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There's an obvious Chinese internet pair trade that can at the same time deliver exposure to the large and growing Chinese internet market, and reduce risk by also having a short leg on a low quality stock.

Here's the trade: go long Renren (NYSE:RENN) at $3.97 and simultaneously short Qihoo 360 Technology (NYSE:QIHU) at $15.70, where both stocks are trading as I'm writing this.

With RenRen you'll get a strongly growing social network with a base on college students and young, recently graduated professionals. This is similar to the roots of Facebook (NASDAQ:FB) itself. Although RenRen is presently not the largest social network in China - that distinction goes to Tencent's Qzone - it's still growing rapidly. For more information, you can read my article "Renren And The Chinese Social Network Scene." RenRen also carries $1.05 billion cash in its books, which means that by buying RenRen at $3.96, you're basically getting a $130 million revenue, fast growing Chinese internet play for just around $500 million, or just 1.3 times book value.

At the same time, you can hedge this position by shorting Qihoo. Qihoo is little more than a homepage filled with paid links and some games. There are many reasons to believe that Qihoo's pageviews might be misstated, and also many reasons to doubt Qihoo's upper management credibility and honesty. Qihoo has short thesis by Citron and, quite amazingly, even the hacker group Anonymous has chipped in! Yet, at the same time, Qihoo still trades at a $1.85 billion market capitalization and almost 5 times book value. Sure, Qihoo claims $212 million in revenues in the last 12 months, but there are reasons to be suspicious about every number Qihoo puts out (including the cash on the bank, at just $364 million).

Conclusion

This is a simple pair trade, go long RenRen and short Qihoo as a hedge. RenRen is reasonably valued to cheap and its numbers are rather believable. Qihoo is expensive, and very likely a fraud with many of its numbers made up. I strongly advise reading Anonymous' piece as it contains important background information on Qihoo's promoter. That background information alone is enough to believe that the stock cannot justify trading at a premium - like it does today - under any circumstance.

Source: A Chinese Internet Pair Trade

Additional disclosure: I might also initiate the corresponding short position on QIHU.