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  • A Performance Review of China Internet Stocks for July
    China Internet stocks ended July on a high note despite enormous uncertainty over the U.S. debt-ceiling increase. After plummeting 11.6% in May and  9.3% in June, stocks in this industry rose 4.6% on average in July, snapping the two-month losing streak (Table 1). This monthly gain was a significant outperformance versus -0.62% for NASDAQ Composite, +0.61% for the BNY Mellon China ADR Index, and +0.89% for the Halter USX China Index. 
    China Internet stocks' rebound in July was broad-based, as demonstrated by two metrics: First, the advance/decline ratio improved to 30/19 in July from 7/40 in June and 6/37 in May. Second, seven of the eight major segments had positive performance: Online security stocks gained the most in July (+25.2%), followed by social media (+16.5%), online advertising (+7.8%), online video (+7.6%), online games (+7.2%), online travel booking (+4.8%), B2B e-Commerce (+1.0%), and B2C e-Commerce (-8.6%) segments.
    Recent IPOs were the major drivers behind the industry's monthly gain. Among the 11 China Internet stocks rising more than 15% in July, six were recent IPOs (Table 1): Taomee (NYSE:TAOM) went public on June 9, NetQin Mobile (NYSE:NQ) on May 5, (NASDAQ:DATE) on May 11, Renren (NYSE:RENN) on May 4, Qihoo 360 (NYSE:QIHU) on March 30, and Phoenix New Media (NYSE:FENG) on May 12. Their strong performance in July reflected investors' bottom-fishing sentiment after seeing these IPOs plunge to depressed price levels in recent months.
    Despite newcomers' impressive stock performance in July, long-time incumbents Sohu (+24.7%), Baidu (+12.1%), and Sina (+3.8%) were the true newsmakers and trendsetters for the month. Sohu (NASDAQ:SOHU) shares surged on the back of strong operating metrics of DMD, an online game developed by Sohu's gaming subsidiary (NASDAQ:CYOU). The game was an instant hit, surpassing 300K Peak Concurrent Users (PCU) and 100 server groups shortly after entering open beta on July 22. DMD's success demonstrated to the whole industry that it's worthwhile to take the time to develop a high-quality game. Baidu (NASDAQ:BIDU) reported stellar 2Q11 earnings on July 25, and introduced its "Landing Page Strategy" during the earnings call. This move indicated that Baidu is making a big push into the downstream of the search engine value chain through strategic partnerships and investments. In July, Sina (NASDAQ:SINA) launched its social game platform and virtual currency Weibi to accelerate the monetization of its Twitter-like service It also launched Tumblr-like service Qing Weibo to defend and expand Weibo's existing user base. Investors should closely monitor the progress of these two new products because they are important early indicators of Weibo's potential for monetization. In my view, Sina shares will remain very volatile until Weibo contributes significant revenues.

    Table 1: China Internet Stocks' Performance in July 2011

    Aug 05 9:40 AM | Link | Comment!
  • Ctrip: On Track to Beat 3Q10 Guidance
    Chinese travel-booking company Ctrip (NASDAQ:CTRP) recently reported solid 2Q10 results and strong guidance for 3Q10. Data from the airline industry and the city of Shanghai have indicated strong growth momentum for Ctrip in July 2010. I believe Ctrip is on track to surpass its guidance of 25% Y/Y increase in air-ticketing volume in 3Q10, 25%-30% growth in hotel-booking volume, and 35%-40% Y/Y increase in overall revenue. "A rising tide lifts all boats." I forecast strong growth in China's overall travel volume will help Ctrip overcome challenges posed by less important factors such as air-ticketing commission cuts and high-speed rail's substitution effect on airlines. Detailed data and analysis are as follows:
    Based on official data from Civil Aviation Administration of China (CAAC), total number of China's air passengers rose 21% year-over-year (17% month-over-month) to 25.47 million in July 2010. Domestic passengers increased 20% Y/Y (35% M/M) to 23.71 million. International passengers rose 44% Y/Y (13% M/M) to 1.76 million (Chart 1). Based on data from TravelSky, the leading provider of IT solutions for China's airline industry, total number of China's air passengers rose 22% Y/Y (17% M/M) to 26.73 million in July. Domestic passengers increased 20% Y/Y (17% M/M) to 23.85 million. International passengers rose 43% Y/Y (16% M/M) to 2.88 million (Chart 2). These data points have indicated strong growth momentum of travel activities in China. I believe Ctrip's air-ticketing volume in July has grown faster than the overall passenger growth of 21% because it has been gaining market share against air-ticketing industry peers. I believe Ctrip is on track to surpass its guidance of 25% Y/Y increase in air-ticketing volume in 3Q10.
    Based on official data from Shanghai World Expo, total number of visitors to this mega event have reached 44.1 million from May 1 to August 23, with daily traffic reaching a new high of 568.3K on August 21 (Chart 3). According to various news reports, the "World Expo Fever" has resulted in significantly higher pricing and occupancy rates for hotels in Shanghai as compared to one-year ago. According to Sina News, some travel groups to Shanghai even had to arrange logding in cities outside of Shanghai because of the scarcity of low-to-medium-level hotel rooms in the city. Based on my estimates, Shanghai-related business has historically accounted for over 15% of Ctrip's total revenues. Therefore, the Shanghai World Expo (May 1 to October 31) has clearly benefited Ctrip a lot in Q2 and Q3. I believe Ctrip is on track to surpass its guidance of 25%-30% growth in hotel-booking volume in 3Q10.

    Chart 1: CAAC Air Passenger Data

    Chart 2: TravelSky Air Passenger Data

    Chart 3: Shanghai World Expo Traffic Data

    Disclosure: No positions
    Aug 23 2:31 PM | Link | Comment!
  • Updates on Changyou's New Games
    Chinese Hero usage has likely peaked. According to my proprietary monitoring, Chinese online game company Changyou's (NASDAQ:CYOU) new title Chinese Hero briefly surpassed 110K PCU after entering open beta on May 20, but its usage has been declining since then. For the past seven days, the game's daily PCU was around 95K. Such performance has led me to believe Chinese Hero may have already seen its peak usage, and it does not have a high chance of becoming a hit game with over 200K+ PCU. For the game to reverse the current trend, I believe Changyou has to simplify its multi-currency economic system, adjust parameters to achieve a better balance between in-game professions, and design more in-game tasks to maintain players' interest.
    Duke of Mount Deer (NYSE:DMD) remains biggest driver of Changyou shares. DMD is a 2.5D MMORPG based on the popular novel "Duke of Mount Deer", and it shares the same development team and game engine with TLBB, Changyou's flagship game. Although DMD is still undergoing its closed beta testing (Nei Ce), it has been supporting Changyou's stock since the beginning of 2010. Based on my checks, Changyou's stock price has likely reflected the market's optimistic expectation that DMD will be a hit game that accounts for at least 20% of the company's total revenues. Considering the unexciting performance of Changyou's other new games such as Chinese Hero and Da Hua Shui Hu, I believe investors' optimism on DMD is the primary reason behind Changyou's second-best year-to-date performance among Chinese online game stocks (Table 1).


    Disclosure: No positions
    Jun 17 5:53 PM | Link | Comment!
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