Hunting Value in 5 Red Hot Chinese Stocks

by: Vatalyst

Chinese internet companies were a hot topic in the market for some time back as these companies offer services in the world’s biggest internet market at the moment. Internet user growth in China is increasing at very rapid speed and internet sales are likely to reach $150 billion by fiscal year 2015. Total users went up to 485 million this year, at a growth rate of 6.0%, which is highest in the world as noted by Economic Times.

In addition to that, there seems to be a wide gap between demand and services of online businesses in China. Here is the reason: The annual value of the e-commerce market in China is expected to reach $305 billion in the next four years, four times the current value. These impressive figures may be the reason why investors are taking interest in Chinese e-commerce companies and few other IPOs. However, there are risks involved. Initial price spikes for many of these IPOs were quickly met with selling pressure. Based on the above mentioned facts about China’s internet market, long term investors might consider the stocks analyzed below. My analysis of several key Chinese internet companies is as follows:

E-Commerce China Dangdang Inc (NYSE:DANG): E-Commerce China Dangdang is an e-commerce company in China with a reputation as the largest book retailer in the country. After its initial price surge at the time of IPO, DANG saw a continuous decline in its price. As of September 22, DANG traded around $6, down by more than 50% when compared to its offering price of $16. In addition to that, the stock was included in the list of ‘threshold securities’ for a consecutive fifty days. On the other hand, the second quarter results were impressive with a 53% increase in net revenue. The company also introduced a new iPhone application during the same time period. Considering China’s internet market, the investors might consider this stock worth keeping an eye on in the long term. Inc (NYSE:YOKU): is an internet television services provider in China that offers web video content. In my investigation, I have concerns that some of its content may be pirated and in violation of U.S. (and possibly Chinese) copyright law, though I give the company the benefit of the doubt. This is something investors ought to look into. The stock performance is quite similar to the other Chinese internet companies at the moment. As of September 21, 2011, YOKU went down to around $18 per share and lost over 5% of its value at the beginning of the week compared to its peer (NASDAQ:SOHU), the broader search site, which went down by around 2%. The stock lost almost 35% of its value in the last month. Fundamentally, however, the company is witnessing revenue growth of almost 100% at the moment and the company is expected to generate positive earnings in the coming quarters, according to analyst estimates. This may be due to the recent unique agreement between YOKU and DreamWorks Animation SKG, (NASDAQ:DWA) for the rights to the KungFu Panda films in China. If investors are looking at a company future prospects, YOKU looks promising in the long term.

SINA Corporation (NASDAQ:SINA): SINA is an online Chinese company providing MVAS (mobile value added services) in China. SINA is considered the "Twitter" equivalent in China, and the stock remains strong compared to the other internet companies in China. The company's second quarter results for fiscal year 2011 were reasonable, with revenue growth of 20%. However, a drop of 1% in the gross margin was a concern, which went down to 57%. This figure is also low when it is compared to 73.59% for (SOHU) and 80.8% for Baidu (NASDAQ:BIDU).

High volume trading was witnessed during the last week with maximum price of $113.98. However, the stock has dropped significantly this week. Overall, the stock seems to be strong, offering upside potential of 12% by year's end based on valuation current estimates.

Tudou Holdings Ltd (NASDAQ:TUDO): Tudou Holdings is an online video company. By way of analogy, it operates in a similar way to TUDO announced its IPO on August 17, 2011 and the ADSs began trading on Nasdaq that day. It cannot be considered a winner, as the stock closed at $25.56 on the first day of its trading, well below its initial offering price of $29.

As of September 22, the stock traded around $22 losing 10% of its value from the first day of trading. Looking at the current scenario for the latest IPOs of the Chinese companies, the stock may follow a downward trend in the near future. Thus, with TUDO, a cautious approach is recommended to investors.

Baidu Inc (BIDU): Baidu offers internet search services in China and, as the largest operator, is considered the Google (NASDAQ:GOOG) of China. The stock looks strong when compared to its peers and direct competitors in the industry. With gross margin of more than 80%, BIDU is on the top among its competitors and well above the industry average margin. It also means that the company is in a position to invest its earnings on new projects that have bright prospects. It is evident from the company's international expansion over the years and $306 million acquisition of a major stake in Information Technology , a Chinese travel site, that BIDU is looking for growth. In addition to that, an IPO of is also expected in the next year. This could benefit BIDU shareholders from an accounting standpoint.

As of September 22,, BIDU traded around $140. The stock is trading at price to earnings multiple of 66 with an annual EPS estimate of $2.91. The only concern about the stock is the uncertainty of the government regulations in China. At current levels BIDU offers handsome capital gain of above 25% to its investors on risk adjusted basis. However, Chinese regulations and restrictions on search and internet sales, as well as uncertainty in enforcement of those rules continue to plague China's still-nascent search industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.