3 stocks for China's Internet growth

These picks represent the country's leading players in online gaming, travel and search.

By MoneyShow.com Nov 4, 2013 4:58PM
MoneyShow.com© Soo Hoo Zheyang/Reuters
Caption: File photo of security guard walking past the company logo of Baidu at its headquarters in BeijingBy Yiannis Mostrous, Capitalist Times

The Internet growth story is far from over, especially in China. Shares of Internet-related Chinese stocks have run up significantly of late -- fueled by a raft of bullish research reports.

Investors seeking exposure to this long-term growth story should have a stomach for volatility and the discipline to avoid overpaying for growth. Here are our top three plays on this powerful growth trend.

Ctrip.com International (CTRP)
With a 48 percent market share, Ctrip.com holds the crown as China’s leading online travel agency, offering a one-stop shop for booking hotels, flights and packaged tours.

In addition to Chinese consumers’ growing comfort level with online shopping, Ctrip.com also stands to benefit from the boom in domestic and international travel that has accompanied rising household incomes.

The China Tourism Academy estimates about 80 million from the mainland traveled abroad in 2012, compared to a mere 10 million in 2000. In 2012, China’s online travel market surpassed $1.5 billion in revenue and should hit the $2 billion mark by the end of 2013.

With $1 billion in cash and cash equivalents on its balance sheet and the best mobile travel application among its competitors, Ctrip.com International should retain its top spot among online travel agencies catering to consumers in Mainland China.

Baidu (BIDU)
Already China’s undisputed leader in Internet search, Baidu has translated this dominance to the mobile web and stands to benefit over the long term by monetizing this traffic.

Like U.S.-based search providers, Baidu isn’t a one-trick pony. One of the company’s most promising–and lucrative–business lines involves operating a channel through which users can purchase and download games to their mobile phones.

The company has moved aggressively to bulk up its mobile offerings. In July 2013, the firm announced an agreement to acquire 91 Wireless; this blockbuster deal gives Baidu the capacity to distribute 69 million mobile applications per day, or 19 million more than its closest competitor.

Although investors have bid up the stock by 71 percent since the start of July, we see additional upside.

Changyou.com (CYOU)
A subsidiary of Internet portal Sohu.com, video game developer Changyou.com specializes in massively multiplayer online role-playing games (MMORPG).

Changyou.com’s share price will fluctuate with the success or failure of the company’s newest releases.

Until recently, the stock had underperformed its peers in China’s Internet and online gaming industry because investors question whether forthcoming expansions to the company’s most popular games will be a hit.

These fears are overblown. The stock trades a less than seven times earnings, compared to an average of 17 times earnings for its peer group.

Although Changyou.com is expected to release 10 to 20 videogames for smartphones over the next two years, the stock’s current valuation assumes almost no growth going forward.

In my view, Changyou.com rates a buy for adventurous investors who can stomach volatility.

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