Are These Chinese Internet Companies Poised to Play the Mobile Way?

18 July 2013 19 h 51 min Comments Off

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(The Motley Fool, 17 Jul, 2013) Shweta is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

China’s internet penetration rate is approximately 38%, which is very low compared to developed economies. Chinese internet companies are adopting various strategies to increase the penetration. Internet usage in China will to rise to 718 million users by the end of this year compared to 538 million users by end of June 2012. These three Chinese internet companies are providing various facilities to increase their penetration in the market. Let’s discuss each in detail.

Initiating e-commerce for higher profits

SINA’s (NASDAQ: SINA) blogging website, Weibo, grew its user base by 6% quarter-over-quarter to 536 million in the first quarter. This website contributed revenue of $25.8 million, which is around 20% of total revenue.

Weibo’s revenue comes from two segments: value added services and advertising. However, the company wants to diversify Weibo’s revenue by including e-commerce services for its users. Therefore, on April 29 it formed a strategic alliance agreement with privately owned Alibaba group, a major player in providing e-commerce platforms to Chinese residents. Under this agreement, Alibaba acquired 18% of SINA’s shares for $586 million. This deal will accelerate SINA’s entry into e-commerce, and Weibo will account for 30% of the total revenue by the end of 2013.

Value added services on mobile devices accounted for 13%, or $15.9 million, of the company’s revenue in the first quarter. There were approximately 1.1 billion mobile users, out of a population of 1.4 billion, by the end of 2012. With the high number of mobile users, the company is developing more applications, or apps, for mobile devices including apps for financial news, sports, and many more. This will increase revenue from mobile value added services to $66 million by the end of 2014.

Strong revenue growth from gaming

Renren’s (NYSE: RENN) online gaming revenue grew 52.9% year-over-year to $26.7 million in the first quarter, accounting for 57.3% of total revenue. With the growing rate of Android use among Chinese residents, it will increase the number of subscribers from 222 million in 2012 to 300 million in 2013. Therefore, the company plans to launch various games on the Android platform, and make existing games Android compatible by the end of this year. This strategy will contribute towards the gaming revenue from $90 million in 2012 to $160 million in 2014.

Renren’s e-commerce website, Nuomi.com, reported revenue growth of 105%, year-over-year, in the first quarter of 2013. This accounted for 11% of the company’s total revenue. Approximately 30% of its transactions came from mobile devices compared to 20% in the first quarter of 2012. The company will launch Nuomi’s mobile app for Android and iOS mobiles by the end of this year, as these devices dominate the market. Additionally, Nuomi is present in 59 cities and plans to expand. These strategies will increase Nuomi’s revenue from $16.1 million in 2012 to $28.5 million in 2013 and $42.5 million in 2014.

Research and development for future growth

Baidu (NASDAQ: BIDU) dominates the Chinese online advertising market with an 80% share. The number of advertisements in the first quarter grew 30% year-over-year.

Internet users in China are expected to increase from 513 million in 2011 to 711 million in 2016. This penetration will strengthen Chinese online advertisement, which will grow at an annual rate of 24% from 2013 to 2016. Revenue per search, or RPS, the advertising revenue generated from 1000 searches, increased from $3.50 in 2007 to $5.60 in 2012. Furthermore, the company’s RPS will surge to $7 in 2013 and $7.30 in 2014.

Currently, Baidu has 37.5% market share of mobile internet search, which is less than its 80% share of personal computer search. The company is spending heavily on research and development to increase its market share of mobile internet search. This will reduce the company’s gross margin from 76.5% in 2012 to 70.4% in 2013. The mobile monetization opportunity, in the long run, will pay higher revenue, rising from $3.58 billion in 2012 to $4.88 billion in 2013.

Conclusion

All the three companies will benefit from the increasing penetration of internet usage in China. SINA’S blogging website will provide a social commerce facility to its users, and the company’s mobile value added services will increase its revenue.

Renren will launch new games for monetizing the increasing number of Android subscribers. In addition, its e-commerce website will target mobile users by launching special applications for them.

I recommend a buy for these two stocks.

Baidu will continue to gain from its dominance in the online advertising market, but its profits will be under pressure for the short-term. Therefore, I recommend a buy for the long run.

Source: The Motley Fool

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