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Double Click on Alibaba

Given my bullish take on China in my September 28th letter, I’m going to be putting a few more single names out there. Jim Trippon’s China Stock Market Digest published a recommendation that caught my eye (click here for my Hedge Fund Radio interview with Jim).

Alibaba (OTC:ALBCF) (HKG 1688) is the Middle Kingdom’s preeminent e-commerce company, and far and away dominates this fastest growing sector of the economy. In the first half of this year, e-commerce sales in China doubled to $31 billion, and the full year figure is expected to grow to $64.5 billion. So far this year, 36 million have joined the Internet there, bringing the total to 420 million.

Electronics accounted for 44.2% of sales, followed by clothing (17.4%), and jewelry (5.8%). Despite this blistering growth, Internet market penetration stands at only 31.8%, among the lowest in Asia. Deutsche Bank predicts the total market will grow to $220 billion by 2014, while the number of users soars to a mind numbing 812 million, nearly triple the US population! That implies an explosive  700% growth of the market over a four year period.

Alibaba’s profits jumped by 46% in Q2. The stock is not cheap with a PE multiple of 55, but it is almost the only game in town. Despite the amazing outlook for the online industry in China, the stock has fallen for most of 2010, presenting investors with a reasonable entry point. Here is not a bad place to start scaling in. As the ADR’s traded on the pink sheets are illiquid, better to buy the Hong Kong traded stock.