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6 Undervalued Chinese Stocks To Consider

January 24, 2012 | About:
This article analyzes technology stocks operating in China that offer potentially significant upside due to their valuations. I believe that the Chinese technology sector should be a focus for investors, given its growth opportunities. Please use this analysis as a starting point for your own due diligence.

Kongzhong Corp (KONG) is a provider of digital entertainment services for consumers in China. The Company operates in three segments: wireless value-added services (WVAS), mobile games and wireless Internet services (WIS). For the nine months ended in its last full fiscal year, KongZhong's revenues increased by 17% to $111.3 million as compared to the prior period, while its net income decreased by 35% to 6.9 milllion. The increase in revenues reflects an increase in the revenue generated by the company’s Mobile and Online games segments. On the other hand, its net income was partially offset by an increase in product development charges, higher sales & marketing expense and an increased general & administrative expense. The company reported a gross profit margin of 45.18% while the net profit margin is reported at 8.15%. Its current ratio is 2.91 times which implies ample liquidity. The company is currently trading at a Price to Earnings ratio of 8.17x which shows the stock still offers significant upside in valuation as the sector’s Price to Earnings multiple is 17.76 times. Kongzhong reported a return on equity of 6.16%, which reflects management effectiveness, and a revenue growth of 2.87% compared to the sector’s 12.34% growth. The major competitors of the company are SINA Corporation, Linktone Ltd and Sohu.com Inc.

Linktone Ltd (LTON) provides entertainment-oriented telecom value-added services and content to mobile users over the second generation (2G) and 2.5G mobile telecommunications networks in China and Indonesia, as well as the third generation (3G) mobile telecommunications network in Indonesia. For the first nine months of last year, Linktone Ltd.'s revenue decreased by 20% to USD43.4mn as compared to the prior period. Its net income from continuing operations totaled $5.2 million, which was up from $809 thousand in the prior period. Lowered revenues are on account of a decrease in revenue from normal operations. The higher net income was on account of lowered product development and selling & marketing expenses. The company reported a gross profit margin of 32.29%. The stock price has appreciated by 130% but still offers a potential upside. The current ratio of the company is 3.71 times indicating ample liquidity. Its current Price to Earnings is 14.2 times while the return on equity is reported at negative 0.69%. In comparison, the sector is currently trading at a Price to earnings multiple of 15.17 times. Linktone reported a net profit margin of 6.95% compared to the sector’s 9.07%. Its major competitors are Shanda Interactive Entertainment Ltd (SDNA), Focus Media Holding Limited (FMCM) and KongZhong Corporation.

The9 Ltd (NCTY) provides massive multiplayer online role playing games (MMORPGs) and other games that it owns or in-licensees within China. For the fiscal year ended 31 December 2010, The9’s revenues decreased by 86% to RMB102.8mn and its net loss increased by 21% to RMB303.5mn. Lowered revenues reflect a substantial decrease in income from online game services and other revenue from website solutions. The company has a negative gross profit margin of 0.41% and a current ratio of 4.94x. However, the stock has appreciated 293% from its yearly lows. The sector is currently trading at a price to earnings multiple of 17.76 times. The company reported a revenue growth of 0.62% compared to the sector’s 12.34%. The company reported a negative return on equity of 13.41% while the sector returned 14.91% .

Ninetowns Internet Technology Group Co Ltd (NINE) is a software company that enables enterprises and trade-related People’s Republic of China Government agencies to streamline the import/export processes in China. Ninetowns and its subsidiaries are principally engaged in the sale of enterprise software and in the provision of after-sales maintenance services. For the six months of its last full fiscal year, Ninetowns Internet Technology Group Co. Ltd.'s revenues remained flat at RMB38.4mn while Net loss totaled $1 million, versus a profit of $400 thousandin the prior period. Stable revenues reflect stability in the sales volume of the Company while the net loss was on account of increased general and administrative expenses, decreased interest income, and a loss of change in fair value of marketable options. Ninetowns Internet Technology Group reported a gross profit margin of 76.78% while the net profit margin was at 16.12%. The company’s stock has a beta of 0.83 and a return on equity of 1.36%. The stock has appreciated by 35% from its yearly low and offers a significant upside on its current price due to a high gross profit margin.

Sohu.com Inc (SOHU) is a Chinese online media, search, gaming, community and mobile service group that recently stacked up well against competitor Sina. Sohu operates s variety of matrices of Chinese language, Web properties and online games in China. For the three months ended in its last fiscal year, Sohu.com Inc.'s revenues increased by 35% to $174.4 million and its net income increased by 48% to $44.8 million compared to the prior period. Higher revenues reflect an increase in income from online brand advertising segment, higher sales from game segment and increased income from the sponsored search segment. The higher net income also reflects by an increase in gross profit, higher other income and an increase in the operating profit margin. The company reported a gross profit margin of 73.84% and a net profit margin of 32.34%, while the sector’s average gross profit and net profit margins are at 47.07% and 13.18%, respectively. The stock is currently trading at a price to earnings multiple of 13.80x. The company has a current ratio of 3.95 times which means it has ample liquidity and it return on equity of 21.14% reflects management effectiveness. The stock has a beta of 1.44 which means it is volatile in nature. The sector is trading at a Price to earnings multiple of 15.7x. Major competitors of the company are SINA Corporation, NetEase.com, Inc. and Baidu.com.

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About the author:

Doug Ehrman
Buy low and sell high is easier in theory than in practice– and that’s where we come in.

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