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Why China’s Internet Sector Is Lucrative
Posted by: Profit Confidential (IP Logged)
Date: September 26, 2012 10:30AM

If you don’t think you can make money in China’s massive Internet market, think again. Just take a look at Internet search engine Yahoo! Inc. (NASDAQ/YHOO). In 2005, the company invested $1.0 billion and the sale of its Yahoo! China unit in exchange for a 40% stake in Chinese Internet upstart Alibaba Group. Fast forward eight years and Yahoo! just made billions in profits after it sold about 17% of its stake back to Alibaba for about $7.6 billion. For Yahoo!, this is the best business decision it has ever made, as the company has been struggling in an Internet space dominated by Google Inc. (GOOG). For Yahoo!, the Alibaba transaction was a great return for the company, which still owns about 23% of Alibaba valued at around $8.1 billion.

Social networking giant Facebook, Inc. (FB) could be the next Yahoo!, once it finds itself. After debuting and trading at an initial public offering (IPO) high of $45.00 on May 18, the stock has been a total dud, down to the current $20.00 level. Barron’s published a negative article on Facebook, suggesting the stock is worth $15.00. The problem with Facebook is that, unlike Google, Facebook needs to monetize its over 900 million users worldwide. Yahoo! has a similar issue and, 16 years removed from its IPO, the company is still confused on its direction with newly appointed CEO Marissa Mayer left to try to figure things out.

I continue to believe that China is not only the king of the Internet space, but also that the country could be on the cusp of a social networking revolution if the Chinese government does not interfere; albeit, I doubt this will happen given the “Big Brother” mentality in China.

But what is for certain is the size and potential of China’s Internet space. The number of Internet users in China is tops in the world, with a whopping 538 million on the Internet at the end of June, according to the China Internet Network Information Center (CNNIC). The numbers are estimated to reach 800 million by 2015, according to the Ministry of Information and Information Technology. The study also estimates there will be over 450 3G subscribers by the end of 2015.

Facebook CEO Mark Zuckerberg knows this, but dominating China will not be easy.

A few years ago, Facebook met government resistance when trying to expand into China, a country where the government tries to control the media, which sometimes, unfortunately, includes freedom of speech. The key to achieving success is developing alliances with Chinese companies and then working hand-in-hand to develop the market. Facebook enlisted Chinese Internet giant Baidu, Inc. (BIDU) to expand its reach.

In August, I presented four Internet stocks, three of which have edged higher. (See “The Next Big Chinese Play.”)

In the small-cap space, a Chinese social networking play is Beijing, China-based Renren Inc. (NYSE/RENN). Renren operates a real-name social networking Internet platform in China with about 162 million activated users as of June 30, 2012. The platform is for social networking and allows users to connect with each other. Services include social networking, online gaming, social commerce, and business social networking.

On the mid-cap side, take a look at SINA Corporation (SINA), an online media company in China and various Chinese communities worldwide. SINA is up 35% from its $49.55 share price when I first mentioned the stock in August.

Other Chinese social media stocks include small-cap Inc. (SOHU) and large-cap Chinese market leader Baidu, Inc. (BIDU).

Stocks Discussed: BIDU, SINA, SOHU, YHOO, GOOG, FB,
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