7 Ways to Play 3 High-Profile Chinese IPOs

Alibaba, JD.com, and Weibo are three high-profile Chinese dot-coms that are set for near-term IPOs. How can you profit from each?

Mar 16, 2014 at 11:00AM

In talking about future IPOs from Alibaba, JD.com, and Weibo, investors have speculated on the best way to profit from each, which includes buying on the IPO pop. However, other suggestions include buying companies like Yahoo! (NASDAQ:YHOO), Softbank (NASDAQOTH:SFTBF), and Sina (NASDAQ:SINA). Then, there are other less talked-about options such as KraneShares China Internet ETF. Yet, in naming these seven options, which are the best for long-term investors?

High-profile Chinese Internet IPOs galore
It's official: In the next few months, at least three high-profile dot-coms based in China will make their U.S. market debut. The most significant of these IPOs will be Alibaba, perhaps the biggest in years, with analysts projecting a market cap north of $150 billion, meaning the market will likely pump it up even more.

Alibaba announced on Thursday that it is 95% sure that New York will be the venue for its IPO, which is good for investors. The e-commerce giant is expected to produce more than $350 billion worth of transactions. This is a company growing at a 50% annual clip –- it generates most of its revenue via advertising -- with expected revenue and net income of $8.6 billion and $3.5 billion in 2014, respectively, according to Bernstein Research.

JD.com is another e-commerce giant, with 35.8 million active customer accounts and 211.7 million orders last year. According to its prospectus, JD.com had $14.1 billion in transaction volume during the first nine months of last year. But, with a business model very similar to Amazon, it has low margins, reporting a net income of less than $10 million. Still, like Alibaba, JD.com is growing like a weed, and analysts expect a market capitalization north of $20 billion by the time it goes public.

Lastly, Weibo is a hybrid of Facebook and Twitter in China, generating the majority of its profits from advertising and games. In the fourth quarter, Weibo's ad revenue increased 163% year-over-year to $56 million, and its non-ad revenue grew 114% to $15.4 million. Therefore, it's a rapidly growing business, one that might reach a market capitalization of $10 billion by the time of its IPO .

How do you profit?
With any of these three IPOs, you can simply buy each stock. However, with Alibaba and Weibo in particular, there are far better ways to capitalize on the demand. Specifically, you can invest in the companies that have investments in these IPOs.

Softbank is a massive Japanese telecom company that has lagged the broader market in 2014, losing 13% of its value. The near-$100 billion company is a good investment by itself at 14 times earnings, but also because it owns a whopping 37% stake in Alibaba. Hence, its position could be worth more than $50 billion, assuming Alibaba doesn't soar higher on the day of its IPO.

Regardless, Softbank has shown a willingness to make large acquisitions, including an 80% stake in Sprint, meaning the cash position from its Alibaba stake, combined with the company's existing $26 billion cash position, will give Softbank the flexibility to acquire companies, invest in infrastructure, and grow significantly larger.

Then, there's Yahoo!, which owns a 24% stake in Alibaba, potentially worth more than $35 billion. To put this in perspective, Yahoo!'s current market capitalization is only $37 billion, meaning it could possibly trade at one times cash once its stake is sold. In an acquisition-happy technology space, such a cash position will give Yahoo! the ability to make many high-profile, low-risk moves for the future.

Last is Sina, which owns 71% of Weibo. Like Yahoo!, Sina's stake could be worth more than its entire market cap of $4.3 billion. Specifically, if Weibo reaches a valuation of $10 billion, Sina's stake could be 70% more valuable than its entire company. Thus, like Softbank and Yahoo!, this would give it the ability to make future investments, buy back stock, pay dividends, or perhaps take the company private with billions still remaining on the balance sheet.

One more play
KraneShares China Internet ETF, also called KWEB, is a direct reflection of the valuation and performance of Internet companies in China. Since its inception date last July, it has increased in value by 44%, as its top-five holdings have all performed exceptionally well.

As new Chinese Internet IPOs occur, KWEB factors them into its ETF, which means investors get the chance to ride the excitement of such stocks higher as a collection. Furthermore, with the high level of excitement surrounding Alibaba, JD.com, and Weibo, KWEB is a way to capitalize on the likely gains that will be seen throughout the industry.

With that said, KWEB is still a small ETF, having total assets of just $64.8 million, but growing fast.

Final thoughts
As we've seen in IPOs during the last two years, demand is high for fast-growing dot-coms, especially large companies like Alibaba, JD.com, and Weibo. You can certainly invest in any of these companies, or you can gain the safety of an ETF while capitalizing on the likely excitement and upside created with these IPOs.

The final suggestion is to invest in the companies that stand to generate massive cash positions following these IPOs. Softbank has shown a key interest in expanding to become a worldwide telecom giant, which it can accomplish with another $50 billion in cash. However, the cash/valuation metric that both Yahoo! and Sina will present following Alibaba and Weibo's IPO is near unprecedented.

Yahoo! will have the cash to double in size, and Sina could triple, yet both companies trade at a valuation that is significantly discounting this fact. As a result, Yahoo! and Sina look to have the most to gain both short-term as the IPO nears, then long-term once the investments are divested.

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Brian Nichols owns shares of Sina and Yahoo!. The Motley Fool recommends Sina and Yahoo!. The Motley Fool owns shares of Sina. 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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