Fund managers cast wary eye on soaring valuations of Chinese internet firms

Fund managers cast wary eye on soaring valuations of Chinese internet firms

Thursday, 27 February, 2014, 11:56am

Ray Chanray.utchan@scmp.com

Fund managers in Hong Kong have turned cautious on China’s red-hot internet sector as valuations for high-flying technology firms approach nosebleed levels.

Their concerns were most recently aggravated when Sina Weibo said on Tuesday it plans to raise about US$500 million in a US listing at a time when its user growth has slowed to the lowest level ever.

The number of users on China’s Twitter-like microblogging service rose just 4.2 per cent between September and December.

The planned initial public offering of Weibo, in which e-commerce giant Alibaba holds an 18 per cent stake – with an option to increase that to 30 per cent – follows on the heels of Chinese e-commerce firmJD.com’s announcement of plans for a US$1.5 billion offering in the United States.

It also comes in the wake of a buying spree by Alibaba – which has snapped up Autonavi in a deal that values the mapping app’s maker at US$1.58 billion – and fellow internet giant Tencent, which made a HK$1.5 billion investment in logistics and trade centre network China South City.

“The mainland internet sector is getting much closer to the peak valuation,” said Seth Fischer, chief investment officer with Oasis Management, a Hong Kong-based multi-strategy hedge fund.

However, Fischer said, “The timing for taking a short position has not come yet.”

Investors should think twice before blindly throwing their money [at] a rosy picture

Raymond Chan, Allianz Global Investors

“The stock market has priced in the best-case scenario in China’s internet sector, which is driven by strong buying momentum at the expense of fundamentals,” said Raymond Chan, Allianz Global Investors’ chief investment officer for Asia Pacific equities.“Investors should think twice before blindly throwing their money [at] a rosy picture.”

Hong Kong-traded shares in Tencent, which owns social networking and messaging app Wechat, have doubled in the past year, with a trailing price-earnings ratio of 55 times. That’s much higher than Google’s ratio of 33 times and eBay’s 22 times.

Meanwhile, analysts were valuing Alibaba at an average US$153 billion early this month, even though its third-quarter growth in revenue and profit had slowed sharply owing to fierce competition on the mainland.

Alibaba, in which US internet portal operator Yahoo has a 24 per cent stake, generated US$1.78 billion of revenue in the three-month period to September, up 51 per cent year on year. Revenue growth decelerated from 71.4 per cent in the first quarter and 61.3 per cent in the second quarter.

Chan warned that the premium on the internet sector was reflecting the monetisation of technology firms at the expense of traditional industries such as department store retailing.

“The notion of tapping into China’s rising middle class can be ridden in other interesting sectors, including tourism and gaming, with more clarity over their expansion plans,” Chan said.

Earnings in the mainland internet sector are not growing as substantially as before, prompting questions of the justification for paying a lofty premium

Ken Wong, Eastspring Investments

After share prices doubled in recent months, the mainland internet sector now trades on a price-earnings ratio of 30 times based on projected earnings for this year.

This compares with an average ratio of under 21 times for the firms’ peers on Nasdaq, according to data provided by British private bank Coutts.

However, high-flying US internet firms such as Facebook and Amazon are trading well above 100 times earnings.

Ken Wong, a Hong Kong-based portfolio manager at Eastspring Investments, a fund management unit of British insurer Prudential, said the valuation of the internet sector has surpassed the peak level at the brink of the global financial crisis of 2008.

“Earnings in the mainland internet sector are not growing as substantially as before, prompting questions of the justification for paying a lofty premium,” Wong said.

Investors with long memories will remember that when Alibaba.com went public in Hong Kong in 2007, shares in the then business-to-business firm, offered at a record price-earnings ratio of 100 times, initially soared.

Later, they were largely ignored by investors, because of slowing growth, and the firm was taken private.