Summary:
<p>Our recent visit to China confirmed our thesis that while macro conditions
remain challenging, the slowdown in China appeared to have bottomed in 3Q12,
and both economic growth and sentiment in China are gradually improving. While
the current economic recovery was initially spurred by state-sponsored
investment, it appears to be spreading into the private sector. Despite
moderating revenue growth and margin compression caused by a confluence of
macroeconomic and industry factors, the long-term fundamentals and valuation
of the Chinese TMT sector are attractive, in our view. The high-beta nature of
the Chinese TMT stocks should allow the sector to recover faster than the
overall market as the Chinese economy improves and investors' risk
appetite returns to emerging market equities. We see significant upside
potential with SINA and AMAP in the mobile Internet transition.</
><strong>Macroeconomic conditions appear to be improving</strong>: As
expected, China's GDP growth decelerated further to 7.4% Y/Y in 3Q.
However, a slew of recently announced economic data paints a rosier picture of
China's economy. Despite still facing a challenging export environment,
manufacturing PMI moved back into expansionary territory in November as both
fixed asset investments and retail sales growth remained resilient and re-
accelerated in recent months.
Investment Thesis
Price Target Calculation
AMAP: Our price target of $22 is based on ~20x our 2013E pro forma earnings
per ADS of $0.90 plus ~$4 in net cash (and ~14x 2013E EV/EBITDA), in line with
AMAP's US peers but at a significant discount to its peers in China. We
believe the target multiple is well deserved given the company's strong growth
prospects.
SINA: Our 12- to 18-month price target of $70 is based on a base-case scenario
of our sum-of-the-parts analysis of SINA, assuming a 15x 2012E EV/EBITDA
multiple for SINA's portal (relative to a historical range of 10-40x) and a
valuation of $1B for its Weibo (or $25/UV, relative to $27 for RENN).
RENN: Our price target of $8 is based on a valuation multiple of ~$20 per
registered user, reasonable, in our view, as it is well within the range of
various Web 2.0 companies that are traded in the public and private markets,
reflecting RENN's growth prospects, size, maturity and levels of monetization.
NTES: Our price target of $65 is based on ~10x our 2013 non-GAAP estimate of
$4.90 plus ~$17/share net cash. Our target P/E multiple is comparable to the
average multiple of Internet portal and online gaming sectors. NTES's games
continue to grow in popularity while other business initiatives such as MVAS,
mini-blog, advertising, and synergies with its strong traffic/user base are
poised for upside, in our view.
BITA: Our $9 price target is based on a ~9.5x 2013E EV/EBITDA multiple, a
comparable trading multiple relative to its Chinese Internet/portal peers. Our
valuation represents BITA's potential growth within both automobile and media/
Internet ad-spend sectors. Note our estimates reflect taoche.com incurring
losses through 2012. Any changes could provide upside to our estimates.
DANG: Our 12- to 18-month price target of $9.50/ADS is based on ~0.2x 2013E
EV/sales, still a significant discount to its e-commerce peers (~2.1x EV/sales
in China and ~1.1x in the US). We believe this adequately reflects risks
associated with DANG's size and the lack of earnings visibility in a fast-
growing but rapidly changing industry.
CTRP: Our price target of $25 implies a P/E multiple of 25x our 2013E non-GAAP
EPADS estimate of $1.01 (or ~20x net of cash). Our estimates reflect
fundamental growth while factoring in the potential impact of heightened
competition on margins. While the sector trades at an average of around a 20x
next-12-month P/E multiple, we believe CTRP deserves to trade at a premium to
its peers given its dominant market position and its track record of above-
industry growth. The average NTM P/E multiple for CTRP has ranged from 15x to
60x in the past five years with an average around 32x.
NQ: Our 12- to 18-month price target of $16.00 is based on ~17x 2013E P/E,
relative to the average for its global security software peers (~13x) and its
SaaS peers (~55x), a valuation that we believe reflects NQ's strong growth
prospects and potential operating leverage of its mobile SaaS model while
factoring potential risks associated with its current size and the changing
competitive landscape in the smartphone software/app market.
