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Three cheers for China
Astounding growth opportunities and attractive valuations bode well for many Chinese tech stocks.
October 26, 2004: 4:26 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - It shouldn't come as a shock that investors are excited about the prospects for tech and telecom companies in the world's largest market.

Several Chinese techs and telecom stocks have had amazing runs this year. Ctrip.com, an online travel company, is up more than 130 percent since debuting on the Nasdaq last December. Shanda Interactive, a developer of online games, is up 167 percent since going public in May.

Most recently, online job recruitment company 51job -- sort of a Chinese version of Monster -- has more than doubled since its IPO late last month.

After such gains, however, some investors have become a bit wary of investing in Chinese tech stocks.

"We had a great deal of exposure to China last year but we've been reducing it mainly due to value not being there at the moment," said Wendell Perkins, manager of the JohnsonFamily International Value fund.

Still, Perkins said investors shouldn't entirely bail on China. They just need to be more cognizant of the valuations for Chinese tech stocks.

"A lot of the higher profile names were too expensive for us to begin with. But if you take a long-term view of China, it's a great place to be," Perkins said. "We do own some stocks there that are still reasonably good buys."

Go bargain hunting

Two such stocks that he owns are China Mobile, the country's largest wireless telecom provider, and Asia Satellite Telecommunications Holdings, the top satellite television company in mainland China and other parts of Asia.

China Mobile trades at about 11 times 2005 earnings estimates and Asia Satellite has a P/E of 12.

China on the cheap?
These six ADRs may be worth buying, given their relatively low valuations and strong growth prospects.
Company P/E* Est. 2005 EPS Gr. Long-Term Est. EPS Gr. 
Tom Online 9.4 35% 35% 
Sohu.com 16.5 13% 22% 
NetEase.com 19.3 36% 27% 
Sina 20.2 14% 36% 
Shanda Interactive 25.5 40% 35% 
Ctrip.com 34.6 35% 39% 
 * based on 2005 estimates and prices as of 10/25/04
 Source:  Thomson/Baseline

Searching for value is key. Fortunately, there are several other attractively priced Chinese stocks that trade in the U.S.

That wasn't the case last year when several Net stocks, most notably, Sina, Sohu.com and NetEase.com, surged on hype about their long-term growth prospects. I wrote a column about a year ago suggesting that these stocks would cool off. They did.

More recently, these three companies and competitors Chinadotcom and Tom Online have all been pummeled due to concerns about the Chinese government's crackdown on spam, wireless porn ads and other inappropriate content sent to users of mobile phones. (For more, see "Sina: Risky business in China")

Besides operating Internet portals, all these companies have wireless messaging businesses. So the government's sanctions have raised questions about just how much money the firms will be able to make from their wireless divisions, which led to several earnings estimate cuts.

Safa Rashtchy, an analyst with Piper Jaffray, thinks that investors have already baked in these reductions into the Chinese Net stocks. Barring extremely bad news, he says, the market's reaction to their latest results and guidance should be positive.

"The low valuation of these stocks combined with removal of several layers of uncertainty on growth (including lower, more achievable forward estimates) will be a strong enough catalyst for investors who have been on the sidelines to start buying," said Rashtchy.

Sina, Sohu and Tom Online report earnings this week while NetEase and Chinadotcom will do so next week.

Don't bet blindly

Jason Brueschke, an analyst with Pacific Growth Equities, likes Tom Online. For one, it's the cheapest of this lot, trading at just 9 times 2005 earnings estimates. The other four companies are valued at a range of about 17 to 20 times next year's profit projections.

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What's more, Tom Online's majority owner is Li Ka-Shing, the head of Hong Kong-based conglomerate Hutchison Whampoa and one of the world's richest men. This fact, Brueschke said, makes the company a much safer bet.

"Investors fail to appreciate is that this is one of Li's companies. Having one of the wealthiest and most influential men in China owning your company carries a lot of weight," said Brueschke.

Still, Brueschke said he thinks the best investment among Chinese tech stocks is Ctrip. He's a little more wary of the wireless, Internet portals and gaming companies in general because competition is likely to intensify in these sectors when companies like Yahoo! and Google become more active in China.

"Travel has high barriers to entry," Brueschke argues. "This is more a classic bet on China as an emerging market."

Investors will have a Ctrip competitor to consider in the near future as well. Rival eLong filed to go public on the Nasdaq earlier this month. Barry Diller's online travel conglomerate IAC/InterActive owns about a 30 percent stake.

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By Paul R. La Monica

All in all, investors will have to be careful and look at the fundamentals of individual businesses instead of blindly buying anything that has a presence in China.

To that end, two other Chinese firms -- Hutchison Telecom and China Finance Online -- haven't done as well as Ctrip, Shanda and 51job. In their first few weeks as public companies, Hutchison Telecom has dipped more than 10 percent, while China Finance Online has fallen nearly 20 percent.

Piper Jaffray's Rashtchy does not own shares of the companies mentioned but his firm has done investment banking for Tom Online and Ctrip.com. Pacific Growth's Brueschke does not own shares of the companies mentioned and his firm has no banking ties to the companies.


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.