3 Chinese Internet Stocks Better Than The Rest

• Alibaba Group Holding Ltd BABA shares are down 22 percent year-to-date, while shares of TENCENT HOLDINGS ADR TCEHY are up 31 percent over the same period.
• Citi’s Thomas Tong identified Tencent, Alibaba and ChinaNetCenter as the top picks in the 32-stock China internet universe.
• Valuation euphoria about Chinese internet stocks has subsided with the realization that O2O will take time to deliver, Tong said.

Analyst Thomas Chong mentioned that the valuation euphoria around Chinese internet companies has subsided with investors realizing that initiatives such as O2O will take time to deliver results.

The analyst believes that companies like Alibaba, Tencent and Baidu Inc (ADR) BIDU will spearhead consolidation in the sector by leveraging off their existing dominance.

China’s internet sub-segments are expected to grow on average by mid-20 percent in 2016, while cloud computing and video movies entertainment segments display long-term growth potential.

Identifying the stocks of Tencent, Alibaba and ChinaNetCenter as the top picks, Chong mentioned that Tencent has a diversified presence in advertising and gaming and is pursuing an asset-light model through an open platform strategy in O2O.

Alibaba’s strength lies in its dominance in ecommerce and new initiatives like cloud computing and internet finance, while ChinaNetCentre’s leadership position in CDN and entry into the cloud computing segment are its strong points.

The Citi report mentioned that unlisted online gaming companies with quality IP are likely be acquired by other leading players. Online video companies are expected to come up with a diversified business model.

Thong believes that box office receipts in China could surpass that of the US by 2017 with the entry of internet companies into the segment.

China’s two top local service providers - Meituan and Dianping - have entered into a strategic deal to create an O2O platform, while Alibaba has proposed to acquire all outstanding shares of Youku Tudou.

Other important developments in the internet segment include Baidu becoming the largest shareholders in Ctrip.com International, Ltd. (ADR) CTRP and the mobile gaming segment witnessing a shake-out with leading players Tencent and NetEase elbowing out smaller peers.

The MSCI China is being expanded to include 14 ADR stocks from China’s internet segment, Thong added.