Neutral fundamental outlook
We maintain a neutral view on China Internet sector fundamentals in 1H12,
as we expect the challenges of 2011 to persist. A maturing Internet industry
necessitates evolving business models, and competitive dynamics should
continue to shift and intensify. Emerging opportunities for revenue growth
(mobile, social) will likely be slow to manifest in driving fundamentals or
stock valuations in the early part of this year. We highlight companyspecific
stock selection ideas – Baidu, Focus Media, New Oriental, SouFun,
Xueda offer material upside potential – rather than broad sector themes.
Value selectively emerging
Our coverage sectors lagged key indices in 2011E, reflecting multiples derating
due to earnings growth deceleration and risk aversion. Consensus
estimates have fallen over the past few months due to macro concerns and
rising investment spend, and valuations should roll forward to 2013E in
late 1Q/early 2Q. Assessing prospects for earnings growth recovery in 2013
is more difficult given forecasts have yet to fully reflect worsening macro
conditions for many companies, and as intensifying competition could
prevent operating leverage from being realized.
Stock ideas in 1H12
Our stock selection for 1H12 is based on more company-specific drivers,
such as improved strategy, new product launches or better competitive
conditions, rather than broad themes (cyclical vs. defensive; mid-cycle vs.
late-cycle). We continue to favor companies with robust business models
in sanguine operating environments, and valuations reflecting reasonable
earnings growth expectations. Our Buy-rated stocks satisfying these
criteria include Focus Media, SouFun and Xueda, which skew to the lowercap
(sub US$3.5bn). For investors with greater market cap requirements,
we also see potential for material absolute share price upside for Baidu
and New Oriental, both Neutral-rated and also satisfying these criteria. We
remain CL-Buy on Youku, but think rapid cost growth could cap
performance until closer to 2H despite strong revenue growth.
Individual stock updates
We adjust our estimates for Shanda Games, Sina, Xueda and Youku, and
slightly lower our target price for Sina. See page 7 for individual updates