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The Next Big Chinese Play

Profit Confidential

Profit Confidential

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Social networking giant Facebook, Inc. (FB) was the most sought after initial public offering since the emergence of Google Inc. (GOOG) in August 2004; but since its debut in May, the stock has been a dud, breaking below $20.00 on August 2 and down over 50% from its IPO high of $45.00 on May 18. The problem with Facebook is that, unlike Google, Facebook needs to monetize its over 900 million users worldwide.

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A key determinant for Facebook will be if it can get into China with its over 500 million Internet users and a social networking market that appears to be ripe for superlative growth. Of course, the extent of the growth will also depend on how much the communist government wants to regulate. But given that China and India account for a third of the world’s population, Facebook will inevitably need to have its fingers in that pie.

I believe China could be on the cusp of a social networking revolution if the government does not interfere. The number of Internet users in China is top 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 million 3G subscribers by the end of 2015.

What all this means is staggering growth, and Facebook CEO Mark Zuckerberg knows this. In my view, Facebook wants to dominate the social networking space in China.

A few years ago, Facebook met government resistance when trying to expand in the country where the government tries to control the media, which sometimes, unfortunately, includes control over 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 market leader and Internet giant Baidu, Inc. (BIDU) to help expand its reach.

If you want to play the Chinese Internet space, there are several high risk speculative stocks you may want to look at.

In the small-cap space, a Chinese social networking play is Beijing, China-based Renren Inc. (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.

Another small-cap Chinese social media stock to watch is Sohu.com Inc. (SOHU).

On the mid-cap side, take a look at SINA Corporation (SINA), an online media company in China and Chinese communities worldwide.

It will be interesting to see how Facebook does in China, but I expect social networking could be the next big thing if allowed to flourish.


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