How to Invest in China

From last week's RealMoney....

Stock quotes in this article: 

BIDU

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GS

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GS

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YHOO

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SINA

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YOKU

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PWRD

With CEO Allen Chan's departure from Sino-Forest earlier this week and the halt in trading of its stock, many investors are scratching their heads and wondering how or if they should invest in China.

I've even heard some commentators on TV say that since the Shanghai index has been flat or down in the last few years, this is proof that China is not a great place to invest. Yes, but most people invest in particular stocks. For example, i\If you bought into Baidu(BIDU) at its March 2009 levels and held on to it until today, you would be up 845%. That's not bad.

Of course, if you've invested in Sino-Forest or some of the other Chinese frauds, you have taken massive hits.

So how should you proceed? Here's my advice.

1. Don't ever put your money in a Chinese Reverse-Takeover (RTO) again. There might be some good ones out there, but I can't name any. It's not worth it. There is way too much risk for the potential return.
2. Don't think a Big Four auditor is a guarantee that everything at a Chinese company is kosher. Longtop Financial had one. So did China Agritech. Both are now trading on the pink sheets.
3. Don't think a big name investment bank is a guarantee that a company is legit.Goldman Sachs (GS) took Longtop public a couple of years ago.
4. All things being equal, it's safer to invest in the bigger-cap Internet companies in China -- and they are less likely to manipulate numbers compared to a manufacturing companies over there. The big dogs of the Chinese Internet are Tencent, Baidu, andAlibaba Group. Alibaba is still private but Yahoo! (YHOO) owns 40% of it, which is why I love Yahoo! Sina (SINA) is trying to break into this small group of big dogs and probably will in the next couple of years as its Weibo users grow.
5. Beneath the "big dogs," there is much more risk, so pick category winners. Sina is the category winner in Weibo (Twitter). Youku (YOKU) is the category winner in online video. Taobao (part of Alibaba Group) is the category winner in e-commerce.
6. Look for value plays. Online gaming in China is severely undervalued at the moment -- especially compared to the expected valuation that Zynga is going to get when it launches its IPO. My two favorites in that space are Perfect World (PWRD) and Giant Interactive (GA). I also think Mecox Lane (MCOX) is massively undervalued compared to Dangdang (DANG).
7. There are no guarantees in China. The Chinese government could rewrite the rule book tomorrow. The whole Alipay incident with Yahoo! shows the risks of Chinese investing. Just as it's possible in the U.S., There could be a big accounting restatement in any of the "big dogs" at any time. However, I think there is still another 18-36 months of growth ahead for China before a major correction, so opportunity does beckon for the right companies.

At the time of publication, Jackson was long YHOO, SINA, PWRD, YOKU and MCOX, although positions can change at any time.

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CHINA

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INTERNET

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What Makes It a Perfect World?

By Eric Jackson
RealMoney Contributor
7/11/2011 10:45 AM EDT
Click here for more stories by Eric Jackson

Perfect World (PWRD - commentary - Trade Now) is one of the best-known online gaming companies in China. The storylines and characters for its top games are sourced from popular legends in Chinese literature, so there is an immediate familiarity for gamers.

Similar to all Chinese gaming stocks, Perfect World pulled back in 2010 from the fall 2009 highs, when the stock hit over $40. In the rally earlier this year, Perfect World and other gaming stocks underperformed. It bottomed at $17 a few weeks ago. Now it's back over $21.
Despite the company's conservative guidance, Perfect Worls has a number of promising new games coming out this year and going into next year. Management is playing it down, but the stock is likely to exceed expectations, which is why I took a position in the name a couple of months ago.

Last month, I met with Perfect World Investor Relations Officer Vivien Wang at the company's headquarters, a 22-story building overlooking Beijing's suburbs. What follows is a summary of our conversation.

Eric: So can you tell me about your company and your strategies for the next six to 12 months?

Wang: The company was founded in 1997, and the senior management has worked together for a very long time. Our revenue is not as concentrated as other companies, none of our games contribute more than 30% of the total revenue, whereas some of our competitors rely on 70% of their revenue from a single game.

For the near term, there are no major catalysts, but right now, we are targeting European investors because they tend to have a longer-term vision.

Moreover, we are trying to lengthen the life cycle of our games from one year to two years, and we focus on a low turnover rate.

