"Gung Ho: Profit from Little Emperors"

This one came in a day or two ago from Louis Navellier, for his Emerging Growth newsletter service. One of my readers suggested a solution, and his solution seems to be a decent guess … but let me get to the details.

Navellier thankfully spares us the story of Chinese overall growth — we do know that China’s economy is growing like gangbusters, probably way too fast for comfort, and that China stocks have been hot enough to boil over anyone’s portfolio lately.

But these days, when the US markets seem very jittery and everyone’s watching Bernanke to see if they can read his mind, Navellier thinks it’s time to send your money to China to profit from the “Little Emperors”

“Little Emperors” is a cute catch phrase for China’s first generation to come of age since the implementation of the “one child” rule that was used to cap China’s population growth. This is the same rule that led to a spike in Chinese overseas adoptions, and that has been used to argue in favor of several other different kinds of China investments. These “Little Emperors” are also more or less the same group as Robert Hsu’s “Chuppies” — the affluent young adults who are the face of China’s urban middle class.

Some folks believe that the rise in Massively Multiplayer Online Role Playing Games (MMPORG’s) and other online gaming and socializing is a natural offshoot of this generation’s situation — millions of kids with no siblings, in a country with little space or opportunity for spontaneous outdoor recreation, naturally leads to the reliance on virtual worlds and virtual friends. Makes sense to me, and that’s part of the argument for investing in companies like Shanda and Netease.

But this teaser refers to neither of those — he goes on to mention blogs, and how China’s populace, especially these little emperors, doesn’t trust state-run media. They’d prefer to follow blogs and other social information sharing.

So how do you make money from that? He compares the impact on the economy to the return of the “Greatest Generation” after World War Two, though he notes that this group in China is dramatically larger.

And he suggests a company (without telling you the name, of course … that’ll run you $995 for the first year.)

In his words: “and if you buy just ONE China stock this year, make it the one that the Little Emperors love the most.”

Other clues?

Forward PE of around 17.

“We’re buying year-over-year revenues up 88%. Plus operating income up 119%.”

“Cash on hand, $72 million, up from $48 million.”

Their franchise is expanding across Asia and Europe.

This one will probably come as a bit of a surprise.

My reader sent in a guess that this one “must be Baidu” … and on the face of it, that makes sense. They are indeed talking about expanding to Japan and Europe, and they certainly play a role in the blog economy and social information sharing in China, since they offer by far the market-leading search engine.

But it’s not Baidu. No matter what estimate you use their forward PE is well over 17 (more like 60), they have much more than 72 million in cash, and their growth numbers don’t quite match those teased (though they’re fairly close in some respects).

No, I had to really get the Thinkolator smokin’ this time, to tell you that the latest Navellier tease on China is …

Gigamedia (GIGM)

Really.

Strange, huh? This is a fairly small company, with a market cap well under a billion. And they’re primarily known for their gambling platforms and software. They do online gambling services, casual games, social software and similar kinds of stuff … most prominently Mah-Jongg … they’re based in Taiwan, and do business in Asia and Europe, including certainly Taiwan and Hong Kong, though I’m not sure how much business they have on the mainland.

Their latest earnings release is here (which confirms the numbers in the tease exactly), and it didn’t move the stock much when it came out … though, as Navellier also teased in his email, the shares did have an awesome August … but only after collapsing from prior highs earlier in the summer, so the shares are back about where they were in May now. This one has also been recommended by the Motley Fool’s Global Gains service in the past, as you can see from this article.

I’ve dabbled in Gigamedia options in the past, but haven’t ever owned the shares. Gigamedia has been famously volatile, and a popular “value” play on Asian gaming in the past. And their overall results in the last quarter were a little disappointing for some, though the “operating” results were the spectacular-sounding numbers Navellier noted above. Though I’d agree that this one is a good play on the growing interest in online games in general throughout Asia, and to a lesser extent Europe, I’m not so sure why it’s a particularly good play on the Chinese market. Gigamedia is also focusing on Japan as a growth market according to recent reports, and I’ve never heard them talk much about breaking in to the famously competitive mainland Chinese gaming market. No reason they can’t, I suppose.

So … this one gets a lot of internet chatter among investors … perhaps including some of you. I’m ambivalent on the shares myself — great potential, lots of competition, and I’m unclear on who they’re really focusing on as a core market for growth. I also really like Baidu, like most everyone else, but can’t stomach the volatility and valuation — I had great success with Baidu options over the summer, but sold all of them a while back.

Got an opinion to share on Gigamedia? Little Emperors? Let us know.

For full disclosure, I currently own Netease call options, but none of the other investments noted above.
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1. I should have guessed Gigamedia, since Navellier was touting it at least a year ago ( I guess my sleuthing was better then, or his clues were more obvious), and he does tend to recycle his recommendations. By the way, Robert Hsu has recently recommended Baidu, which I had stayed away from but finally relented. When the IPO first came out and jumped so quickly, I predicted a Baidu recovery group.

   womanwithportfolio

   [Reply]

   Posted by Anonymous | September 12, 2007, 9:14 pm

2. Looks to be a bit over bought currently – breaking resistance today. Should have a good $2 down side with a possible own between $12.25 – $12.50.

   If it drops with a market sell off under $9 I’d back up the truck for a few 100 shares and sell if it drifted lower than $5. That’s a wide swing and a big if, but it looks like this things is a “swinger”.

   Regards.
   Hexdek16

   [Reply]

   Posted by Anonymous | September 13, 2007, 3:06 am