Pacific Crest's Cheng Cheng Loves 58.com And Qunar, Positive On Baidu And Alibaba Before Earnings

Pacific Crest analyst Cheng Cheng recently returned from a trip from China, during which Pacific Crest analysts met with representatives from various Internet companies to discuss the current environment in China. While economic headlines out of the country have been turbulent as of late, Cheng describes Chinese Internet demand as “stable and healthy.”

Internet Checks

It’s no secret that China’s A-shares markets have been extremely volatile in recent weeks. However, Cheng notes that investor concern for the stability of most Chinese Internet stocks is unwarranted.

“All of the companies we have talked to have not seen activity or demand slow down from the recent Chinese market volatility,” Cheng explicitly states in the report.

According to the report, Pacific Crest sees Q2 search advertising tracking in-line with expectations and online video advertising tracking ahead of the firm’s expectations.

Economic Weakness

Cheng believes that fears surrounding the reported weakness in recent Chinese smartphone and automotive sales numbers are overblown. In the handset market, he sees “end-market-specific factors,” not smartphone saturation, driving recent weakness.

Cheng also points out that slumping new car sales in China have been accompanied by surging growth in second-hand auto sales.

Finally, recent data on housing and travel indicate “healthy consumer demand” in China.

Stock Picks

Cheng names 58.com Inc WUBA and Qunar Cayman Islands Ltd QUNR as Pacific Crest's top two Overweight-rated Chinese Internet stocks ahead of Q2 earnings. Cheng notes that the recent 20 percent pullbacks in the share prices of both stocks have created a value opportunity for investors.

In addition, Pacific Crest has Overweight ratings on the stocks of Alibaba Group Holding Ltd BABA and Baidu Inc BIDU.