The market correction in the last few weeks has brought many stocks down hard, and in the last couple of weeks, the Chinese Internet stock sector has been one of the hardest-hit. In the past few days, concerns over the possibility of slower growth in China, combined with a report that the United States Department of Justice is investigating accounting irregularities at some Chinese companies, has driven many stocks lower.
A top securities regulator said U.S. criminal authorities are investigating accounting irregularities at Chinese companies listed on U.S. stock exchanges. “There are parts of the Justice Department that are actively engaged in this area,” said Robert Khuzami, director of enforcement at the U.S. Securities and Exchange Commission.
With an already very jittery market, this report was all that was needed to cause some panic-selling. The report does not accuse any of the leading Chinese stocks as being involved in any investigation, and I highly doubt that they are. There have been a number of small Chinese companies that have well-known accounting issues and concerns. This is not new to anyone who has been following the market. The handful of already known cases of accounting irregularities at some Chinese companies has harmed many solid companies with no irregularities.
This has turned into a case of throwing the baby out with the bath water. The sell-off in this sector was so broad and indiscriminate that it appears it could be a capitulation, and that could mean it's time to buy some fast-growing companies at bargain prices now. There is no doubt that with the huge population in China, and continued population growth, the opportunities for some of these companies are enormous. Here are some stocks that have been driven lower and now look cheap:
Shanda Games Limited (GAME)
is trading at $4.21. Shanda is based in China and specializes in massively multi-player online role-playing games. The 52-week high is $7.70, the 50-day moving average is $5.29 and the 200-day moving average is $6.22. GAME has earnings estimates of about 73 cents per share for 2011 and 80 cents for 2012. This puts the P/E ratio at about 6. Compared to other Chinese Internet-related companies, these shares are cheap. Many Chinese companies in this sector have P/E ratios that are significantly higher. This company has a solid balance sheet, with about $588 million in cash, equivalent to about $2.07 per share in cash.
Giant Interactive (GA)
is trading at $3.32. Giant Interactive is one of the leading online gaming companies in China, with popular games such as King of Kings III, Giant Online, and Dragon Soul. These shares have a 52-week trading range of $3.20 to $9.45. The 50-day moving average is $4.54 and the 200-day moving average is $4.62. GA earnings estimates are about 58 cents per share in 2011 and 75 cents for 2012. This puts the P/E ratio at about 5.5, which is low for one of the leading online gaming companies. Looks like a good time to buy cheap shares. GA has recently announced a plan to buy back
about $50 million in stock.
Perfect World Co., Ltd. (PWRD)
is trading at $11.44. PWRD develops and offers online games and has titles such as Perfect World, Legend of Martial Arts, Forsaken World and others. These shares have fallen from a 52-week high of $34.40 and just recently hit a 52-week low. The 50-day moving average is $17.60 and the 200-day moving average is $21.21. PWRD earnings estimates are about $2.99 per share in 2011, and $3.24 for 2012. This puts the P/E ratio at about 4, which is very low for one of the leading online gaming companies. The balance sheet is extremely strong with almost $6.75 per share in cash and no debt. The substantial amount of cash they have on the balance sheet will allow them to invest in future high-growth opportunities. These shares have been volatile, dropping from about $20 in just a couple weeks to around $11. The drop seems overdone, but I would only buy in stages.
NetEase.com, Inc. (NTES)
is trading at $38.11. NTES offers multi-player online role-playing games, and has some of the most popular game titles, such as Fantasy Westward Journey, Heroes of Tang Dynasty and others. This company also licenses games. The 52-week range is $35.20 to $55. The 50-day moving average is $46.22 and the 200-day moving average is $45. NTES has earnings estimates of about $3.56 per share for 2011 and $4.06 for 2012. This puts the PE ratio at about 11. This company has a solid balance sheet with about $1.75 billion in cash, equivalent to about $13.44 per share in cash.
E-Commerce China Dangdang (DANG)
shares are trading around $5.07. Dangdang is based in China and is often likened to be the Amazon.com (AMZN
) of China. These shares have fallen from a 52-week high of $36.40. The 50-day moving average is $8.08. DANG shares have been cut in half since the market started to correct in early August, but the potential of this company is still just as strong. DANG has a current market cap of about $401 million and a enterprise value of about $157 million due to the cash on the balance sheet of roughly $257 million. An enterprise value of only $157 million for a Internet company, with one of the most popular websites, in a country like China is way too cheap. The cash on the balance sheet of about $257 million is equivalent to around $3.25 per share, so the stock is trading just a couple bucks over cash value.
Qihoo 360 Technology (QIHU)
is trading at $16.36. QIHU is one of the leading providers of Internet security products in China. The 52 week range is $16.01 to $36.21. The 50-day moving average is $21.41 and the 200 day moving average is unavailable since this company recently went public. QIHU has earnings estimates of about 35 cents per share for 2011 and 62 cents for 2012. These shares have dropped from recent highs of around $25. I would wait to see if these shares have bottomed before considering an investment here, because the P/E ratio appears high compared to many other stocks.
Renren, Inc. (RENN)
is trading at $5.28. Renren is a social networking company in China. Many call it the Facebook of China. The 52-week high is $24. These shares have dropped from recent highs of around $14 to current levels. RENN has a market capitalization of about $2 billion and a enterprise value of about $1 billion due to the cash on the balance sheet of roughly $1.2 billion. The cash on the balance sheet of about $1.2 billion is equivalent to around $3.14 per share, so the stock is trading just a couple bucks over cash value. Reports have put the value of Facebook at around $75 to $100 billion, and that makes buying RENN with a enterprise value of about $788 million a real bargain. The largest social networking site in China (the most populous nation in the world) has to be worth more than 1% of Facebook.
shares are trading around $108.96. Baidu is a leading Internet search site in China. The 50-day moving average is $141.05 and the 200-day moving average is $130.44. Earnings estimates for BIDU are $2.91 per share in 2011, and $4.40 for 2012. The 52 week range is $94.33 to $165.96. I think Baidu was overvalued when it was trading near the 52-week highs, but it has come down to much more reasonable levels and the stock is so oversold, it might see a rebound soon. Still, I prefer Google (GOOG
) shares at current levels.
Disclaimer: Data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. This information is solely educational in nature and not intended to serve as the basis for any investment decision.
Disclosure: I am long DANG, RENN.