The Bubble in Chinese Internet Stocks

With all the talk about Facebook and Twitter valuations it’s important to keep the other bubble in internet companies, namely, that of Chinese internet companies.  Companies like SINA Corp (NASDAQ:SINA), Baidu, Inc (NASDAQ:BIDU), Sohu.com (NASDAQ:SOHU), and NetEase.com (NASDAQ:NTES) are looking rather bubblicious.

A quick review of these companies’ fundamentals suggests that they are over-bought and are ripe for a fall at the hint of any slowdown in China’s booming economy:

  • Sina Corp: Its forward price-to-earnings ratio is 61.15 and its trailing price-to-earnings ratio cannot be calculated because it had been losing money until recently. Its market captitalization is around $8.8 billion, and, curiously, its enterprise value is only $7.9 billion.  Its profit margin is -4.7% while its operating margin is a robus 23.9%.  Its return on assets is an anemic 3.7% and its return on equity is, of course, negative.  Other valuation measures are sky high: its price-to-earnings growth ratio is 4.42, its price-to-sales ratio is 21.80, and its price-to-book ratio is 7.08.  In short, investors in this stock expect it to grow faster than the Chinese economy pretty much indefinitely.  That, of course, is logically impossible, and it is something we’ve seen in the United States before, with the advent of the dot-com bubble stocks projecting growth rates of 50% or more per year in perpetuity.  12.7% of its float is sold short. About the company: SINA Corporation is a global Internet media company operating Chinese-language destination sites.  The Company offers a network of branded content and services targeting people of Chinese descent worldwide.  SINA.com offers online news, entertainment, community, and commerce through web sites that are produced and updated by local teams in China, Hong Kong, Taiwan, and North America.
  • Baidu, Inc.: Its forward price-to-earnings ratio is 40.84 which is rather high.  But that’s nothing compared to its trailing price-to-earnings ratio of 97.53.  Its price-to-earnings growth ratio is a reasonable 0.95, but its price-t0-sales is 43.09 and its price-to-book ratio is 40.58.  Its profit margin is 44.54% and its operating margin is 50.02%.  Its return on assets is 28.76% and its return on equity is 53.58%.  Despite being a very expensive stock, the company is robustly profitable.  Its profitability should provide some downside protection on the stock; however, the stock is currently priced for a very high rate of growth in perpetuity.  This is, of course, unsustainable.  2.2% of its float is sold short.  About the company: Baidu, Inc. operates an Internet search engine.  The Company offers algorithmic search, enterprise search, pay for performance and news, MP3, and image searches.
  • Sohu.com Inc.: This company’s valuations are a little bit more reasonable that the other companies’.  Its forward price-to-earnings ratio is 17.34 and its trailing price-to-earnings ratio is 26.6.  Its price-to-earnings growth ratio is 1.51, its price-to-sales ratio is 6.12, and its price-to-book ratio is 4.69.  Its profit margin is 24.26% and its operating margin is 38.1%.  Its return on assets is 14.48% and its return on equity is 23.99%.  11.7% of its float is sold short.  About the company: Sohu.com Inc. operates an Internet portal in China.  The Company’s Web site consists of Chinese language Web navigational and search capabilities, Web-based communications services, and a platform for e-commerce services.
  • NetEase.com Inc.: Its forward price-to-earnings ratio is 13.89, its trailing price-to-earnings ratio is 19.77, its price-to-earnings growth ratio is 1.00, its price-to-sales ratio is 8.2, and its price-to-book ratio is 4.63.  Its profit margin is 4.059% and its operating margin is 46.2%.  Its return on assets is 15.62% and its return on equity is 26.03%.  2.1% of its float is sold short.  About the company: NetEase.com Inc. is an Internet technology company that develops applications, services and other Internet technologies in China.  The Company provides online gaming services that include in-house developed massively multi-player online role-playing games and licensed titles.  NetEase also provides free email and various channels of content, online advertising, search and community services.

Competitors to these companies include: Google, Inc (NASDAQ:GOOG), Yahoo! Inc. (NASDAQ:YHOO), Shanda Interactive (NASDAQ:SNDA), Rediff.com India Ltd. (NASDAQ:REDF), AOL, Inc. (NYSE:AOL), and Youku.com Inc. (NYSE:YOKU)

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