How To Cope With The Structural Bubble Of US-Listed Chinese Stock

How To Cope With The Structural Bubble Of US-Listed Chinese Stock: "

1. US-listed Chinese stock structural bubble

(1). US-listed Chinese stocks have experienced a hike of overvaluation

From June last year to the end of April this year, in 10 months’ time, US-listed Chinese stocks experienced a significant price hike. Take iChinaStock Index (ICS30) for example,, the index climbed from 765.58 on Jun. 29, 2010 to 1266.02 on Apr. 29, 2011, a big rise of 65.37%. ICS30 is developed by iChinaStock.com of Snowball Finance to reflect the trend of US-listed Chinese stocks, as an example

CHXN, a Chinese stock index introduced by Nasdaq, has confirmed the hike of overvaluation of US-listed Chinese stocks. CHXN fluctuated upward from 165.79 on Jun. 29, 2010 to 244.45 on Apr. 25, 2011, a rise of 47.45%.

The following chart shows the overall performance of ICS30 and S&P 500. From the lowest point of 1022.58 on Jul. 2, 2010 to 1363.61 on Apr. 29, 2011, S&P 500 registered an aggregate growth of 33.35%, a rate significantly lower than ICS30’s 65.37% growth during the same period.

(2). Only a few sectors rose, TMT was the major pusher

a) TMT sector showed significant jump

Most US-listed Chinese stocks are TMT (technology, media and telecommunication), solar energy, education, medicine and health care, and pharmaceutical. As the following chart shows, during the upward trending process, TMT20, an iChinaStock index reflecting performance of TMT sector, ran parallel to ICS30. From 908.94 on Dec. 31, 2010 to 1250.72 on Apr. 25, 2011, TMT20 had an aggregate rise of 37.6%, higher than ICS30’s biggest growth of 29.93% during the same period. Further considering the fact that eight out of ten biggest US-listed Chinese stocks are from TMT sector, TMT sector was the major force behind the upward trend.

b) Some sectors did not rise

This round of rise did not benefit all sectors. Take education, healthcare, and pharmaceutical sectors as an example. When ICS30 (purple curve in the following chart) and TMT20 (blue curve in the following chart) were rising and climbing to the highest level of the year, EDU10 (iChinaStock education stock index, green curve in the following chart) was tumbling and HCP10 (iChinaStock healthcare stock index, red curve in the following chart) maintained at the same level.

(3). Reason for TMT sector’s jump

We are experiencing a transformation from “PC + Internet” to “mobile terminals + mobile network.” The vast space of development for Chinese mobile network industry and some US-listed Chinese TMT companies’ optimism accumulated in the short term to trigger the formation of TMT bubble.

a) Rise of mobile network is changing ecosystem of the Internet

Kleiner Perkins Caufield & Byers (KPCB), a well-known American venture capital fund, issued a Mobile Network Trend Report in February indicating that with the popularity of mobile terminals and mobile network, Internet users and traffic started to grow rapid at the end of 2010 and global mobile data volume is expected to increase by 26 fold in the next 5 years. Different services, such as social, search and mobile, are beginning to intertwine among one another. Newly emerging social media represented by Twitter, Facebook and Zynga start to popularize and grow vigorously under the push of mobile network. In addition, mobile business is fundamentally changing users’ purchasing behavior and triggering the development of mobile advertisement.

John Doerr, a partner of KPCB, summarizes the development of mobile network as “SoLoMo”, that is, social, local and mobile.

(From KPCB’s Mobile Network Trend Report)

b) China has vast space for development of Internet industry

Data from International Telecommunications Union (ITU) show that there were 1.8 billion Internet users by the end of 2009. Although China ranked the first with 384 million users, rate of popularity was just 29% and there was still big space for development. Number of Internet users in China grew at a rate of 29%, higher than American’s 4% and global average rate of 13% as well.

By the third quarter of 2010, rate of popularity of 3G communication in US reached as high as 47% and that of China was just 2%. But number of 3G users in China is exploding at a rate of 458%.

c) Chinese Internet companies benefit from the development of mobile network

With the development of social network, new media (online video), e-commerce and LBS, Internet industry in China has witnessed birth of public companies represented by Dangdang (NYSE: DANG), Youku (NYSE: YOKU), Renren (NYSE: RENN) and Sky Mobi (Nasdaq: MOBI). Traditional Internet companies represented by Sina (NASDAQ: SINA) and Baidu (NASDAQ: BIDU) are also introducing new businesses, such as Sina Weibo (Sina’s Twitter-like microblogging services) and Qiyi (an online video site controlled by Baidu). These new companies and new businesses have obviously benefited from the development of mobile terminals and mobile network.

d) Spread of over-optimism

From the development of the capital market, bubbles are the result of people’s over-optimism of prospect of new techniques and new applications in the short run. Railroad in the 1840s, automobile and radio in the 1920s, transistor in the 1950s, and personal computer in early 1980s and biological technology have brought people excessive optimism. New technologies enable people to envision prospects of the new world. Spread of the optimistic mentality make people think they can all benefit from their investment. Hence, here come over-investment and bubbles.

