"Investors are driving up valuations on Chinese Internet companies as an almost threefold surge in Alibaba Group Holding Ltd. (BABA)’s profits buoyed the earnings outlook for the industry.
Online companies includingVipshop Holdings Ltd. (VIPS), a fashion retailer, and YY Inc. (YY), a social entertainment website, have led gains this year on the Bloomberg China-US Equity Index. The gauge, with about half of its members focused on web business, trades at 18 times forward earnings, near a four-year high reached July 28 and up from a multiple of 11 in February.
Investor confidence is growing in companies that provide online services to the world’s largest pool of Internet users -- some 632 million people -- after Alibaba said in June that net income rose to about 23.1 billion yuan ($3.7 billion) in the 12 months through March from 8.4 billion yuan a year earlier. Alibaba,China’s largest e-commerce operator, is preparing its U.S. listing in a deal that analysts estimate may value the company at $198 billion, three times what it was in May last year.
“The surge in Alibaba’s valuation along with its booming sales and profit help bring people’s attention to the quick growth in China’s Internet sector and its potential,” Tan Chiheng, an analyst at Granite Point Capital Inc., which invests in Chinese equities, said by phone from Boston. “The giant has made quite a few acquisitions that have lifted the targets’ valuations. More mobile-focused web companies can become buying targets.”
Alibaba’s profit soared as sales jumped with shopping promotions and new acquisitions bolstering mobile services. The Hangzhou-based company said in a filing for its initial public offering that it will make investments and acquisitions in areas of mobile, digital media and logistics after announcing 26 deals worth $16 billion since the start of 2012, for companies ranging from online mapping and video to web browsers.
Companies in the KraneShares CSI China Internet Fund (KWEB), an exchange-traded fund that tracks web companies with listings abroad, boosted sales by 41 percent and earnings by 30 percent on average in the first quarter, compared with sales growth of 19 percent and 24 percent profit increase for U.S. web-focused companies, according to Brendan Ahern, managing director at New York-based Krane Fund Advisors LLC. The ETF has rallied 16 percent in 2014.
Sales Surge
Guangzhou-based Vipshop’s net income surged fourfold in the first quarter this year as sales jumped 126 percent to $701.9 million. YY, also based in Guangzhou, said profit rose 139 percent in the April-June period while revenue doubled to $135.6 million.
“The Internet is picking up momentum in China, the population is vast and the language, regulation and cultural barriers have made it good for local companies,” Gustavo Galindo, senior emerging markets portfolio manager at Russell Investments, said by e-mail Aug. 1.
While Chinese Internet company shares have done “tremendously well,” the prices may not reflect the risk that more and more mergers and acquisitions make differentiation more difficult, according to Devan Kaloo, head of global emerging markets at Aberdeen Asset Management Plc.
Margin Compression
“The boundary between Internet companies is blurred,” Kaloo said in an interview at Bloomberg’s headquarters in New York on Aug. 6. “They are going to fight each other out. That means there potentially a big risk to margin compression because of that.”
SOURCE: BLOOMBERG
In a complacent market it is always prudent to take a cautious approach,and a measured risk.
