Sell-Side Analysis of China Internet and Wireless Companies (NTES, TOMO, KONG, LTON, HRAY, CTRP, JOBS, SINA, SNDA, SOHU)

Piper Jaffray analyst Safa Rashtchy released a note to clients today. Here are highlights relating to China stocks:

We maintain our strong conviction that the China sector will outperform U.S. over the long term and would continue to have a significant exposure to this market, especially given the much more conservative estimates for 2006 and beyond that assume heavy spending and lower margins. Despite these lower estimates, the valuations of these China Internet players are still much lower than U.S. peers, with average of Chinese companies (ex companies with a P/E over 100) trading at 21x 2006E EPS, compared with 30x for the U.S. companies. We expect the catalyst for the China sector to gradually develop in the first quarter.

Top Sector: Wireless.
Within the China group, we favor the wireless service providers which are now seeing a much more stable market and still solid growth rates while the valuations are still well below the sector (11x vs. 21x for the entire China group, ex companies with a P/E over 100). We believe Tom Online (TOMO; Mkt Cap$941M; OP; PT $25), KongZhong (KONG; Mkt Cap $445M; OP; PT$15), Linktone (LTON; Mkt Cap$283M; OP; PT$15), and Hurray (HRAY; Mkt Cap$161M; OP; PT$14) all represent solid investment opportunities in China.

• NetEase (ticker: NTES): NTES shares are now very cheap but the uncertainty of potential revenue model changes in the gaming sector, as well as the potential success of the company's new games still cloud the stock.

• Sina (ticker: SINA): While valuation limits upside, we remain favorable on the portals and especially on Sina's long term prospects.

• Shanda (ticker: SNDA): Shares are now trading at a very low valuation and clarity on the potential of EZ platform could produce a catalyst for the stock.

• Tom Online (ticker: TOMO): We expect TOMO, as the leading wireless player, to perform well in 2006. We note that wireless sector is our top China pick for 2006 and TOMO enjoys a strong competitive lead in this space.

• Ctrip (ticker: CTRP): Stocks should once again recover once Q4 numbers are out. Margin decline due to mix is already in the stock and the company remains the top leader in travel space in China.

• Sohu (ticker: SOHU): We remain favorable on the portals and SOHU's win of the Olympics gives it an extra boost. Valuation limits the upside but the stock is trading below our target price.

• 51Job (ticker: JOBS): Company remains the top player in the market and as such will remain attractive for long term holders.

• Linktone (ticker: LTON): A strong wireless play that should benefit form the overall sector recovery in 2006.

• Hurray (ticker: HRAY); One of the best values in China and within the wireless sector. Hurray's tie to Unicom has unfairly shrouded the stock with a negative cloud, masking the company's very strong competitive position in music. Recent game acquisition further diversifies revenues. One of the best picks for a potential of significant appreciation.