Year of the bull for China Internet stocks

chart_ws_stock_baiduinc.top(3).png By Paul R. La Monica, assistant managing editor


NEW YORK (CNNMoney) -- China's year of the rabbit begins on February 3. But investors in Chinese Internet stocks should be forgiven if they think it's the year of the bull (or ox if you will) all over again.

Baidu (BIDU), the top online search company in China, reported fourth-quarter results this week that blew past analysts' expectations. The stock surged 9% Tuesday and was up again Wednesday to hit a new all-time high.

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Internet media company Sohu.com (SOHU) also reported stellar results this week, citing strong demand for online advertising. The stock gained 5% Monday and another 6% Tuesday. It's near a 52-week high.

This double dose of good news from China's dot-coms helped lift the shares of several other Chinese Web stocks that trade in the U.S.

Sohu competitor Sina (SINA) is up about 7% in the past week. And shares of two recent initial public offerings, online video provider Youku.com (YOKU) and e-commerce company Dangdang (DANG), both shot up Tuesday.

Eric Jackson, managing member at Naples, Fla.-based hedge fund Ironfire Capital, said it makes sense that China Internet stocks are garnering so much attention. The combination of one billion potential Web users and an economy still growing at near double-digit percentage clip is hard to ignore.

"For e-commerce and online media in China, the rising tide is lifting all boats," said Jackson, whose firm owns Sina.

But investors need to be careful. Some of the Chinese dot-coms are unproven and still losing money.

That's the case with Youku, which debuted with much fanfare in December. It was invariably described as China's YouTube. But the company is expected to report a loss for the fourth quarter of 2010 and throughout 2011 for that matter.

Eric Hickey, an analyst with Janco Partners in Denver, said that investors looking to capitalize on the growth in online video in China would be better off with Sohu.

The company, which also is a player in Web video, is profitable, trades at just 19 times 2011 earnings estimates and also owns a majority stake in hot China gaming company Changyou.com (CYOU).

Some of the other online gaming companies in China are also making money and growing fairly rapidly.

Tian Hou, an analyst with Auriga USA, a brokerage firm in New York, said she likes NetEase.com (NTES). She said the company has a strong pipeline of games -- and the stock is fairly cheap, trading at just 13 times 2011 earnings estimates.

Beyond gaming. Hickey said he also likes Sina, primarily due to its ownership of microblogging service Weibo, which is kind of like the Twitter of China. (As you'll see, just about all dot-com leaders in China are described as "fill in the name of American equivalent" of China.)

But Sina does have a valuation that would make almost any price-conscious investor blush. It trades at over 40 times 2011 earnings estimates. Baidu is also extremely expensive, at about 50 times 2011 profit forecasts.

Jackson and Hickey both said though that what seems like high valuations may not be so problematic if you take a long-term approach.

Baidu, for example, is growing like a weed and has dominant market share in search. Yet, it still trades at a fraction of what Google (GOOG, Fortune 500) is worth, with a market value of $41 billion compared to nearly $200 billion for Google.

Sina is valued at about $5 billion while Yahoo (YHOO, Fortune 500) still has a market value of over $20 billion. Should the leaders in China, which in all likelihood will pass the United States in terms of online ad dollars, trade at such a steep discount to an also-ran in America? Hickey doesn't think so.

Still, competition is likely to become more fierce in China this year -- precisely because the market is so attractive.

Hou said she expects Google, which redirected users in China to its Hong Kong site last year because of censorship concerns, will take steps to increase its presence there again .

As a result, she thinks Google will take market share from Baidu -- and that this is not yet priced into Baidu's stock.

Regardless of whether or not you believe the China dot-com hype though, you can't ignore it. Jackson said he expects more China Internet IPOs in the not-so-distant future.

He suggested that Renren, a social networking site usually described as ... you guessed it, China's Facebook ... could go public in the U.S. later this year. Jackson said he wouldn't be surprised if another social media site in China, Kaixin001, also filed for a U.S. listing.

Another IPO possibility is Taobao, a Chinese online auction site known as ... wait for it ... China's eBay (EBAY, Fortune 500). That could wind up being a boon for struggling Yahoo, as Yahoo owns a 40% stake in Taobao parent Alibaba Group.

However, Alibaba has reportedly put plans to take any of its subsidiaries public on hold. So Yahoo fans may have to wait longer for that offering to materialize.

-- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.  To top of page

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