Tuesday, June 28, 2011

Don't Bail on China Tech Stocks

By Eric Jackson
RealMoney Contributor

6/28/2011 1:30 PM EDT
Click here for more stories by Eric Jackson

The second quarter has not been kind to Chinese tech stocks. After flying high from January to April, big China techs such as Sina (SINA - commentary - Trade Now), Sohu (SOHU - commentary - Trade Now) andBaidu (BIDU - commentary - Trade Now) got walloped. Newbie China tech IPOs such as Youku (YOKU -commentary - Trade Now), Dangdang (DANG - commentary - Trade Now), and Qihoo 360 (QIHU -commentary - Trade Now) got hurt even more.

There were many reasons for the sharp pullback in these China tech stocks, some of which are listed below:

  • the general market pullback meant that these high-beta names pulled back even more;
  • more evidence of fraud in China stocks spreading from smaller reverse takeover companies to larger companies such asSino-Forest and Longtop Financial (LFT- commentary - Trade Now);
  • continued worries about a China Internet bubble and concerns that this was the beginning of the end; and
  • Jack Ma transferred out Alipay from Alibaba, sending Yahoo!'s (YHOO - commentary - Trade Now) shares down and worrying Americans that there is no rule of law in China.
In the midst of this wave of bad news and worry, I happened to be traveling through China, meeting with several tech companies. I was asked about if we were in a bubble more than anything else while I was there.

What I said then and what I still believe now is that this is not the beginning of the end but the end of the beginning. The Chinese Internet bubble is not bursting now, and I don't believe it will burst this year. I still think we have six to 36 months of good times ahead of us. It's hard to know more precisely than that when the party will end -- at least at this point.

Translated for investors, that means you shouldn't miss out on a second-half bounce-back for these stocks.

There is a range of quality out there, however, so you need to do a lot of research and due diligence before jumping in.

I recommend you stick with two of the biggest quality names: Baidu and Sina. They are solid companies with great management teams that will continue to be in-demand sites for a long time. Everywhere I went in China, I would hear people updating their Sina Weibo status on their iPhones. That is a growing monster service, right there.

Similar to Baidu and Sina, Hong Kong-listed Tencent should also do well in the second half of the year.


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