Rise of the Chinese internet stocks

Chinese e-commerce giant Alibaba has been grabbing headlines ahead of what will be a blockbuster initial public offering (IPO) on the New York Stock Exchange.

Alibaba.com Ltd.'s headquarters in Hangzhou
Source: Bloomberg

The heightened interest has spurred investors to take a closer look at other Chinese companies within the internet sector that have been enjoying a bit of a run-up recently.

Looking at the KraneShares CSI China Internet ETF, which tracks a sample of these companies, the index is up over 44 percent for the past 12 months.

The obvious growth story is that the Chinese internet market is the largest in the world and twice the size of the US market.

China’s largest search engine Baidu saw its revenue grow 43 percent last year, more than double of Google. That’s set to pick up further this year, especially on the back of rising smartphone and mobile internet adoption rates in China.

There are already signs of that in the Q2 results released in July, where Baidu posted better-than-expected earnings with a 34% rise in earnings.

For almost every major US internet service, there’s a Chinese version doing just as well. Here’s a closer look at some of these companies and how they are positioned for growth.

In a bit of a mash up of Skype-meets-YouTube-meets-Zynga, the real-time interactive social platform engages users in group activities through voice, text and video. It’s somewhat of a virtual room or stadium, where sessions can hold up to tens of thousands of people for events ranging from concerts, karaoke, education, sports and seminars.

In 2013, net revenue rose 122.4 percent to US$301.2 million, while net profit jumped 435.7 percent to US$78.9 million. A significant portion of its revenue comes from the sale of virtual goods. YY also enjoys pretty good backing with one of its major investors being Lei Jun, the chief executive officer of Xiaomi.

Strong earnings have helped share prices run up over 160 percent in the 12 months to June. It currently has a forward price-to-earnings (P/E) ratio of 30. It enjoys a moat of being a first mover and one of the few platforms delivering high-quality voice and video.

The 10-year-old e-commerce site is the main rival to Alibaba. It is poised to ride on the bright outlook over Chinese e-tailing. Often likened to Amazon, JD.com also shares its traits of little profit but great growth potential.

JD.com became the third largest US listing this year when it raised US$1.8 billion in its May IPO. On the first day of trading share prices jumped 10 percent.

What has got many analysts excited is the recent investment in JD.com by China’s largest internet company, Tencent. The partnership is expected to ramp up the site’s expansion and reduce its operating costs.

Investors should note that JD.com functions more as a direct seller rather than a marketplace connecting buyers and sellers. This adds a bit of a risk in holding inventory and it has a relatively narrow revenue pool with over 80 percent estimated to be contributed by electronics and appliances.

The search engine giant is often dubbed as China’s Google, as it has a similar web of businesses that offer cross-selling opportunities and synergies. Some of the online services and interests under its umbrella include cloud storage, MP3 search, encyclopedia, internet television, recruitment, anti-virus, a money market fund, and a travel website.

Based on research by Enfodesk, Baidu enjoys a very dominant lead, with its 80 percent market share of the Chinese market – significantly ahead of its closest competitor, Qihoo 360, which corners around 16 percent of Chinese users. It also stands to benefit from the huge pipeline of new internet users getting online via smartphones.

In a similar problem faced by other global counterparts, one downside to look out for is how well it could monetise a shifting base toward mobile internet access.

This has seen it ramping up investments in the mobile space, most recently with its US$1.9 billion acquisition of the country’s largest mobile app store 91 Wireless. The stock has nearly doubled in price in the past 12 months to June and is trading at forward P/E of around 32.

Tencent is the fourth-largest internet company behind Google, Amazon and Ebay. It recently made the headlines for buying a 20 percent stake in China’s Craigslist-like site 58.com for US$736 million.

Tencent runs a gamut of businesses that ranges from mass media, e-commerce, games, internet and mobile value-added services, and online advertising. Some of its more well-known products include instant messenger QQ and chat service WeChat.

WeChat, which incorporates many social networking features, is spearheading Tencent’s push into the mobile space with features such as with e-payments. It already has around 355 million active users, surpassing the ‘Chinese Twitter’ Sina Weibo’s 129 million users.

Tencent’s stock price has more than doubled in the past 12 months to June and is trading at a forward P/E of around 40.

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