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.
Mad potential, mad valuation
SINA Corp (NASDAQ:SINA) is a leading online media company and value-added information service provider for Chinese communities both inside and outside of China, targeting overseas audiences through region-specific websites. Its massive traffic has helped it attract advertisers in the past and should continue to do so as corporate budgets expand.
One of the main growth drivers for this company over the next few years will be its Twitter-like service, Weibo. Providing high client stickiness and traffic and massive information on user profile and behavioral patterns, Weibo will help SINA Corp (NASDAQ:SINA) attract more advertisers and increase its cross-selling capabilities, further profiting from online gaming, app stores and online payment systems in the longer term. Moreover, its well-educated audience makes its webpages even more attractive for advertisers. The rapidly increasing use of smartphones and tablets in China is the other big growth catalyst for SINA Corp (NASDAQ:SINA).
Analysts expect SINA Corp (NASDAQ:SINA) to deliver an average annual EPS growth rate above 200%, over 10 times higher than its peers’ average. Although most of this optimism seems priced in the stock, which already trades at 115 times its earnings, this is a stock to buy and hold, if you are willing to pay the premium. Upside potential is just…mad!
Bottom line
Above I have analyzed three companies that seem to be dodging the effects of the Chinese credit crunch. In spite of a slowing economic growth, these firms seem poised to outperform the market, benefiting from secular tailwinds in the longer term, thus delivering plenty of upside. Although all three offer compelling investment prospects, their valuations set them apart. Offering a balance between these two characteristics (outlook and valuation), I’d say Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is probably the best choice; nevertheless, if I could, I would definitely add all three to my long-term portfolio.
The article Chinese Internet Companies Not Affected by the Credit Crunch originally appeared on Fool.com and is written by Damian Illia.
Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Baidu, SINA , and Sohu.com. The Motley Fool owns shares of Baidu. Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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