Searching for Growth in China
It's pretty tempting to invest in China's growth, and no other place to me seems more tempting than the growth of the Internet in China.
DISCLAIMER: I am not a financial professional, so do your own research. I own stock or options in Baidu and Sina as of this writing, and plan to buy more in the future, but may also to sell them in the future at an unspecified time. Investing in emerging markets is especially risky and you should do so with extreme caution.
As of July 2005, internet users in China totalled over 100 million people [see reference], nearly as large as the U.S. internet population. In addition, as of today, the #5 (baidu.com) and #6 (sina.com) most visited web sites in the world are from China [See Alexa Global Top 500]. Even with so many Chinese people already online, there's still plenty of room for growth given China's staggering 1.3 billion population. Due to the low incomes in China, it will take years or decades for a significant fraction of the Chinese population to get online, but then, that's also years to decades of growth ahead. For those with nerves of steel and a long time horizon of several years, it's a attractive, though risky place to invest.
The Case for China
Many economists and politicians think Chinese currency is undervalued. The exact amount is up for debate, but this paper pegs it as about 22.5% undervalued. This would work in favor of those owning assets in Chinese companies and in favor of owning companies profiting in Chinese currencies.
The Case for Sina.com
Sina.com is one of the largest web portals in China and also provides mobile phone data services, web hosting, and more. I view it like a "Yahoo of China", they do a little bit of everything. As of today, it actually has a reasonable forward P/E of 23.16 (current quote: SINA). It's profitable and should benefit from the overall growth of internet use in China.
The Case for Baidu.com
Baidu had a spectacular IPO earlier this year. Its offering was at $27 a share, but on the opening day it closed at $123.90 a share. You'd be hard-pressed to find someone that would say it's undervalued with a forward P/E today (November 13, 2005) of 166.79! In addition, some analysts think its current fair market price should be around $45/share (see Baidu Shares Appear 'Extremely Overvalued'). I think that it's certainly true, it's overvalued by any normal measure. But what if you look into the future, say 5 years from now. According to this article research firm Piper Jaffrey thinks the China search market will grow from $134 million today to $1 billion by 2010. Currently Baidu has a 44.7% market share, but if that erodes due to competition by 2010 to around 30%, that means Baidu would be pulling in $300 million in revenues. Expenses at search companies tend to be low, around 30% of revenues, so earnings might be around $210 million. That puts my Baidu at a valuation of between $4.2 billion and $6.3 billion (assuming a P/E of between 20 and 30), compared to its current market value of $1.68 billion when the China search market reaches $1 billion. Whether it will happen in 5 years or not is a big question, and whether the competition will acquire, or kill Baidu is another big question, since 5 years is a long time in Internet time. Interestingly enough, Google also has a minority investment in Baidu.
Also of interest:
Speech by Baidu's Cofounder Robin Li
Web traffic at Baidu today is about 1/3 of Google's U.S. traffic, according to Alexa.com. See the current traffic numbers here.
How Do Search Engines Handle Chinese Queries - A comparison of Chinese search engines.
DISCLAIMER: I am not a financial professional, so do your own research. I own stock or options in Baidu and Sina as of this writing, and plan to buy more in the future, but may also to sell them in the future at an unspecified time. Investing in emerging markets is especially risky and you should do so with extreme caution.
As of July 2005, internet users in China totalled over 100 million people [see reference], nearly as large as the U.S. internet population. In addition, as of today, the #5 (baidu.com) and #6 (sina.com) most visited web sites in the world are from China [See Alexa Global Top 500]. Even with so many Chinese people already online, there's still plenty of room for growth given China's staggering 1.3 billion population. Due to the low incomes in China, it will take years or decades for a significant fraction of the Chinese population to get online, but then, that's also years to decades of growth ahead. For those with nerves of steel and a long time horizon of several years, it's a attractive, though risky place to invest.
The Case for China
Many economists and politicians think Chinese currency is undervalued. The exact amount is up for debate, but this paper pegs it as about 22.5% undervalued. This would work in favor of those owning assets in Chinese companies and in favor of owning companies profiting in Chinese currencies.
The Case for Sina.com
Sina.com is one of the largest web portals in China and also provides mobile phone data services, web hosting, and more. I view it like a "Yahoo of China", they do a little bit of everything. As of today, it actually has a reasonable forward P/E of 23.16 (current quote: SINA). It's profitable and should benefit from the overall growth of internet use in China.
The Case for Baidu.com
Baidu had a spectacular IPO earlier this year. Its offering was at $27 a share, but on the opening day it closed at $123.90 a share. You'd be hard-pressed to find someone that would say it's undervalued with a forward P/E today (November 13, 2005) of 166.79! In addition, some analysts think its current fair market price should be around $45/share (see Baidu Shares Appear 'Extremely Overvalued'). I think that it's certainly true, it's overvalued by any normal measure. But what if you look into the future, say 5 years from now. According to this article research firm Piper Jaffrey thinks the China search market will grow from $134 million today to $1 billion by 2010. Currently Baidu has a 44.7% market share, but if that erodes due to competition by 2010 to around 30%, that means Baidu would be pulling in $300 million in revenues. Expenses at search companies tend to be low, around 30% of revenues, so earnings might be around $210 million. That puts my Baidu at a valuation of between $4.2 billion and $6.3 billion (assuming a P/E of between 20 and 30), compared to its current market value of $1.68 billion when the China search market reaches $1 billion. Whether it will happen in 5 years or not is a big question, and whether the competition will acquire, or kill Baidu is another big question, since 5 years is a long time in Internet time. Interestingly enough, Google also has a minority investment in Baidu.
Also of interest:
Speech by Baidu's Cofounder Robin Li
Web traffic at Baidu today is about 1/3 of Google's U.S. traffic, according to Alexa.com. See the current traffic numbers here.
How Do Search Engines Handle Chinese Queries - A comparison of Chinese search engines.
posted by jasonz at
4:31 PM
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