Chinese advertising stocks have been among the market’s top performers this month. While most of these stocks are significantly off of their 52-week highs, there are some indications that this could be more than just a so-called “dead cat” bounce. Large Chinese companies appear to be increasing their advertising spend in a sign that lending problems may be mitigating.
Here are some of the top performers:
- China Mass Media Corporation (NYSE:CMM) +150%*
- Charm Communications Inc. (NASDAQ:CHRM) +40%
- VisionChina Media Inc. (NASDAQ:VISN) +20%
- AirMedia Group Inc. (NASDAQ:AMCN) + 20%
- Baidu.com Inc. (NASDAQ:BIDU) + 20%
- Focus Media Holding Limited (NASDAQ:FMCN) +15%
* This increase was obscured by a change to the ADR ratio.
Bullish Earnings Reports Drive Optimism
Bullish earnings reports have been one of the catalysts behind the sector’s recent performance. In late-October, Baidu.com reported earnings and guidance that surpassed analyst expectations. CEO Robin Li attributed this to spending by large customers that significantly outperformed their expectations, which is a sign that the economy may be on the rebound.
Other earnings reports have also come in better than expected. Charm Communications reported third quarter EPS that missed consensus, but revenues and a fourth quarter outlook that both surpassed estimates. And analysts have also been bullish on the sector in their research notes. For instance, Morgan Stanley named Focus Media a long Research Tactical Idea in late October.
China’s Economy: A Divided Kind of Limbo
It’s no surprise that China has been struggling with taming its overheated economy. Expansive lending by state-controlled banks has propelled its economy too fast, which has prompted the government to take action to control inflation. The solution has so far been to create an artificial shortage of credit by restricting the lending capability of banks through undisclosed limits.
While overall lending may have slowed down, larger businesses aren’t feeling as much heat as smaller companies. Signs of this can be seen in corporate yield gaps, which track the difference between 10-year local currency notes and sovereign debt rates. These figures suggest that two years of monetary tightening may now be unwound as its inflation figures slow down – a good sign for big business.
Chinese advertising companies will be among the first sectors to experience the benefits of improved lending among big businesses. With the modest turnaround in an otherwise dismal year for these stocks, some investors are betting this is more than just a “dead cat” bounce. Whether or not they are right remains to be seen, but this is definitely a sector worth watching over the coming quarters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.