For more than six months, Chinese Internet stocks have been threading water, dragged down by tight monetary policy at home, a looming trade dispute between the U.S. and China, accounting irregularities among some of the U.S.-listed companies, and a momentum shift. Youku's merger with Tudou Holdings recently is a game changer for the industry, as it signals a determination by the leadership of these companies to enhance shareholder value. But which stocks offer the greatest potential?
As we wrote in previous articles, investors should stay away from industries and companies that undergo a momentum shift. Yet long-term investors may want to search for gold in the trash, trying to identify a 'Chinese Amazon.com'. As indicated from the table below, Baidu, Inc. (BIDU), Sina Corporation (SINA), and Sohu.com Inc. (SOHU) are three good choices for such strategy. They display solid fundamentals and are trading at a reasonable price. Baidu, for instance, has a PE of 21.18, while it enjoys a hefty 52.25% operating margin. Sohu.com has a PE of 10.45, while it enjoys a 33.20% operating margin.
Forward PE (December 2012)
Operating Margin (%)
Baidu, Inc. (BIDU)
Internet search engine
Sina Corp (SINA)
Media and mobile value-added services
E-Commerce China Dangdang Inc. (DANG)
Business -to-Consumer e-Commerce
Renren Inc (RENN)
Sohu.com Inc. (SOHU)
Brand advertising, on-line gaming
* These statistics should be interpreted with caution, as Chinese accounting standards are different than those of the U.S. So they aren't comparable with those of their U.S. counterparts like Amazon.com (AMZN) and Google (GOOG).