To China and back

Chinese internet stocks are way way way out of my comfort zone. Besides the hype and transient nature of many business models, the stratospheric valuations and the political risk are issues that I can’t get my head around. With the Chinese stock market up 25% in a month, it looks like classic bubble territory.

That said, the latest IDC predictions for 2015 recently caught my attention. One of the predictions asserted the following:

“China will experience skyrocketing influence on the global information and telecommunications technology market in 2015 with spending that will account for 43% of all industry growth, one third of all smartphone purchases, and about one third of all online shoppers. With a huge domestic market, China’s cloud and ecommerce leaders (Alibaba in ecommerce, Tencent in social, and Baidu in search) will rise to prominence in the global marketplace. Similarly, Chinese branded smartphone makers will capture more than a third of the worldwide smartphone market.”

Every now and again (as I did in this post) I look at how a few of the Chinese internet stocks that trade in the US are progressing for the sake of curiosity. The graph below shows a selected few – Baidu (internet search), NetEase (online gaming), Ctrip (travel services), Sina (online media), Sohu (various online services), Tencent (social, traded in Hong Kong), and Alibaba (e-commerce). click to enlarge Tencent is the biggest gainer at over 300% since 2011; NetEase is just below 300%; with Baidu over 200%. Alibaba is up 16% since its stock market debut in September. Since 2011, the underperformers are Ctrip about breakeven, Sohu down 20%, and Sina down 50%. An equally weighted portfolio of these stocks, excluding Alibaba, invested at the beginning of 2011 would have resulted in an 84% gain or an approx 16.5% annual return. The current price to 2015 projected EPS multiples against the 2014 to 2015 projected EPS growth for these stocks compared to the same metric for a number of the established US internet names gives an insight into current valuations, as per the graph below.

click to enlarge Looking at this graph, Baidu is the only Chinese stock of the names highlighted by IDC that looks to me like one that may warrant further investigation as an investment possibility (but only when there is a meaningful pull back in the market in 2015). However, I wouldn’t be rushing out to get involved anytime soon as it seems to me that an established internet name like Google is more interesting as an investment prospect at current relative valuations than any of the higher growth Chinese equivalents.