5 Chinese Dot-Coms That Are Cheaper Than You Think

Earnings season is here, and that may not be a good thing for investors that have their portfolios invested entirely in U.S. companies. Analysts see the S&P 500 companies -- on average -- posting their first year-over-year decline in profitability in nearly three years.

China isn't at its best right now. Like many global markets, the world's most populous nation has slowed down from its once-torrid pace of economic improvement.

However, decelerating growth doesn't mean that upticks are toast. It's also a temporary lull.

Let's take a look at five of China's Internet companies that may be fetching cheaper earnings multiples than you're probably expecting. The one caveat to making the cut is that they are all growing their bottom lines at heartier clips than their P/E ratios.

Company

Oct. 17, 2012

2012 P/E

2013 P/E

My Watchlist

Baidu (Nasdaq: BIDU  )

$114.85

25

18

Add

51job (Nasdaq: JOBS  )

$46.95

19

16

Add

NetEase.com (Nasdaq: NTES  )

$52.87

12

10

Add

SouFun (NYSE: SFUN  )

$17.73

10

9

Add

Qihoo 360 (NYSE: QIHU  )

$22.23

31

21

Add

Source: Yahoo! Finance.

There are some pretty low multiples there, especially once you start considering each company's unique strengths and growth rates.

High five
Baidu is China's leading search engine, claiming roughly three out of every four searches performed in China. For years, growth investors have flocked to Baidu as the Google (Nasdaq: GOOG  ) of China, but Baidu is growing considerably faster. Despite being largely limited to China -- for now -- Baidu is the one growing its bottom line at a 55% rate this year and a 33% projected clip next year. Global Google, on the other hand, is looking to grow its earnings per share by 19% this year and 16% next year. This isn't a knock on Google. Big G has earned its distinction as the Internet's top dog. However, is it fair for Baidu to only be fetching a forward earnings multiple in the teens?

51job is an online job recruiter. The company got its start by wedging weekly missives of employment listings in regional newspapers. It has gone on to cash in on its brand as an online hub for recruitment services. Revenue growth has decelerated as it scales back its old-school printing business, but the good news here is that margins continue to expand given the scalable nature of its website. Investors are seeing that in action this year, as analysts see earnings climbing 20% higher on a mere 11% top-line spurt.

NetEase is a pioneer in massive multiplayer online role-playing games. As many as hundreds of thousands of gamers are playing some of NetEase's more popular titles at the same time. NetEase's market mastery attracted Activision Blizzard (Nasdaq: ATVI  ) to rely on the company to run its World of Warcraft franchise in China. Between Activision Blizzard's street cred and its own portfolio of engaging diversions, NetEase has been serving up healthy revenue and ridiculously fat profit margins.

SouFun is the cheapest of the five names, at least on an earnings multiple basis. It's easy to see why investors have been skittish about SouFun. It operates a popular Internet portal related to real estate at a time when the frothy residential real estate market in China is leading many economists to view it as a bubble waiting to pop. However, SouFun also provides related online offerings including research on home improvement projects and furniture purchases. The proof of SouFun's success is in the pudding, as growth has continued even as traditional real estate plays have been volatile.

Finally we have Qihoo 360. Offering up China's most popular Web browser and a suite of online security software has helped the company expand into search this summer and smartphones in the future. Yes, this is the company that ate into Baidu's market share, though Baidu is still the undisputed top dog here. Qihoo 360 may be the most expensive name on this list, but it's also the one growing the fastest. Wall Street's targeting revenue to soar 88% this year and 49% next year.

Betting on China
Many investors are afraid of buying into China these days. Despite the recent lows and historically cheap valuations, many market watchers remain on the sidelines. They want to see China's growth begin to accelerate again.

Anyone that watched this week's presidential debate also knows that there were some unflattering things said about China, leading many investors to avoid the region altogether until tension between the two countries subsides. Risk-averse investors may want to wait, but that will probably mean having to pay higher prices for these growing companies down the road.

If you prefer a safer way to grab some overseas sizzle, a new report details three American companies destined to dominate the world. It's a free report. Want it? Click here and get it.

Rick Aristotle Munarriz has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard, Baidu, and Google. Motley Fool newsletter services recommend 51job, Activision Blizzard, Baidu, Google, and NetEase.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2064370, ~/Articles/ArticleHandler.aspx, 4/19/2014 9:09:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

TREND TRACKER: Get Rich When the Web Goes Dark

It's time to say "goodbye" to your Internet! One bleeding-edge technology is about to put the World Wide Web to bed. And if you act right away, it could make you wildly rich. Experts are calling it the single largest business opportunity in the history of capitalism… The Economist is calling it "transformative"... but you'll probably just call it "how I made my millions." Big money is already on the move. Don't be too late to the party – find out the 1 stock to own when the Web goes dark.


Advertisement