That headline carries the promise of Robert Hsu’s latest tease, and since I shared some “rerun” articles of his with subscribers to the Stock Gumshoe Daily Update on Friday, I thought I might as well have a look at a “fresh” one today.
And yes, he puts right in the headline that “Hint: It’s not Baidu” … though I know he has recommended Baidu in the past, of course. Maybe, like some folks, he’s scared away by the valuation. So if Baidu isn’t the “#1 Chinese Internet Company,” that we should buy, who is?
Hsu would be happy to tell you — for a fee, this is a teaser for his Asia Edge newsletter, which these days is apparently “on sale” for $2,995. This particular stock, though, we can sleuth out for you for a much lower price (still free!)
So let’s check out those clues about this company, shall we?
“My next Internet profit taker is the largest Chinese Internet company in the world, and its shares are on the verge of breaking out to new highs….
“As the New York Times said, ‘Homegrown websites… have captured millions of Chinese youths obsessed with online games, pirated movies and music, the raising of virtual vegetables, microblogging and instant messaging.’
“And that’s why I am writing today. The dominant player in the ‘homegrown website’ industry is China’s number-one Internet company, and it’s trading for just $13 per share….
“It has the potential to be more profitable than the 248%, 169% and 163% gains that we made in Mechel, Vimpel and Mosaic.”
OK, so that’s a little back story — how about the specifics and the numbers that will guide us to the promised land?
“More Than 30% Growth Per Year
“The Internet in China is growing rapidly in popularity among young and old Chinese—and this company has staked out its position as the number-one innovator and premier provider of online services in the country…
“In 1999, it started an instant messaging service, and currently controls more than 78% of the instant messaging market share in China, with one billion instant messenger users.
“In 2005, the company launched the largest multimedia social networking service in China—essentially the Facebook of China.
“In 2006, it released a consumer-to-consumer action platform that is similar to eBay and an online payment service similar to PayPal….
“To top it off, the company recently reported a 74% increase in revenues, a 72% rise in gross profit and a whopping 85% increase in net profit! Add in the stock’s 145% surge in the past 12 months and you can quickly see why this company is presenting investors with a once-in-a-lifetime buying opportunity right now.
“When you consider the fact that China’s Internet industry has grown more than 550% in the past eight years, and nearly 75% of the country still doesn’t use the Internet, you can quickly see the explosive upside potential.
“And this company stands directly in line to profit.
“For these reasons, if you can grab this one NOW, you could easily grab a quick 50% gains in 90 days and, perhaps, a triple when held for the next 12 months.”
So hoo dat?
Tencent (0700 on the Hong Kong exchange, TCEHY on the pink sheets)
At least, that’s what I have to assume given the other clues — though Hsu is way off on the price, Tencent hasn’t traded for US $13 for a long time, it’s right around $21 these days (don’t worry, everything else is an exact match — including those precise growth numbers for 2009). And don’t let the fact that it’s a somewhat obscure name for US investors fool you: Tencent is by far the biggest Chinese internet company, they have about 1.8 billion shares outstanding and a market cap of about $38 billion — almost twice as big as the more well-known Baidu.
And like Baidu, it’s expensive as heck on trailing earnings — Tencent earned HK$2.95 last year, so on the HK price of about HK$164 that’s a trailing PE of about 55. Not completely insane, especially given the growth rate, but certainly pricey.
And yes, this is another example (the last one of these was in February for his rare earth metals pick, which continues to be promoted) of Hsu stretching beyond his initial boundaries for Asia Edge recommendations — he used to recommend only companies with ADRs that trade in New York, but he has moved now to stocks that are primarily traded overseas:
“They’re not ADRs, but instead are traded directly in the heart of China, on the Hong Kong Stock Exchange… a place where our unique “boots-on-the-ground” research network can really shine and generate almost obscene profits for you.
“The “catch” is that in order to participate in this phenomenal stock, you’ll need to trade online through either E-Trade, Fidelity or Interactive Brokers, where they make it almost as simple to buy this unique Hong Kong-listed Internet company as it is to buy your run-of-the-mill ADR.
“If those brokers aren’t an option for you, you can still get in using the other major discounters or your full-service broker, but you’ll have to talk with a live rep over the phone (the phone call shouldn’t take more than 10 minutes, I promise). Commissions may be a bit higher as well… but when you’re looking at potential triple-bagger in the next year, are you really going to quibble over an extra few dollars in commissions?”
It’s true that most of the brokerage firms can buy in Hong Kong, Singapore, Australia, London or wherever for you, for a fee, but there are also — particularly for folks who are trading relatively small amounts — pink sheets listings for many of these foreign stocks. Depending on your broker, they might be treated as a regular trade or as a foreign, broker-assisted trade, so yes, make sure you know what services and commissions you should expect from your broker before placing an order. And some of them will indeed require you to call to order these more obscure (for US investors) stocks.