The round of TMT sector bubble was generated by similar optimism, which came from confidence of Internet’s role in social network, e-commerce, LBS and other areas.

(4). Whether TMT sector bubble will burst

a) TMT sector recently showed valuation drop

Since the price peak at the end of April, TMT sector began to show a major correction. By Jun. 16, in as short as 7 weeks, TMT20 dropped by 37.03%, from 1284.85 to 809.08.

Some stocks also showed a significant correction. Take Sina as example. The stock tumbled from $142.83 on Apr. 20 to $77.62 on Jun. 20, a drop of 45.66%. Renren, which was listed on NYSE this May, once shot up to $24 on its first trading day and closed at $18. After as few as 36 trading days, Renren broken its lowest record one after another and closed at merely $6.13.

b) We cannot harshly conclude that TMT sector bubble has burst

Even though TMT sector experienced a significant correction in May and June, we cannot conclude the sector bubble has burst based on this.

By Jun. 28, Baidu’s PE ratio and sales ratio have not dropped significantly compared with late April and were much higher than those of Google in the same period.

At the same time, Dangdang’s PE ratio and sales ratio were showing significant correction, after which, PE ratio was still at a relatively high level. In addition, according to StarMine data from Thomas Reuters, Dangdang’s PE ratio was 140 at the end of June and stock price had a premium of 200% over others of the same sector.

Youku also showed significant correction. But even after it, sales ratio was still much higher than that of Netflix. Youku, which has not yet turned profitable, has no data available in terms of PE ratio.

Let us look at Sina’s recent performance. Since late April, Sina’s continuous drop halted in mid-June and stock price shot back to above $100. On Jun. 29, Sina closed at $100.45 and registered a rise of 29.41% during 7 trading days. Year-to-date accumulated rise is still 45.96%. Compared with the close price of $34.95 on the same day last year, the rise is still as high as 187.41%.

According Thomas Reuters StarMine data, Sina’s price had a premium of 225% over others of the same sector.

2. Investment strategy for US-listed Chinese stock structural bubble

US stock market shows no phenomenon of “sectors take turn to fluctuate” as Chinese A share market does. This is especially so for US-listed Chinese stocks. This round of rise will not necessarily be ensued by another round of rise. Relatively low valuation level of some sectors (online game, photovoltaic, healthcare, for example) has virtually become a norm.

As for US-listed Chinese stocks, those with the biggest investment opportunities are Internet companies. The Internet industry is now in the important process of transformation and the structural change will bring new investment opportunities. Investors need to study which companies will benefit from the vigorous development of mobile network, social media and e-commerce.

In the meantime, we need to clearly understanding that the Internet 2.0 era will show situations of “winner takes all”. The competitiveness of an Internet company will be reflected by innovative business models. Simply copying others can hardly make one survive in the market. This is the biggest difference between Internet 2.0 and Internet 1.0, represented by portal websites. It is no longer important to have “largeness and comprehensiveness”. Having new products and new business models to grasp users’ need in a thinly defined market can make one put up his own hedge and manage to take in all the profits.

(By Yuming Wang, iChinaStock.com)

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Why The Amazon Tablet Will Be Killer (AMZN, AAPL)

Why The Amazon Tablet Will Be Killer (AMZN, AAPL): "

The Amazon tablet is coming in the Fall, and all evidence points to its being a killer device.

Tech gadget review site Retrevo polled its users and found out that what they want in a tablet is what Amazon can give them: namely, lower prices and a trusted brand.

Their survey says what prospective tablet customers want most is lower prices:

What's more, customers trust the Amazon brand to make a great tablet more than most customer electronics brand (also: look at how badly RIM is doing):

And while most people prefer an iPad, there's also a lot of people who are open to buying some other tablet:

Amazon is best positioned to make a really good tablet at cheap prices for the following reasons:

• Scale. Amazon is huge and can team up with an OEM to drive down prices for an Amazon tablet.
  
  


• Distribution. Amazon owns the world's biggest shopping mall. Retailers' cut are a huge part of the price of tablets, and Apple and Amazon are the only ones who have their own huge retail operation. What's more, Amazon already has deals in place with retailers to sell its Kindle e-reader, so it stands to reason it could also sell tablets through them.
  
  


• Media. Amazon has its app store, its Kindle e-book platform, its MP3 shop and an increasingly good video streaming service.
  
  


• Product experience/design. The Kindle is a great device, and Jeff Bezos is a product visionary. No one expects an Amazon tablet to be better than an iPad, but there's no reason why they can't make a tablet that's very good at a very good value.

Nokia's Chinese Death Spiral (NOK)

Nokia's Chinese Death Spiral (NOK): "

Nokia, which is huge in China, is getting undercut by local rivals and losing share, a potentially even more troubling story than its lack of a good smartphone platform.

As Bloomberg notes, Nokia's shipments to China fell 41% YoY last quarter, a terrible number. Part of the reason is that the big Chinese carriers are getting more assertive. And part of the reason is local rivals like ZTE and Huawei undercutting Nokia.

