higher multiples on a stock, but I would love to see the evidence that a high PE implies low risk in regards to as the author put it the 'investment risk'.

Here's another gem in regards to CTrip: "its stock chart shows something other Chinese internet stocks do not have: a four-year uptrend with very low risks ".

The chart shows share price going up and the author is correlating this with risk? The statement implies price going up means low risk, i.e. the fact it has went up in the past means it is at low risk of dropping in future. Yeah right.

I actually like CTRIP medium term prospects too but the author should seriously do some reading on the definition of risk and investments, and look beyond prices going up and high PEs.

A.

Jul 16 02:26 AM

[ArtfulDodger:]

I agree with most of the commentators that a high PE certainly does not represent low risk.

But I also agree with Buffett/Munger that a PE ratio most often is a popularity contest ratio: as a rule, the higher the more popular; the lower the less.

Jul 16 08:52 AM

[Xiaofan Zhang:]

Thanks guys for your comments!

On the topic of "high P/E means high growth and low risks", let's put it in context: The table in my article shows CTRP's growth potential is similar to that of SINA, SNDA, NTES, and lower than that of PWRD, CYOU, SOHU. But CTRP's P/E ratio is much higher than the P/Es of these six peers. The reason is: investors believe CTRP involves lower risks. In this case, CTRP's high P/E implies low risks perceived by investors.

Having said that, I admit that my original sentence "high P/E means high growth and low risks" was incorrect. It should have been "high P/E means high growth or low risk, or both".

anonemouse was correct in pointing out the potential risks involved in some high-P/E Chinese stocks. I think in this case, investors who have pushed up these stocks' valuation believe the risks are reasonable after taking into account the potential growth and returns. The market may be wrong on these stocks, but this is what the market is believing now. We may disagree with the market, and we may even be able to achieve good returns by betting against the market.

Xiaofan


On Jul 16 02:26 AM anonemouse wrote:

> Exactly Glen. The only way to mitigate the various risks is to buy
> something cheaply by whatever combination of metrics one chooses
> based on Earnings, Book, Sales, FCF etc.
>
> In regards to Alphameither's statement I do understand why people
> accept higher multiples on a stock, but I would love to see the evidence
> that a high PE implies low risk in regards to as the author put it
> the 'investment risk'.
>
> Here's another gem in regards to CTrip: "its stock chart shows something
> other Chinese internet stocks do not have: a four-year uptrend with
> very low risks ".
>
> The chart shows share price going up and the author is correlating
> this with risk? The statement implies price going up means low risk,
> i.e. the fact it has went up in the past means it is at low risk
> of dropping in future. Yeah right.
>
> I actually like CTRIP medium term prospects too but the author should
> seriously do some reading on the definition of risk and investments,
> and look beyond prices going up and high PEs.
>
> A.
>
>
>
>

Jul 16 02:15 PM

[BGRT:]

Mr Zhang is absolutely correct. When earnings are inconsistent, investors discount the valuation, i.e. lower multiples. Perhaps the author could share his opinion on other Chinese stocks, like HMIN.

Jul 18 12:54 AM

[Zoltan L. K...:]

SOHU looks solid from a financial and a product/market perspective.

Aug 05 10:58 AM