By
Rick Aristotle Munarriz
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January 25, 2008
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Capitalism is thriving in China. Market data provider China Finance Online (Nasdaq: JRJC ) is teaming up with China Telecom (NYSE: CHA ) to launch a personal finance portal.
This is a very big deal. China Telecom may be the country's leading old-school telephone connectivity provider, but it also watches over more than 40 million broadband customers and 10,000 business halls. With the new channel featured prominently on Vnet -- China Telecom's landing page for subscribers, as well as its subscriber services gateway -- both companies will be able to market China Finance Online's premium stock and market information.
Providing market information in a booming economy sounds like a can't-miss proposition. Reality has been more like an air ball. Xinhua Finance Media (Nasdaq: XFML ) went public 10 months ago at $13 a share. It's trading at less than half that price today. China Finance Online is rallying on the China Telecom deal, but it is still trading at one-third of the peak it set three months ago.
The market's apathy is a surprise. Even if mainland trading has felt like the tulip-bulb frenzy revisited, it's hard to deny China's attractions. The economy is growing quickly. Margins are also wide for companies that can deliver content electronically, such as NetEase.com (Nasdaq: NTES ) , Sohu.com (Nasdaq: SOHU ) , and Baidu.com (Nasdaq: BIDU ) -- all three companies have trailing gross margins above 60%.
Valuation fears? Are you kidding me? Analysts expect China Finance Online to earn $0.92 a share this year. That gives the stock an attractive forward earnings multiple in the teens. I don't like the fact that the company has failed to beat Wall Street's profit targets in each of the past three quarters, but mutually beneficial deals like this one will only help.
We also can't ignore China Telecom's role as an ambassador. Its base of 40 million broadband subscribers is just one-fifth of its wireline user base. As customers upgrade to broadband connectivity, its portal will become even more prominent in China.
The deal works. There will always be the threat of cheaper -- or even free -- providers of market data. Investors will have to live with that risk. It didn't get in the way of a company like Dow Jones being acquired at a pretty premium by News Corp. (NYSE: NWS ) . So you may as well warm up to China Finance Online before hungry suitors do. It's got three months of lost gains to make up, arming itself with the catalysts to claw its way back.
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