Analyst Bullish on China Stocks Despite Recent Gains (FMCN, TOMO, CTRP, NTES, KONG, HRAY)

Piper Jaffray’s Safa Rashtchy released a research note on China stocks earlier today. Key extracts:

The Chinese Internet sector has had an impressive and well-deserved run this year, up nearly 30%, which is consistent with our expectations that more investors are now focusing on China and are also more comfortable investing in these stocks. This is consistent with our expectations, as we outlined in previous China Analysts earlier this year. This move has pushed some of the stocks in our coverage universe close to our target prices but we note that we believe the sector multiples are rising. Despite these rising multiples, we do expect some consolidation in the sector before we see another major gain. We note that fundamentals remain very strong but there has not been a major acceleration in growth rates, and as such, the increase largely reflects higher investor confidence and increasing multiples. The valuations are now about 35% higher than the beginning of the year, but still relatively reasonable at an average of 16x 2007E EBITDA and 27x PE (Pro Forma EPS), generally in line with the broader U.S. Internet sector (we note that the U.S. sector has been under pressure so far this year with many large cap companies trading near trough valuations).

We expect modest increases in our estimates throughout the year, especially as we have been lowering some estimates already (in wireless sector in particular). We also believe that additional catalysts will include continued outperformance by sector leaders such as Focus Media Holding (ticker: FMCN), Ctrip.com International, Ltd. (ticker: CTRP), and NetEase.com, Inc. (ticker: NTES), as well as 3G licenses later in the year. We believe online the gaming industry is continuing to see robust demand, which is partly reflected by the solid performance of gaming stocks in the last week.

Overall, we would continue to own China names, especially sector leaders, but we also encourage investors to broaden their ownership to stocks that have not moved as much and now can demand higher multiples. In the wireless sector, this will include KongZhong Corporation (ticker: KONG) and Hurray! Holding Co., Ltd. (ticker: HRAY). In other areas, we note that 51job remains below our price target and while we have not changed our rating, we remain positively inclined toward the stock.

Our Top Picks

Focus Media Holding (ticker: FMCN) - Expect continued upside and increased leverage from recent consolidation; entry into new areas such as wireless a potential 2007 catalyst.

TOM Online, Inc. (ticker: TOMO) - The key wireless player; owning wireless sector ahead of 3G license announcement this year should prove to be beneficial.