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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.


Oct. 17, 2012

2012 P/E

2013 P/E

My Watchlist

Baidu (Nasdaq: BIDU  )





51job (Nasdaq: JOBS  )




Add (Nasdaq: NTES  )





SouFun (NYSE: SFUN  )





Qihoo 360 (NYSE: QIHU  )





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.

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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 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.

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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