Net Stocks From China Showing Cracks

Margins like that will no doubt attract new market entrants willing to undercut current portal economics, says the anonymous buy-sider. But Chervitz argues that a shakeout has already taken place, and the top participants have enough cash to defend themselves from competitive onslaughts.

As for revenue sharing with the China Mobile and China Unicom, Chervitz says indications are that operators aren't pressing for greater revenue shares as they renew contracts with the portals. In its second-quarter conference call, NetEase.com said that a contract negotiated with China Unicom two months earlier in fact had better terms for NetEase.com than the prior contract. Execs said they didn't expect that revenue-sharing terms with China Mobile would be amended "in the near future." Those terms are covered in one-year contracts negotiated on a regional basis, says NetEase.com.

Bill Me Later

But revenue sharing is only one of the concerns that investors have to stay on top of. One negative for Sina, Sohu.com and NetEase.com last week was a report that China Mobile had asked the portals to stop billing mobile customers for computer software and movie downloads -- a move that Bloomberg reported was aimed at curbing pornography.

U.S. Bancorp Piper Jaffray analyst Safa Rashtchy, who has outperform ratings on all three of the portals, argued last week that the selloff was unwarranted. "We believe this announcement has been generally misinterpreted to mean China Mobile will stop billing for SMS services."

Even so, it confirms the opinion of skeptics -- a population that presumably comprises short-sellers -- that the telephone operators are keeping a close eye on content, and may intervene again should it be decided that dating services, for example, veer into the neighborhood of pornography or prostitution.

Then there's the insider sales. In addition to sales at the portals by executives and directors -- several of whom have been selling on a regular basis while retaining significant stakes -- News Corp. (NWS) said in early July it was selling its remaining stake in NetEase.com. Chervitz, who says he's confident that American media companies would buy major stakes in the portals had they the chance, isn't rattled by News Corp.'s departure.

Revenue growth is "explosive," summarizes Chervitz, and the companies have "real leverage" on the bottom line.

"These things aren't really going to break down until something fundamental changes," Chervitz says. "And we don't see that."

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