3 China Internet Stocks That Appear Set for an Emerging Short Squeeze

Includes: DANG, QIHU, YOKU
by: Cindy Reed
For several years, China has dominated the world’s Emerging Market status in many areas, and is especially known for expansion in the area of internet technology. China’s internet population recently reached 415.6 million, significantly more users than the entire population of the United States. This quantity represents only 31% penetration of the 1.3 billion people in China (a ratio of 415,000,000 to 1,342,750,000) Internet use continues to grow throughout China as the government assists and encourages every small remote village to have communication via internet and cell phones.
Seeking Alpha author, Prieur du Plessis, presents charts and extensive discussion regarding the current status of China’s Emerging Recovery. His analysis shows that “Japan’s twin disasters in March are severely denting China’s manufacturing sector,” and that “The stronger seasonally adjusted manufacturing PMI for China in May was therefore on the back of the recovery in Japan’s manufacturing sector.” His conclusion is that Japan’s manufacturing sector is now gaining momentum, that the worst for both Japan and China is past, and that the obvious recovery in Japan will provide a “surprise on the upside” for China.
The following leading China internet stocks therefore appear set for an Emerging Short Squeeze. All three have strong market positioning in China that uniquely parallels some of the strongest internet stocks in the USA. All three suffered significant declines in the first couple weeks of June enhancing their recovery potential. All three have high levels of short interest for short squeeze action, especially with Friday’s scheduled options contract expiration cycle.

Qihoo 360 (NYSE:QIHU) is a mixture of internet services. First, Qihoo is the leading anti-virus software company in China with 238 million monthly active users, representing a virus user penetration rate of 83.9% in China. Its 360Safe browser is second in usage to Baidu (NASDAQ:BIDU) and holds a 19% market share. In addition to a browser, Qihoo has a popular web game portal, a group-buying aggregation platform, and recently began providing cloud-computing services and a 360Safe application for iPhone The stock price hit an annual low of $20.10 down 25% from $26.96 the first of the month. Short interest is 30% of float. Also of note is an Analyst upgrade from Stifel Nicolaus on May 20 from “Hold” to “Buy” with a Price Target of $38.
Dang Dang (NYSE:DANG) is the Amazon.com of China. It offers almost 600,000 book titles, other media products and general merchandise including beauty and personal care, home and lifestyle, and baby / children / maternity products. In July 2009 it launched a marketplace program allowing third-party merchants to sell their products alongside the main product offering The stock price hit $10.72, a 47% price decrease from $20.25 the first part of June. Short interest is 33% of float.
Youku (NYSE:YOKU) is the Netflix.com and partially the Youtube.com of China. Its Internet television platform provides over 2,200 movie titles, 1,250 television serial drama titles, and 194 variety shows. Over two-thirds of the content comes from commercial media companies. It also provides a platform to upload home-produced videos similar to the content on youtube.com. The stock price hit $26.77 a 42% decrease in June from $46.20 the first of the month. Short interest is 9% of float.
The extreme decline in stock prices over the last two weeks was not the result of a specific news release or identifiable change in the status of the individual companies, but more a delayed reaction to a four week DOW and Nasdaq decline which extended aggressively into the June month for an additional two weeks. As usual, when the USA markets begin to correct and feel pessimism, then the bear trends flow to all the countries of the world.
In contrast to the unemployment problem in the USA, just yesterday China Daily posted an article indicating nearly 30 percent of employers currently plan to increase their workforce and more than 50% intend to keep their payrolls unchanged. The world recovery has obviously slowed down, and the Japan disasters have had a material impact. However, China, with its large population, still presents the best emerging solution for world recovery, and I am confident will continue to experience strong stock performance from QIHU, DANG, and YOKU.

Disclosure: I am long QIHU, DANG, YOKU.