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A Second Act for Chinese Internet Stocks?

20 May 2013 in Trading Ideas

Following a prolonged period of unfulfilled promise for hopeful investors, a recent flurry of activity has appeared to breathe some life into the Chinese Internet sector.

The China Internet motif is up 17.8% for the past month alone. It has now increased 13.7% in 2013, and 8.1% in the last 12 months.

The tried-and-true bullish indicators of earnings outperformances and big acquisitions have contributed to the sector’s recent rally.

For starters, Ctrip.com got investors’ attention by announcing on May 9 that its first-quarter revenue and profit would be better than expected – then saying sales would jump 20% in this year’s second quarter.1 The news sparked several analyst upgrades, and seemed to lift other Chinese web stocks, as investors were buoyed that the entire sector was beginning an upswing. E-Commerce China Dang Dang, for example, surged 19% in a week.

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But also driving sentiment has been the recent spate of buyouts. According to Bloomberg, 19 mergers and acquisitions have been announced this year among US-traded Chinese companies with a total value of $3.1 billion, compared with 23 deals worth $1.9 billion a year earlier. Data showed that Internet content companies were the targets with the most value among five sectors.

Front and center have been two recent moves by China’s biggest e-commerce company, Alibaba, which lifted the sector after agreeing on May 10 to buy a stake in digital map provider AutoNavi just two weeks after buying into Sina Corp’s Twitter-like Weibo service.

Then, toss in two more developments from this month: Chinese search-engine operator Baidu buying PPS Net TV’s Internet video business last week, and news that Sohu’s Sogou search tool may be seeking a strategic partnership.

But back to Alibaba for a moment: Not to be underestimated was its May 8 regulatory filing which disclosed that it doubled its profit in its December quarter, while sales rose 80%. This, in turn, has likely done a lot to fuel even more anticipation about a possible Alibaba public offering this year or next. Data compiled by Bloomberg suggested the offer’s valuation could reach $62.5 billion.

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While many Chinese Internet stocks have delivered the opposite of reliable performance over the past several years, investors could be excused for expecting that sudden news of an Alibaba offering could lift the sector even higher.

1Belinda Cao, “Alibaba M&A Fuels Gains as Sohu Jumps: China Overnight,” Bloomberg.com, May 12, 2013, http://www.bloomberg.com/news/2013-05-12/alibaba-m-a-fuels-gains-as-sohu-jumps-china-overnight.html, (accessed May 16, 2013).