Rally in China Internet Stocks Begins to Stall; Much of Gains ‘Built on Hope’

Rally in China Internet Stocks Begins to Stall

Much of Gains ‘Built on Hope’

MIA LAMAR

Updated Oct. 30, 2013 5:45 p.m. ET

HONG KONG—A blistering four-month rally in Chinese Internet stocks is starting to stall as investors question whether expectations are running ahead of reality. After months of big gains, shares in Chinese Internet stocks have roughly doubled so far this year and are now valued at around 30 times expected 2013 earnings, BarclaysBARC.LN +0.90% said in a report. That compares with a gain of around 30% this year for the Nasdaq NDAQ -0.79% Composite Index, home to U.S. technology bellwethers GoogleInc. GOOG -0.56% and Apple Inc., AAPL +1.59% Barclays said.“A correction is well expected in the market—it’s just a question of when,” said Elinor Leung, a technology analyst at CLSA Asia-Pacific Markets in Hong Kong.

Investors jumped into shares of Chinese companies such as Tencent Holdings Ltd.TCEHY +1.09% —operator of the popular WeChat messaging service—and search provider Baidu Inc., BIDU +3.47% counting on their ability to cash in on the country’s fast-growing population of smartphone users.

China overtook the U.S. as the world’s largest smartphone market last year, but the majority of its 1.3 billion people still uses basic phones. Smartphones accounted for just 18% of China’s mobile phone subscriptions last year, and the percentage is expected to nearly double this year to 33%, according to Credit SuisseCSGN.VX -0.46%

“The story is there but the prices have run a little bit ahead of fundamentals,” said Jan de Bruijn, head of Asian equities at Lion Global Investors in Singapore, which managed US$23.7 billion as of Sept. 30.

Much of the gains were “built on hope,” Mr. de Bruijn said, and with the end of the year looming he has been gradually reducing exposure to the sector since last month. “We need to see more evidence of monetization going ahead.”

Meanwhile, allegations last week by short-seller Muddy Waters LLC that small Chinese mobile-software firm NQ Mobile Inc. NQ +11.26% is a “massive fraud” that “cannot monetize users that it does not have” sent a chill through the sector, investors said.

NQ Mobile called the report, the latest in a string of fraud allegations leveled at Chinese companies in recent years, “false and inaccurate.”

Michael Reynal, head of emerging markets at RS Investments in San Francisco, said he has been trimming exposure to the sector over the past six weeks, primarily in small caps. “We worry at some of the speculative and fast money activity [in the] smaller players,” he said.

Now analysts are warning of further profit-taking after the earnings season got off to a rocky start. Sohu.com Inc., SOHU -2.24% owner of one of China’s biggest Web portals, this week reported a loss for the third quarter and warned of a bigger one in the fourth due to heavy investment spending. The report sent its shares tumbling by 16% Tuesday, dragging down stocks across the sector.

“Certainly the sentiment is erring toward locking in gains rather than risk losing them,” said Andrew Sullivan, director of sales trading at Kim Eng Securities in Hong Kong.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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