U.S. listed Chinese equities, as represented by the PowerShares Golden Dragon Halter USX China Portfolio (PGJ) are up over 10.5% YTD after a bruising 2011 in which the index was down 26.4%. Within the group, Chinese Internet stocks, led by Baidu.com Inc. (BIDU) and Netease.com Inc. (NTES), have been the strongest. While the Chinese economy may slow-down in the short-term, from the torrid pace of recent years, in response to the government clamp-down on inflation and worsening markets worldwide for its goods and services, especially in Europe, it is indeed a foregone conclusion that it will still remain the strongest among the world's major economies for the foreseeable future. As such, we believe that a well diversified portfolio focused on the long-term ought to have some weighting among Chinese equities.
It is with this background that we examine in this article the investing activities of the world's largest fund managers, managing between $50 billion and over $700 billion in 13-F assets, in Chinese Internet stocks, based on the latest available Q4 institutional 13-F filings (other articles focusing on the investing activities of mega funds in Chinese solar and other stocks can be accessed from our author page, as they become available). Taken together these mega fund managers control over 35% of the assets invested in the U.S. equity markets, but number just over 30 out of the tens of thousands of funds that invest in the U.S. equity markets. Also, taken together, they are bearish on China stocks, cutting a net $0.6 billion in Q4 from their $19 billion prior quarter position (for more general information on these mega funds, please look at the end of the article).
The following are the Chinese Internet companies that these mega fund managers are most bullish about (see Table):
Ctrip.com International ADR (CTRP): CTRP is a China-based consolidator of hotel accommodations, airline tickets and packaged tours targeting individual business and leisure travelers in China. Mega funds together added a net $34 million in Q4 to their $1.19 billion prior quarter position in the company, and taken together mega funds hold 40.2% of the outstanding shares. The top buyers were Oppenheimer Funds ($136 million) and T Rowe Price ($40 million), and the top holders were T Rowe Price ($353 million), Oppenheimer Funds ($279 million) and Capital World Investors ($245 million).
CTRP shares have been weak ever since the company forecast a drop in Q4 margins last November, and in its Q4 report that it released last month, the company reported in-line revenue and earnings. Its shares currently trade at 17-18 forward P/E and 2.8 P/B compared to averages of 70.5 and 5.4 for its peers in the Internet commerce group. With the growth of the Chinese travel market behind it, CTRP seems like an attractive play, but we would wait on the sidelines until margin growth is resumed.
Sina Corp. (SINA): SINA is a Chinese internet portal offering media content and services for China and global Chinese communities. Mega funds together added a net $44 million in Q4 to their $1.03 billion prior quarter position in the company, and taken together mega funds hold 25.1% of the outstanding shares. The top buyers were Morgan Stanley ($56 million), UBS Global Asset Management ($35 million), and Wells Fargo & Co. ($34 million), and the top holder was T Rowe Price ($416 million).
SINA trades at a premium 38-39 forward P/E and 4.2 P/B compared to averages of 27.0 and 4.0 for its peers in the internet content group, while earnings are projected to grow at a strong 35.9% annual rate from 92c in 2011 to $1.70 in 2013. The stock has consistently traded at a premium compared to its brethren in the Chinese Internet space, such as BIDU and Sohu.com (SOHU), mostly to account for the potential of its innovative, market-leading, twitter-like micro-blogging service Weibo that has taken China by storm.
Youku.com Inc. (YOKU): YOKU, China's largest video-streaming company, is more popularly known as the YouTube of China. But in reality, it is more a combination of Netflix and YouTube; Netflix, because it offers mostly professionally-generated content licensed from movie studios and TV companies, and YouTube due to its reliance on advertising as a main source of revenue. Mega funds together added a net $60 million in Q4 to their $486 million prior quarter position in the company, and taken together mega funds hold 21.9% of the outstanding shares. The top buyers were Janus Capital Management ($67 million) and T Rowe Price ($31 million), and the top holders were Morgan Stanley ($168 million), Janus Capital Management ($160 million), and T Rowe Price ($135 million).
YOKU shares have retreated over a third from the $32.75 high they hit on the afternoon following its March 12th announcement of a definitive agreement to combine with rival Tudou Holdings (TUDO), an online video company in China that allows users to upload, share, watch, rate and comment on videos, in a 100% stock-for-stock transaction. The retreat maybe accounting for the Q4 miss that it announced on the same day as the merger, but that was over-shadowed by the excitement around the merger news.
The merger of rivals YOKU and TUDO is being heralded as a game changer for the Chinese online video market, with Beijing-based research firm T.H. Capital predicting that the deal would change it from a content-centric to a distribution-centric market, so that eventually content providers may have to pay for distribution. Moreover, post-merger, the new YOKU will strengthen its leadership, gaining the dominant market share, and well ahead of peers Sohu.com , a leading Chinese internet portal, and Baidu Inc. , a leading Chinese provider of internet search, targeted online advertising and other internet content services. YOKU shares currently trade at 3.9 P/B and at 18.5 PSR versus averages of 1.7 and 3.3 for its peers in the internet content group.
Besides these, mega funds based on their Q4 trading activity indicated that they are bearish on the following Chinese Internet stocks (see Table):
- Baidu Inc. , often touted as the Google of China, a leading Chinese provider of internet search, targeted online advertising and other internet content services, in which mega funds together cut a net $168 million in Q4 from their $10.1 billion prior quarter position in the company;
- Sohu.com Inc. , the third largest internet portal and a leading brand in China, that offers Chinese language web navigational and search capabilities, 12 main content channels, Web-based communications and community services, and a platform for e-commerce services, in which mega funds together cut a net $59 million in Q4 from their $536 million prior quarter position in the company;
- Netease Inc. , a Chinese provider of an interactive online gaming community, internet portal and wireless value-added services, in which mega funds together cut a net $76 million in Q4 from their $1.08 billion prior quarter position in the company;
- Renren Inc. (RENN), often called the Facebook of China, is a Chinese operator of a social networking platform that enables users to communicate and share information via Renren.com, in which mega funds together cut a net $49 million in Q4 from their $93 million prior quarter position in the company; and
- E-commerce China Dangdang (DANG), a Chinese online retailer offering books and other media, personal care and general merchandise via Dangdang.com, also often called the Amazon of China, in which mega funds together cut a net $14 million in Q4 from their $23 million prior quarter position in the company.
Note to Table: The companies selected to be included in both the Top Buys and Sells and Top Holdings categories in the Table were picked on both an absolute basis, i.e. the highest dollar amounts of buys and/or sells, as well as those amounts relative to their market-cap. That way, the list is not biased towards the largest companies in the group.
General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.