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A Performance Review of China Internet Stocks for July

|Includes: BIDU, CYOU, DATE, FENG, LKM, QIHU, RENN, SINA, SOHU, Taomee Holdings (TAOM)
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 (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