Although many are concerned about the credit crunch in China, its effect on Internet ADRs is quite limited. Consequently, companies like Sohu.com Inc (NASDAQ:SOHU), Baidu.com, Inc. (ADR) (NASDAQ:BIDU) and SINA Corp (NASDAQ:SINA) still have long growth runways ahead of them. All three seem poised to benefit from the increasing penetration of the internet in China, accompanying the expansion of its middle-classes and the rising corporate spending on advertising. Let’s take a closer look at them and try decide which one stands as the best investment opportunity.
Who’s playing?
Sohu.com Inc (NASDAQ:SOHU) is a Chinese Internet portal that offers media, search, gaming, community and mobile services, dominating the market in terms of brand recognition, page views and registered users. Aggressive expansion initiatives in the paid search, gaming and online video segments make its sites more attractive to users, and therefore, also to advertisers. However, analysts expect roughly ¼ of 2013’s revenue to derive from advertising. The gaming segment is expected to be the strongest, contributing with over half the total income, according to Morningstar.
Going forward, the company will need to differentiate from its peers in order to attract more users. Its hefty investments on high-quality video have encouraging early results and put the firm in an advantaged position. In addition, its paid search business, which accounted for 12% of 2012´s sales, could get to contribute with 25% of the total revenue over the next few years.
Trading at 25 times consensus earnings, almost a 30% discount to the industry average, while expected to outperform its peers in terms of EPS growth over the next five years, this is a stock to buy and hold for the long-term. Meanwhile, a strong and ever-increasing cash flow and no long-term debt will help Sohu.com Inc (NASDAQ:SOHU) enhance shareholders’ value through stock repurchase programs (and maybe even a dividend yield in the quarters to come).
When Google is not around
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is a leading Chinese-language search engine, with particular dominance in the paid search market. Although the company is, along with Tencent, the only firm with a sizable long-term debt in the Chinese web big-leagues, its cash generation capabilities and strong net cash position makes this situation not worrying at all.
Its unmatched market share — and its focus on small and mid-sized businesses through thousands of sales agents operating nationwide — puts Baidu.com, Inc. (ADR) (NASDAQ:BIDU) in a particularly advantaged position to benefit from the increased spending on paid-searching. Despite stiff competition from Qihoo (Google has not competed in the Chinese market since 2006), Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s deal with Apple Inc. (NASDAQ:AAPL) to include support for Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s search engine on iPhones and other iOS-powered mobile devices and tablets will help it maintain its front-runner position.
Diversification will also contribute to growth in the years to come. The launch of an online payments solution, BaiduPay, and job recruitment site, Baijob, along with the recently acquired majority ownership in iQiyi, a popular video-streaming site, should prove highly beneficial for the company´s overall traffic and revenues.
Analysts expect the firm to outperform its peers, delivering average EPS growth rates around 20% over the next five years, even above those projected for Sohu.com Inc (NASDAQ:SOHU). Trading at 18 times its earnings, about a 35% discount to the industry average, I’d recommend buying this stock for your long-term portfolio.
