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China's Web Is Weaving Hyper-Growth

7 March 2014 in Trading Ideas

Many investors don’t need to hear more than “50% revenue growth” to understand that any such company – or sector – is probably worth at least a second look.

Those are the kinds of numbers that are flying out of many of the publicly listed Chinese internet firms these days – with resulting surges in stock prices.

The China Internet motif has risen 20.9% in the past month. In that same time period, the S&P 500 has gained 5.9%. In the past 12 months, the motif has increased 127.4%; the S&P 500 is up 24.1%.

One example, Baidu, the so-called Google of China, which makes up more than 17% of the motif’s weighting, has been on its own tear, gaining nearly 15% in the past month.

Earlier, this week Citi Research analysts lifted their price target on the stock to $215 from $175 following what Citi called the company’s “strong” revenue growth and “successful” transition into mobile.1

Baidu said revenue grew 50% in its most recent fourth quarter, and said it expects revenue to rise 55% to 60% in the first quarter, well above consensus analyst expectations of top-line growth of mid-40%.

In addition, it’s mobile division, which accounts for more than 20% of company’s overall revenue, is up from about 10% just two quarters ago. Baidu’s mobile app platform is China’s No. 1 mobile app distribution channel with a 40%-plus market share.

That’s not to say other companies also aren’t posting high growth numbers.

On Thursday Chinese Internet company Qihoo 360 Technology beat Wall Street’s Q4 forecast and reported that its sales doubled on strong momentum from its mobile gaming business.2

 

Qihoo began primarily as a mobile security software vendor, but it has spent much of the last two years investing in gaming and search technology, the latter move prodding Baidu to spend more on its own mobile operations.

Mobile gaming has grown quickly in China alongside the rapid adoption of handsets, with more gamers switching to mobile from traditional desktop gaming. T.H. Capital analyst Tian X. Hou estimated that total mobile gaming market revenue in China rose 59% between last year’s third and fourth quarters.

However, growth among China’s web companies isn’t just limited to portals and gaming companies. One of China’s recent hot IPOs, Chinese flash-sale website operator Vipshop, saw its stock leap this week after announcing its sales more than doubled in the latest quarter.3

Recent macro-economic news suggests that the Chinese economy may be experiencing lower rates of growth, which could accelerate thoughts of sell-off in the minds of investors, but this has yet to hamper the recent performance of this sector.

1Shuli Ren, “Baidu: Strong Q4 Rev Growth, Higher Mobile Mix, Citi Raises TP,” barrons.com, March 3, 2014.

2Kevin Shalvey, “Qihoo 360 Sales Seen Doubling On Mobile Gaming,” investors.com, March 5, 2014, http://news.investors.com/030514-692135-qihoo-360-technology-to-report-fourth-quarter-results-thursday.htm?ven=yahoocp&src=aurlled&ven=yahoo.

3Kevin Shalvey, “Vipshop Jumps On Price Target Upgrades After Q4 Beats,” investors.com, March 4, 2014, http://news.investors.com/030414-692014-chinese-flash-sale-site-vipshop-tramples-q4-forecast.htm?ven=yahoocp&src=aurlled&ven=yahoo.

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