Goldman's Deep Dive Into Chinese Internet Stocks
- While SINA Corp (NASDAQ: SINA) shares have climbed YTD, shares of Sohu.com Inc (NASDAQ: SOHU), SouFun Holdings Ltd (NYSE: SFUN), Alibaba Group Holding Ltd (NYSE: BABA) and Baidu Inc (ADR) (NASDAQ: BIDU) are down.
- Goldman Sachs’ Piyush Mubayi downgraded the ratings on Sohu, SouFun and SINA, while maintaining Buy ratings on Alibaba and Baidu.
- China’s major Internet companies appear poised for earnings growth and a crystallization of value following the mergers, buybacks, and inclusion of Chinese ADRs to MXCN, Mubayi said.
Earlier in November, the MSCI China index, or MXCN, included 14 US-listed Chinese internet companies. Following this, as well as the five mergers in 2015 and the spate of share repurchases, China’s major Internet companies appear poised for “improved earnings and a crystallization of value at a time where the sector remains in favor,” analyst Piyush Mubayi said.
Alibaba: Bullish Stance Intact
Mubayi maintained a Buy rating on Alibaba, with a price target of $102.
Online shopping accounts for merely 11 percent of China’s retail spend currently and there is potential for further growth. “We believe that Alibaba, as the category leader, will continue to be a long-term leader in this space and benefit from the secular tailwind in the sector,” Mubayi wrote.
Alibaba appears to be on track to hit US$1tn in GMV by FY2020E, with 386mn active annual buyers and 346mn mobile MAUs. Moreover, monetization trends could be boosted in 2016 by the discontinuation of the lottery business in 1QCY15, the analyst said.
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Baidu: Robust Core Search And O2O On Track
Goldman Sachs maintained a Buy rating on Baidu, with a price target of $248.
Mubayi commented that the key reasons for the positive stance on the company are:
- Solid search platform: “In an environment where mobile CPM (cost per mille) narrows the gap with PC, we believe Baidu’s search platform and big-data technology can continue to drive ROI.” The analyst projected 25 percent CAGR in search revenue in the next three years
- O2O expansion on track: Total GMV growth is expected to continue to be robust as Baidu’s O2O expands to over 400 cities.
Mubayi expects Baidu to generate revenue growth of 35 percent and 24 percent in 2015 and 2016 and non-GAAP op margins of 18.4 percent and 21.0 percent, respectively.
SouFun: Transition Requires More Time
The analyst downgraded SouFun from Buy to Neutral, while reducing the price target from $13.50 to US$7.70.
Mubayi said that the company’s business mix had changed significantly since the last update from Goldman Sachs.
“While we remain positive on the growth of its direct sales business and its long-term value proposition to various parties in real estate transactions (including rental), we believe the rapidly increasing headcount will put more pressure on margins in the next few quarters,” he explained.
Execution continues to be the main risk in the medium term in the company’s transformation story. SouFun’s shares have been under pressure due to uncertainties related to the company’s restructuring and the weakening real estate market in China, Mubayi noted.
SINA: Weibo And Vertical Strategy
Goldman Sachs downgraded SINA from Buy to Neutral, while maintaining the price target at $50.
Mubayi mentioned that SINA’s portal business is likely to remain under pressure. He added that Weibo could outperform within the SINA ecosystem. While Weibo generated total revenue growth of 48 percent in 3Q15, it could record 35 percent and 32 percent revenue growth in 2016 and 17, respectively.
“Vertical strategy remains as a key focus for SINA, but with limited financial impact in the short term. Key areas include internet finance, automobile, and sports but it might take time to bear fruit,” the report stated.
Sohu: Game Adversely Impacts Performance
Mubayi downgraded Sohu from Neutral to Sell, while maintaining a price target of $48.
Management guided to 4Q revenues of $435mn- $465mn, representing a 6 percent y/y decline at the midpoint. This is 13 percent below Goldman Sachs’ estimates and 14 percent below consensus. 4Q non-GAAP loss per share was guided to $0.65-$0.90, consensus estimate of $0.38 loss per share.
Mubayi pointed out that the company had missed the revenue and earnings guidance for two consecutive quarters. He added that the already weak results were dragged down by Changyou, which contributed 30 percent of revenues and 80 percent of net income before NCI.
The report noted, “[W]e have not seen any recovery signs yet. In addition, the portal ad segment was negatively impacted by the macro slowdown and its video business is still facing intense competition amid losses.”
Latest Ratings for SINA
|Sep 2016||Brean Capital||Maintains||Buy|
|Aug 2016||JP Morgan||Assumes||Overweight|
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