Tencent does indeed dominate the instant messaging service in China with their QQ service, and they’ve expanded that out to social networking with Qzone, and to virtual currencies and exchange with services that are somewhat akin to PayPal, and to gaming (mostly casual games, but some of the more immersive ones as well). They get the vast majority of their revenue from “value added services” for their QQ and mobile users, stuff like premium subscriptions and fancy clothes for your online avatar and that kind of thing. Instant messaging has lost a lot of lustre in the US market, since AOL and Microsoft never really made any money on their IM programs, and mobile texting and Twitter are much more popular now than “traditional” IM services, but Tencent does have a huge number of users — when I owned shares several years ago, they were peaking at about 20 million concurrent users (the maximum number who were online and using the service at any one time), but that number has now climbed over 100 million.
At the time, the big concern was whether QQ would be well integrated into the cellular provider networks and offerings (I have no idea where that currently stands, but they sure have plenty of users so they must have good leverage), and whether Tencent would be able to build up the real promise of their huge web properties by increasing their reliance on advertising revenue (they still haven’t, as far as I can tell — ad revenue has certainly climbed over the years, but as a percentage of revenue advertising it remains tiny, considering they have one of the internet’s top ten global sites in QQ.com, and more engaged users than almost anyone else in the world). Tencent has been trying pretty everything online, essentially mimicking whatever works in the US and elsewhere and seeing what appeals to Chinese web users — they’ve even developed their own search engine (that’s part of the reason their ad revenue ticked down last year, as they switched over to their own system and dropped their partner — which I assume was Baidu, but I don’t remember and didn’t check).
And yes, I did own the shares many years ago — this is one of the stocks that I recall quite bitterly, since I sold the shares at about $8 in late 2007, and they’re now at $21. I know, I should be happy with the 150% gain I got on that stock and never look back, but it still eats at me that it could have been been quite a bit more. It’s the missed opportunities that linger in your mind, not the stocks that you sold at just the right time. At least, that’s how it is if you’re a masochist like your friendly neighborhood Stock Gumshoe. For what it’s worth, the shares were crazy expensive back then, too, as with so many hot growth stocks.
Actually, I’ve owned this one twice — I also was for a pretty long time a shareholder in Naspers, the big South African media conglomerate that was listed on the Nasdaq before Sarbanes-Oxley hit (you can still buy them on the pinks, at NPSNY, if you’re interested), and Naspers was an early investor in Tencent and still owns about 35% of Tencent shares — many folks argue that the dominance of Tencent in Naspers’ portfolio means that the rest of their holdings trade at a discount (the other stuff, revenue-wise, is mostly African pay tv services, though they also own newspapers, a Brazilian publisher, mail.ru and many other miscellaneous “new media” properties … South Africa is by far their largest market if you ignore Tencent).
But today I don’t own shares — and I often have a devil of a time convincing myself to buy stocks like this or like Baidu that are so large and expensive and growing so fast. Opportunity is huge for emerging internet stars in the still-developing Chinese online space, but the risk is obviously very high for these stocks as well, in part because they have relatively focused income streams and rely on a huge number of very low cost transactions for the majority of their income, and e-commerce and online advertising are not nearly as mature in China as in the US and Western Europe. Still, man oh man are they growing fast — and Tencent has not been quite as wild a ride as Baidu … and the shares have been a far better investment than BIDU shares if you ignore the last five or six months, when Baidu has been soaring on the strength of Google’s problems with the Chinese government.
For many US investors I know there’s more comfort in owning a stock like Baidu, if only because they can be more easily described with a successful US corollary (“the Google of China”) — Tencent, however, is more of a mishmosh, many of its services have comparables in the US, whether it’s Twitter, Facebook, WordPress, or AOL’s AIM … but Tencent has variants on those kinds of services that somehow make money, unlike Facebook, Twitter, et al, so it can be a bit tougher to “fall in love” with the story for US investors. And, of course, it’s hard for US investors to buy, though by no means impossible.
So what do you think? Interested in picking up shares of Tencent (or Baidu, for that matter — or someone cheaper like Sina or the Chinese gaming companies?) Let us know with a comment below.
Full disclosure: I’ve owned most of the companies above in the past, but, just to be clear, I am not currently invested in Tencent, Baidu, Naspers or any other company mentioned, and will not trade in any company covered for at least three days.
Personal Capital is an advertiser with Stock Gumshoe, but Travis also uses it every day for his personal accounts and finds it invaluable. Here's what he said: "They offer a great (and genuinely FREE) 'second opinion' for your financial plan, but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.