Chinese Internets: Sherpa Needed
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing in Chinese internet stocks has never been harder as convoluted partnerships, mergers, accounting scandals in other Chinese stock sectors, government crackdowns on content and a slowing Chinese economy have made what was already a difficult space to navigate like walking through a maze of towering bamboo. What you need is an intrepid guide to give you an overview.
A Guide To The Maze
First, you need to get the main players straight. Baidu, Inc is like Google, Sohu.com Inc is also like Google (or Yahoo), SINA Corporation is like Twitter, Renren, Inc is like Facebook and Tudou Holdings Limited and Youku Inc are like YouTube. Got that? No, I don’t blame you.
The big dog is Baidu (NASDAQ: BIDU) which has the largest share of the Chinese internet pie with around 80% of Chinese paid search. Its business description is very similar to Google and it has directly benefited from Google’s retreat from China over government censorship issues. Baidu also has a share of the Japanese search market with a division there. Like all the Chinese internet stocks it has seen a significant decline in share price from a high of $165.00 after last July’s earning release to a current share running in the low $100’s. It has a market cap of 38.32 billion, a P/E of 32.88 and a PEG of .60. It has a salesforce of over 7000 employees currently pushing more ads to small to medium enterprises. It reports July 23.
Baidu’s main competitor is Sohu(NASDAQ: SOHU). Again, Sohu is down 51.72% from its July 2011 high of $90.37. Its business is very similar to Baidu’s and in fact, Baidu once unsuccessfully attempted to buy Sohu’s search. Sohu, like Baidu, is trying to rev up mobile search and has a platform like Baidu’s Phoenix Nest which in turn is similar to Google AdWords. Sohu is considered the number two in Chinese search with a market cap of 1.48 billion, a P/E of 11.30, no debt and a PEG of 1.70. As I mentioned before about convoluted partnerships, Baidu, Sohu and Tencent Holdings will share in costs on copyrighted online video. This will definitely help bottom lines on both Baidu and Sohu. Sohu reports July 27.
Then there’s Sina (NASDAQ: SINA) which is generally likened to Twitter with Sina’s Weibo.com microblogging site and other mobile value added services including web TV. It is partnering with Zynga to make “Draw Something” available. Sina was recently upgraded to overweight by HBSC for its long term plans to monetize Weibo, something shareholders have been eagerly anticipating. Sina currently has negative earnings of $5.03 a share but does have a low debt to equity ratio of .20. It has a 3.27 billion market cap and a PEG of 11.11. This one, too has dived from a high of $125.37 on July 19, 2011 to a low of $38.30. It reports August 14.
Run From Renren?
In the social network space is Renren (NYSE: RENN) and like Facebook also has online games much like Facebook’s relationship with Zynga. Since Facebook is banned in China, Renren dominates this space. As this is now less than $5.00 and normally not covered by the Fools I will say it was once at a 52 week high of $11.32 and is trading above its 52 week low of $3.21. Renren has no debt but little institutional ownership at 6.6%. It has a market cap of 1.68 billion, a P/E of 51.81 and a PEG of 6.88. Renren reports August 8.
Finally, there’s Youku (NYSE: YOKU) and Tudou which should be considered as one entity as they recently agreed to merge with Youku buying Tudou for $1 billion dollars. They would be the YouTube of China.
Youku has deals with big content names Comcast’s NBC Universal and Time Warner for online video streaming. Youku has a negative earnings per share of -.40 and a 2.17 billion market cap. It has traded down since last summer from $38.33 to a 52 week low of $13.76, but has rebounded to $18.92 of late. With a forward P/E of 189.20 and debt of 2.41 million (still only a fraction of total cash of $568.04 million) institutions only hold 5.50%. But again YouTube is banned in China.
Tudou’s Chief Operations Officer just left on July 10 for personal reasons and news that the People's Republic of China crackdown on pornography now has burdened Tudou with monitoring its content for pornography, an added expense, have hurt the stock lately. With the recent agreement to merge any news on Tudou is material to Youku. Tudou has a negative earnings per share of -$2.66. Tudou reports on August 21 and Youku on August 6.
The best outlooks overall would be for Sohu and Baidu, more specifically Baidu since Apple has agreed to use Baidu for the default search on iPad and iPhone in China, a real win-win for both companies. Baidu also has their CLOUDRom which lets Chinese Android users use Baidu applications more relevant to their needs. Another slap in the face for Google since they left China. In that mobile space Baidu is also still working on its own smartphones.
With 15 buys, 8 outperforms, 5 holds and no sells, analysts seem to like Baidu’s prospects despite its decelerating growth. The sales force is still making a concerted push with small to medium businesses especially in the Tier Two and three cities (i.e. smaller cities than Beijing and the largest population centers). And Baidu seems to have recovered from last August’s China Central TV’s undercover report on advertisers buying their way up search ranks.
As for Sohu it has no debt and a better PEG. But only 69.7% is held by institutions compared to Baidu’s 78.9%. It all seems like six of one, half a dozen of another.
Last summer’s hopes for great numbers in Chinese internet stocks have been dashed with a Chinese slowdown, accounting scandals and a perception (justifiably so) of more government intrusion. Frankly, my head is swimming with the labyrinthine connections between these companies and the overlap of services (my spell check is smoking) but they seem to be clawing their way back on Chinese rate cuts and deals with American companies. While I think Baidu and Sohu are the best of the lot, I hope Fools will double their due diligence on Chinese internets and make sure to keep a map to the maze in your back pockets.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu and SINA. Motley Fool newsletter services recommend Baidu, SINA , and Sohu.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.