Spear Targets Chinese Nets
10/01/2004 12:00 am EST
"What is the best way to invest in China, a nation of 1.3 billion people on the verge of an unparalleled economic boom?" asks Gregory Spear . "We currently prefer the smaller Chinese Internet companies." For those aware of the high risks, he looks at two of these plays.
"SINA (SINA NASDAQ) is one of several leading online media companies serving China. SINA is committed to the lucrative instant messaging business; the service already has 80 million registered user accounts. SINA is a play on the rapid movement of people from the Chinese countryside into the cities, an inexorable trend that is happening all across Asia. SINA is also teaming up with Yahoo! to start a new online auction service in China. In late July SINA reported quarterly earnings of $18 million, or 31 cents per share, an increase of 150% from the year ago figure. Quarterly sales grew 89%. The company surprised the Street, however, by forecasting flat revenue in the third quarter. Is this the end of the party? We don't think so. Technically, the stock is oversold and we think this is likely to be the bottom of a longer term cup that will slowly lead SINA back toward its 2004 highs. Being an independent media company in China has its risks. Since the latest state campaign against Internet cafes began, up to 40,000 have been closed, and China Mobile has recently cracked down on aggressive wireless sales practices that included spam and sex-related marketing. For SINA, this has meant the loss of its interactive voice content business. While these moves have created worries among western investors, it is likely that from a long-term perspective SINA should still be considered a ground floor opportunity.
"Online gaming is expected to be a $400 million market in China in 2004, and NetEase (NTES NASDAQ) is the leader. Like text messaging, online gaming in China has exploded in recent years. China's online games market is expected to grow 80% in 2004. An estimated 13.8 million online gamers spent $240 million last year. When NTES reported financial data last month it was the 25% sequential growth in online gaming net earnings, to $15.9 million, that stood out. In fact, wireless text messaging revenue dropped due to China Mobile crackdown. In the end, gross profit was up 58% but with operating expenses doubling from previous year ago levels due to a new ad campaign, the company brought 'only' $11 million to the bottom line, a 29% gain. This still gives NTES a price-to-earnings growth ratio of less than 1. While SINA is partnering with Yahoo!, Netease is partnering with Google, to provide enhanced search services as well as cooperating in online advertising, including a cost-per-click search advertising service. Technically the chart pattern for NTES is similar to SINA, except the 2003 run took NTES well above its original IPO range of about $15, whereas SINA is now trading back into its IPO range, which is where we expect solid support for both companies. That presents NTES with more downside risk. That said, we believe NTES is an attractive long-term play."
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