U.S. listed Chinese equities, as represented by the PowerShares Golden Dragon Halter USX China Portfolio (PGJ) are up over 6.5% 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 legendary or guru fund managers, such as Warren Buffet, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, that are well-known for their savvy in picking winning stocks year after year. Generally, their investment horizon and holding periods stretches into many quarters and years, sometimes even decades. In this article, we examine based on our research of their latest available Q3 institutional 13-F filings the Chinese Internet companies that they are most bullish and bearish about. Taken together, these guru managers are bullish on Chinese stocks in general, adding a net $528 million in Q4 to their $4.30 billion prior quarter holdings in the group (for more general information on these guru funds, please look at the end of the article).
The following are the Chinese Internet companies that guru fund managers are bullish about, that are also trading at a discount to their peers in the group (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. Guru funds together added a net $28 million in Q4 to their $180 million prior quarter position in the company, and taken together they hold 7.0% of the outstanding shares. The top buyer was Tiger cub Stephen Mandel's hedge fund Lone Pine Capital ($17 million), also the top holder at $195 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 2.7 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.
Sohu.com Inc. (SOHU): SOHU is the third largest internet portal and a leading brand in China. It 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. Guru funds together added a net $11 million in Q4 to their $32 million prior quarter position in the company, and taken together they hold 2.3% of the outstanding shares. The top buyer was Platinum Investment Management ($9 million), and the top holders were Hussman Econometrics Advisors ($18 million) and Platinum Investment Management ($16 million).
SOHU shares have been weak ever since the company reported its Q4 in early February in which it beat earnings ($1.36 v/s $1.26) and reported revenues in-line, while guiding Q1 revenues below consensus estimates. Its shares are currently flat for the year, and trading at a current 10.4 P/E and 1.9 P/B compared with averages of 19.9 and 2.3 for its peers in the internet services group.
Netease Inc. : NTES is a Chinese provider of an interactive online gaming community, internet portal and wireless value-added services. Guru funds added a net $127 million to their $409 million prior quarter position, and taken together guru funds hold 7.3% of the outstanding shares. The top guru fund buyer was Tiger cub Stephen Mandel's hedge fund Lone Pine Capital ($61 million), also the top holder at $419 million.
NTES shares are up strongly since it reported a good Q4 in mid-February, beating analyst earnings ($1.09 v/s $1.04) and revenue estimates. Its shares currently trade near all-time highs, at a current 14.2 P/E (on a TTM basis) and 3.6 P/B, compared to averages of 23.4 and 2.1 for its peers in the internet content group.
The following are some additional Chinese Internet stocks that guru funds accumulated in Q4 (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 guru funds together added a net $586 million in Q4 to their $1.95 billion prior quarter position in the company; and
- Youku.com Inc. (YOKU), China's largest video-streaming company, and more popularly known as the YouTube of China, but 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, in which guru funds together added a net $54 million in Q4 to their $312 million prior quarter position in the company.
The following are the Chinese Internet companies that guru fund managers are most bearish about (see Table):
- Sina Corp. (SINA), a Chinese internet portal offering media content and services for China and global Chinese communities, in which guru funds together cut a net $93 million in Q4 from their $344 million prior quarter position in the company;
- 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 guru funds together cut a net $42 million in Q4 from their $60 million 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 guru funds together cut out completely their $26 million prior quarter position in the company; and
- Perfect World (PWRD), a Chinese developer of 3-D online games, in which guru funds together cut a net $2 million in Q4 from their $6 million prior quarter position in the company.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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.