19 Chinese Internet Stocks That Have Wall Street Talking

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In a report issued Sunday, analysts at Summit Research initiated coverage on the Chinese Internet sector.

Overall, they have a “favorable view on this sector and a bias towards market leaders with long-term monetization potential.” They selected Baidu Inc (ADR) BIDU, Qihoo 360 Technology Co Ltd QIHU, Vipshop Holdings Ltd – ADR VIPS and YY Inc (ADR) YY as their top picks.

The firm thinks the Chinese Internet segment “should continue its secular growth over the next several years...we should see depressed margin profiles in 2015 for companies across many verticals due to fierce competition and aggressive investment for emerging growth drivers.”

That said, they believe “those investments are warranted in order to be better positioned for the next cycle of internet growth, which features emerging drivers such as mobile, local, and eCommerce.”

Related Link: Morgan Stanley: 58.com And Ganji.com Merger Would Provide Multiple Avenues Of Cost & Revenue Synergies

Things To Watch

The report highlights a few key points:

  • The online ad market in China seems poised to continue its secular growth, driven by an ever-increasing penetration of the Internet and advertisers’ growing focus on high-ROI keyword search marketing. Consequently, the analysts rate Baidu and Qihoo with a Buy, and SINA Corp SINA and Sohu.com Inc SOHU with a Hold.
  • Monetization is still at its initial stages. However, a significant percentage of Internet traffic is already coming from mobile devices. Some of the main players in the segment are building an ecosystem and user base “around key mobile apps,” which the analysts believe “lays a solid foundation of future monetization.” In this line, they give Cheetah Mobile Inc (ADR) CMCM and Weibo Corp (ADR) WB a Buy rating, but issue a Hold for Tencent on the back of its valuation.
  • The online travel market, especially the leisure travel segment, is showing “strong growth momentum. However, players in the space tend to sacrifice near-term profitability to pursue market share.”
  • Overall, Summit is “positive on players with strong market share gain potential and efficient operation.” This is why they rate Qunar Cayman Islands Ltd QUNR and Tuniu Corp TOUR with a Buy, but give Ctrip.com International, Ltd. (ADR) CTRP a Hold rating.
  • Although online video is gaining traction among advertisers, competition and content costs should pressure margins in the foreseeable future, thus limiting, profitability visibility, the report states. Stock implications: the firm issued a Hold rating for Youku Tudou Inc (ADR) YOKU.
  • eCommerce penetration in China remains relatively low. However, analysts expect this to change over the next couple of years. On the other hand, they also believe competition will continue to intensify. They rate Alibaba Group Holding Ltd BABA, Vipshop Holdings and Jumei International Holding Ltd (ADR) JMEI as Buy cases, and give JD.Com Inc (ADR) JD and 58.com Inc (ADR) WUBA a Hold rating.
  • “Further broadband/mobile penetration and increasing discretionary income should drive online entertainment’s substantial growth over the last several years.” The analysts say they see potential in emerging mobile games and social interactive platforms. Consequently, they roll out Buy ratings on YY Inc and Changyou.Com Ltd (ADR) CYOU.
  • “A significant shortage of skilled and educated work force drives the strong demand for recruitment and career-related services. However, the online recruitment market is highly fragmented and competitive.”
  • This, lastly, is why they give Zhaopin Ltd (ADR) ZPIN a Hold rating.
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Posted In: Analyst ColorLong IdeasEmerging MarketsInitiationAnalyst RatingsMoversTrading IdeasChinaChinese Internet stocksSummit ResearchTencent
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