After rebounding 16.2% in October, China internet stocks dropped 7.9% on average in November (Table 1), underperforming the monthly returns of NASDAQ Composite (QQQ) (-2.4%), the BNY Mellon China ADR Index (+0.5%), and the Halter USX China Index (-3.0%). The advance/decline ratio for the industry deteriorated to 17/33 from 42/8 in October. Below is my analysis of the major themes and topics for the month.
Traditional sub-industries outperformed emerging sub-industries. China Internet's emerging sub-industries were the worst performers for November: social media, B2C e-commerce, and online video stocks plunged 27.8%, 24.0%, and 16.0% on average, respectively, led by Renren (RENN), -47.4%; Dangdang (DANG), -32.3%; and Ku6 (KUTV), -28.9%. By contrast, traditional cash-cow sub-industries performed much better: B2B e-Commerce, online travel booking, online advertising and online games stocks declined 6.2%, 8.7%, 9.2% and 9.4%, respectively. The most resilient stocks for the month were small caps, which dominated the list of top 15 performers. NetEase (NTES) and Baidu (BIDU) were the most resilient large cap China Internet stocks, declining 4.8% and 6.6%, respectively.
Recent IPOs were the main driver behind the industry's monthly decline. Among the nine China Internet stocks dropping more than 20% in November, five were recent IPOs (Table 1): Renren (RENN) went public on May 4, Jiayuan.com (DATE) on May 11, Taomee (TAOM) on June 9, Tudou (TUDO) on August 17, and Dangdang (DANG) on December 8, 2010. This pattern shows that investors have increasingly realized that many of China Internet's emerging sub-industries are actually bubbles.
Social media stocks hurt by worsening outlook for monetization and competition. In November, all Chinese social media stocks were among the 15 worst performing China Internet stocks. The hardest blow to investor confidence came during Renren's 3Q11 earnings conference call when CEO Joe Chen said the peak of social gaming activity and monetization in China had already happened more than one year ago. This means Sina (SINA) Weibo, whose social games business is still in the pre-monetization stage, may have come to the party too late. As Tencent, Sina, and Renren continue to evolve themselves into hybrids of Facebook and Twitter, their lack of differentiation is forcing every company to compete on spending on R&D and marketing. This trend is turning China's social networking services industry into a huge cash-burning machine.
Table 1: China Internet Stocks' Performance in November 2011
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.