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My First-Hand Impressions of the Chinese Tech Sector

Here are my top 11 impressions of the Chinese tech sector from my recent trip there.

Read the full post here at Forbes.

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The Next Great Chinese Stock - And it's Not an IPO

Chinese gaming company Perfect World has had a disappointing last 12 months, but some new games are about to change its luck. Expect a $47 stock by the end of the year.

Read the whole post over at Forbes.

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Perfect World Is Just Perfect

By Eric Jackson
RealMoney Contributor
4/7/2011 12:15 PM EDT
Click here for more stories by Eric Jackson

There has been a recent amazing run-up in some Chinese Internet stocks. Sina (SINA - commentary -Trade Now) is up 61% year-to-date, Baidu (BIDU - commentary - Trade Now) is up 42% year-to-date. And Sohu (SOHU - commentary - Trade Now) is up 49% year-to-date.

Investor reasoning appears to be that all three of these companies are experiencing the rising tide of online advertising growth in China. The local economy in China keeps holding up, despite the China bears worrying about inflation, social unrest and the local property market. All these problems have been contained to this point by the Chinese government. In the meantime, people keep surfing the Web. And, while that's going on -- and the Internet penetration rate in China keeps rising from only one-third today -- advertisers need to spend money to get people to buy their stuff. Sina has also benefited from the explosion in popularity of its Twitter-like Weibo service.

These big Chinese destination portals have been the chief beneficiaries of this trend. One group, however, hasn't participated in this big Chinese stock rally over the past few months: Chinese online-gaming companies.

As Americans, we know that online games are big over in China. I don't think you really appreciate it, however, until you go over there and visit. Among young people especially, these games become an intricate part of their lives.

I was in China last year, and a friend was telling me a story about how it's a problem now that many youths lack good social manners because they spend too much time playing games and texting. He talked about how young people he knows will text each other during the week and suggest getting together on a Saturday at a Starbucks (SBUX - commentary - Trade Now). When they arrive there, they will all sit and play games on their phones separately -- without talking to each other.

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Earthquake Won't Shake Tech Stocks

By Eric Jackson
RealMoney Contributor
3/14/2011 8:00 AM EDT
Click here for more stories by Eric Jackson

With the frantic headlines and devastating imagery over the weekend of the Japanese earthquake and tsunami, what are the implications to your portfolio of tech stocks and Chinese stocks?

I believe we are nearing the end of the uncertainty weighing on the markets over the current nuclear concerns. If we were focused on rebuilding, the markets would be having an easier time moving forward. As it is, we are still not sure of the situation with the nuclear reactors. Every time the word "nuclear meltdown" is used in describing the event unfolding, the market jitters.

But this is not the '80s in Chernobyl. This is modern-day Japan. The fears are outpacing the reality of the situation. By the end of the week, I suspect our fears will have subsided and our full attention will be focused on the improving American economy, not Japan.

I listened in on a conference call of BAML Capital Partners' top Japan and Asian analysts last night. One of their key messages was that the Japan crisis would have little if any impact on the rest of Asia. Yes, China exports a lot to Japan, and the Japanese consumer is going to be in hunker-down mode for a while. Yet this headwind will likely be more than offset by Japan's need for stuff in order to rebuild.

Electronics, basic materials, food, energy. Japan needs them. China will sell them a lot.

It's been interesting to watch over the past week (especially Friday) how a number of Chinese tech names have been performing well. On Friday, there were big gains in Baidu (BIDU - commentary - Trade Now),Sohu (SOHU - commentary - Trade Now), Sina (SINA - commentary - Trade Now), Shanda Interactive(SNDA - commentary - Trade Now), Perfect World (PWRD - commentary - Trade Now), Changyou.com(CYOU - commentary - Trade Now), SouFun (SFUN - commentary - Trade Now), and Shanda Games(GAME - commentary - Trade Now).

NetEase.com (NTES - commentary - Trade Now) was down on Friday but has had a strong couple of weeks since its earnings came out.

Why have these Chinese Web and gaming companies been doing so well, even after the massive earthquake hit at midnight last Thursday night? Despite the jitters about energy in North Africa in the last month, most investors are seeing the strength in all these names with rising advertising revenues and increased game usage from a confident Chinese consumer. Those local factors will trump tragic events next door in Japan.

These companies will continue to see their stock prices rise and fall solely on their own performance and the continued strength of the Chinese economy.

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