CHINA'S ONLINE ADVERTISING REVENUES
According to a recent research report released by iResearch.cn China's online advertising market for the year ending 2010 was as follows:
- Y/E 2010: RMB35.63 billion (US$5.4 billion)
- Y/E 2009: RMB23.51 billion (US$3.56 billion)
- Y/E 2010 vs Y/E 2009 % Change: +51.8%
- Q4 2010: RMB10.56 billion (US$1.6 billion)
- Q4 2009: RMB6.96 billion (US$1.05 billion)
- Q4 2010 vs Q4 2009 % Change: +51.72%
Although China's online advertising revenues experienced double-digit growth betweeen the years 2010 and 2009, online advertising revenues increased by only 5.5% between Q3 and Q4 2010.
According to iResearch the online advertising market in Q4 reflects two sets of changes:
- The market remained stable with modest growth, reflecting the maturation of the online ad market;
- The size of quarterly growth is slowing down — first time in 7 quarters that sequential growth was not in double digits other except for the market contraction in Q1 2010 – which reflects the decrease in advertiser “pulling power”.
With respect to the breakdown of ad formats the key takeaway was that video and rich media advertising shrank by .9% to 7.6% of total online ad spending while so-called “new forms ofadvertising” grew by 1.5% to 14.5%. The remaining formats such as display ads, search ads, text links and other formats remained largely flat.
The decline in video and rich media shows a weak market acceptance on the part of major advertisers that the format is the most appropriate for online campaigns.
According to MagnaGlobal's Worldwide Advertising Forecast for 2011, China's online advertising revenues are expected to grow by 12.5% in 2011. In November 30, 2010, eMarketer projected that China's forecasted online advertising revenues for 2011 would increase by 13%.
CHINESE STOCKS GET BATTERED
The slowdown in China's online advertising revenues has really battered U.S.-listed China stocks. But in the rush to judgment, investors risk confusing the good with the bad and the ugly.
The bad are getting all the headlines. A group of Chinese firms that crept onto U.S. markets in the past few years, only to be exposed as frauds, are darkening investors' view of all Chinese firms. That is hardly surprising when major institutional investors are losing big. A 73% fall in the stock price of Canada-listed Sino-Forest Corp (TSE:TRE) since the start of the month means a paper loss for leading shareholder Paulson & Co. of more than $500 million.
The ugly are those with a compelling story to tell, but little or no history of profitability. Into this category falls the following Chinese companies:
- Renren (NYSE-RENN), pitched as the Chinese Facebook. Stock price dropped 42% since its IPO on May 4.
- Youku.com Inc (NYSE:YOKU), seen as China's Youtube. Stock price dropped 53.4% since April 19.
- Dangdang Inc (ADR) (NYSE:DANG), viewed as the country's Amazon.com. Stock price dropped by 47.8% since April 25.
The Chinese imitators do offer similar services, but they face fiercer competition than their U.S. peers and have a far less developed advertising market to tap for profits. In the last six months, all three rode a wave of enthusiasm to high valuations at their initial public offerings, only to see prices slump as investor's looked more closely at the competition they face in their sector. Dangdang and Renren have both halved in value since the closes on their first day of trading, and Youku is down 50% from its April peak.
That leaves the good, those firms with a dominant market share and a history of profitability that are also sliding.
- Baidu.com, Inc (NASDAQ:BIDU), with 75% of China's online search space. Stock price dropped 20.1% since April 26.
- Tencent Holdings Limited (HKG:0700), with 72% of the instant messaging space. Stock price dropped by 11.1% since April 26.
- SINA Corporation (NASDAQ:SINA), the most visited portal and owner of the phenomenally popular Weibo microblog. Stock price dropped by 37.4% since April 20.
- Sohu.com Inc (NASDAQ:SOHU), operates online games and search sites. Stock price dropped by 34.7% since April 28.
Baidu and Tencent have fallen 20.1% and 11.1% respectively since April 26. Sohu has dropped a whopping 34.7% since the end of April. With suspicions about corporate governance high, Sina's management chose a bad time to sell shares—a move disclosed at the beginning of the month. Sina's stock is down 37.4% since April 20, against a 6% fall in the Nasdaq Composite. Yes, these stocks' valuations reached frothy levels, too, but at least there was a more solid business behind them.
With more negative noise on China's growth and inflation expected in the summer months and bears crawling over other companies in search of weaknesses, sentiment will stay negative. Investors that have lost a fistful of dollars on one China stock may not be inclined to risk a few dollars more on another. But a lack of discrimination on the way down makes no more sense than on the way up. For investors that can distinguish the good from the bad and the ugly, a continued market slide will start to present opportunities.
COMMENTARY: These "Chop Suey" stock prices have been experiencing incredible growth, and many stock analysts have been predicing that Chinese internet stock prices were over-heating and that there maybe a bubble this year. The price-earnings ratios for some of these companies closely parallel what is happening here in the U.S.
- Baidu, China's Google presently has a P/E of 66.9. This is roughly three times Google.
- Dangdang presently has a P/E of 839.12.
Looks like the long predicted Chinese internet bubble has finally arrived.
Courtesy of an article dated June 8, 2011 appearing in DigitalEastAsia and an article June 11, 2011 appearing in The Wall Street Journal
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