This is arguably more important than whether the Nokia/Microsoft alliance works, and here's why.

Here's how the Nokia bullish story plays out: sure, Nokia doesn't have a competitive platform, but it's early days (true), and Nokia still has tremendous reach and distribution and marketplace all over the world. Once it plugs a competitive platform (and Windows is well regarded) into good handsets (and Nokia can make great handsets) it can use that huge distribution to move zillions of phones and become competitive again.

The problem is that that vaunted distribution advantage can evaporate if Nokia is undercut by nimbler emerging markets rivals who can make phones cheaper and faster. Once that happens carriers will demand lower margins, compressing margins, and give it less shelf space, which means less sales and less scale; in other words, a perfect recipe for a death spiral. And yet, that's what seems to be in the early stages of happening.

Apple’s share of Nortel patent purchase: $2.6 billion

Apple’s share of Nortel patent purchase: $2.6 billion: "

It turns out Apple wasn’t just a participant in the consortium that included Microsoft, Sony, and Research in Motion that won the auction for Nortel’s patent portfolio–it contributed more than half of the $4.5 billion purchase price. Mobile patent portfolios that are up for grabs have become strategically important for Apple to defend itself in a variety of patent disputes over mobile devices with Samsung, Nokia, HTC, and others.

From Apple’s 10-Q filed with the SEC Wednesday:

On June 27, 2011, the Company, as part of a consortium, participated in the acquisition of Nortel’s patent portfolio for an overall purchase price of $4.5 billion, of which the Company’s contribution will be approximately $2.6 billion. This asset acquisition is subject to approval by various regulatory agencies.

Google may have lost out to the Apple-led consortium on Nortel, but it’s back on the hunt. It’s been reported that both Google and Apple are also interested in scooping up another collection of intellectual property up for sale, that of mobile-phone designer InterDigital.

It’s clear Apple is ready to play defense on its products, as COO Tim Cook warned Tuesday, “We want people to invent their own stuff. We’re going to make sure we defend our portfiolio from everyone.”

But bulking up on Nortel’s patents, and potentially InterDigital’s, shows Apple is prepared to go on the offensive too.

Apple Outsold Nokia In Smartphones In Q2 (NOK, AAPL)

Apple Outsold Nokia In Smartphones In Q2 (NOK, AAPL): "

Nokia reported this morning that it shipped 16.7 million smartphones in Q2, down 34% year-over-year and down 31% from Q1.

Apple, meanwhile, shipped 20.3 million iPhones in Q2, up 142% year-over-year and up 9% from Q1.

That means Apple sold more smartphones than Nokia last quarter, a concept that would have sounded a little crazy even just a year ago. (Here’s a chart.)

The difference in smartphone revenue between the companies is even more dramatic. Nokia reports smartphone sales of about $3.4 billion for Q2, while Apple’s iPhone revenue totaled $13.3 billion during the quarter. (Apple’s figure represents revenue “recognized from iPhone sales, carrier agreements, services, and Apple-branded and third-party iPhone accessories.”)

The big difference: The iPhone has an average sales price of more than $600, while Nokia reports a smartphone ASP around $200.

Pigs beware: Roku gets Angry Birds with new devices

Pigs beware: Roku gets Angry Birds with new devices: "

Roku is rolling out the latest generation of media streaming boxes later this month, with a new, smaller form factor and more powerful graphics at the same price point as the last generation. With the release, the company is betting big on casual games becoming available on new Roku 2 devices, including Rovio’s Angry Birds.

Like its product release last year, the new generation of Roku boxes will have three distinct price points with products targeted at entry-level, intermediate and power users. The Roku 2 HD ($60), Roku 2 XD ($80) and Roku 2 XS ($100) will soon be available online and in channel partners’ retail stores in the coming weeks. Tech specs for all three are as expected after Roku’s next generation of devices leaked online due to an FCC filing, but this release isn’t about the technology under the hood as it is about the new opportunity it introduces through casual games that will soon be released on the platform.

While Roku is continuing its practice of having different price points for different users, most of the innovation and value comes at the high end. The startup has not only packaged Angry Birds with the Roku 2 XS, but it’s also included a game-changing remote control (no pun intended) with an accelerometer included. While only the top-of-the-line model comes with the new gaming remote, it will be available as a separate accessory for Roku users that want to buy it later.

That remote is what mostly makes Angry Birds playable on the device. It’s powered by Bluetooth, and it’s capable of working with all three models. Also contributing is a new processor built into Roku boxes that will enable the kind of casual games that will soon become a staple on the device.

In addition to the original Angry Birds title, Roku will soon release Angry Birds Seasons and Angry Birds Rio. But that’s just the start of its casual games revolution: Roku has also struck a deal with Namco that will bring Pac-Man CE and Galaga to the platform, and has other similar deals in the works, according to Roku VP of Marketing Chuck Seiber.

The new devices aren’t just about gaming, though. New video and social networking applications are being released with the platform as well. That includes a new, just-released Facebook channel with higher-quality picture and video capabilities, as well as channels for Epix, Major League Soccer, AOL and FOX News.