Battered Chinese net stocks still risky

US listed Chinese Internet stocks are trading at lofty valuations even after a slump.

U.S.-listed Chinese Internet stocks are trading at lofty valuations even after a slump in share prices on concerns over accounting scandals,and face an uncertain business outlook. The accounting irregularities have drawn attention from regulators and brokers and some of the auditors involved are facing legal action. Trading in several Chinese companies has been halted on U.S. and Canadian exchanges,some for months,as company and exchange officials investigate suspicions of accounting fraud.

Some stocks such as Sina Corp ,Dangdang ,Renren and Youku are still trading at expensive valuations and analysts recommend investors would be better placed to pick up their relatively cheaper rivals Tencent or Baidu . Some of these newly listed stocks are losing money but people expect them to have an (unrealistic) quick turnaround in a short period of time,said Benjamin Tam,a Hong Kong-based portfolio manager with Investors Group.

Dangdang,a small player in China’s e-commerce industry,is trading at 140 times its 2011 earnings per share. The shares have fallen 40 percent since the accounting scandal broke in June. Thomson Reuters Starmine data shows Dangdang trades at a 200 percent premium to its peers.

Youku.com,a loss-making video-sharing website in China,has lost more than 30 percent of its stock market value since the start of June. Qihoo 360 ,provider of antivirus software in China,has also fallen about 30 percent. Qihoo trades at 135 times its 2011 earnings.

Firms such as Dangdang,Qihoo 360 and Youku were the darlings of the U.S. investors when they first debuted. U.S. investors were drawn to the growth potential of these firms who marketed themselves as the YouTube or Amazon of China.

Loss-making Renren,which was marketed as China’s Facebook,has lost 45 percent of its value since June. Some of these stocks had valuations that were crazy high. If you are talking about valuations that are crazy high,look at Renren or Youku where people have thrown value on a price to sales basis,said Paul Wuh,managing director of telecoms and Internet research at Samsung Securities.

Earlier this month,Hong Kong-based short seller Muddy Waters issued a warning on Sino-Forest ,leading to a collapse of the stock. Fitch downgraded the company’s bonds and billionaire fund manager John Paulson dumped his stake in Sino-Forest.

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The report triggered a wider sell-off of Chinese stocks listed in the United States. Some big Chinese Internet names such as Sina,trading at 70 times its 2011 earnings,could be susceptible,analysts said.

Sina’s shares have risen 25 percent this year based on optimism over its popular microblogging product,Weibo. The company has said it is not going to focus on monetizing the platform and instead look to build up its market share.

According to Starmine data,Sina is trading at a 255 percent premium to its peers.

Some analysts said Chinese Internet stocks,Baidu Inc and Tencent were better placed,given their track records and relatively cheaper valuations.

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Shares of China’s largest search engine Baidu have lost around 6 percent since the start of June and are trading at 47 times its 2011 earnings. Tencent is even cheaper,trading at 30 times 2011 earnings.

We really like Tencent because of their open application platform,said Wuh,referring to Tencent’s drive to open up its popular instant-messaging platform to application developers in an effort to increase user stickiness.

Some analysts said Baidu,compared with Google’s price to earnings multiple of 15 based on its 2011 earnings,was also a good pick because of the vast growth still left in the search space.

We still treat these companies at reasonable levels because the companies’ earnings growth is still robust,said Tam.