Technology companies and the Chinese equity market have outperformed their benchmarks, highlighting "buy"-recommended Chinese tech stocks. NetEase.com ( NTES) is the Yahoo-Google-Match.com-Nintendo-MySpace-Facebook-TheStreet.com of the world's most populous nation. Shares of the 10-year-old company, China's second-biggest online games provider, have risen 19% in the past three months and 32% over a year, benefiting from an array of Web and wireless services to a growing community of users. Its offerings include online games, search capabilities, blogging, messaging, dating services, news and virtually every other imaginable form of information. Shanda Interactive ( SNDA) has focused on the areas it dominates: games and entertainment. Shanda's online offerings should appeal to a wide audience, as it provides literature in addition to multi-player games. In addition, it has created an e-commerce service platform that provides electronic billing and payment capabilities, marketing services, a distribution network and customer relationship management tools. Shanda rose to as much as $39.48 in early trading, only 61 cents from its all-time high. NetEase traded as high as $26.35, 81 cents below its record high. China passed the U.S. last year as the world's largest Internet market. There are more than 250 million Web users, and the country might have 406 million users by 2010, according to Credit Suisse. Growth is spurring Chinese online gaming company Changyou.com to launch an initial public offering this week, as the number of users has doubled to more than 800,000 in less than two years. More than five of its Chinese rivals have conducted IPOs in the U.S. in the past five years. Chinese stocks have outpaced those in the U.S. this year, with the Shanghai index up 13% this month and 30% this year, trailing only Peru among global indexes.
With earnings per share growth of 29% in 2008, the consensus of analysts tracking NetEase is for EPS growth of 7% in the current year. Expectations are that, as economic stimulus programs in China and elsewhere take hold, EPS growth will accelerate to 15% next year. The stock has a price of 11.5 times current-year estimated EPS. Its "overall grade" of B from TheStreet.com Ratings makes it a "buy" recommendation. Shanda Interactive is also expected to grow as if the worldwide slump hasn't touched China. Analysts expect its latest fiscal earnings per share of US$2.52 to grow to $2.94 during the current year and expand to $3.33 next year. With its shares recently changing hands at slightly above 10 times next year's expected earnings per share, TheStreet.com Ratings' quantitative evaluation model assigns it an overall grade of B, also qualifying it as a "buy" recommendation. The stock has risen 20% in the past three months and 24% during the past 12 months. Among a number of Chinese tech stocks rated as "hold" by TheStreet.com is Baidu ( BIDU), a Chinese-language search-engine pioneer. Its shares have been changing hands at more than 13 times book verses 3.4 for Netease.com and 4.6 for Shanda. And priced at close to 32 times its current year's estimated earnings and more than 24 times next year's projected net, its shares appear fully priced, prompting TheStreet.com Ratings to assign it a "risk grade" of D and an overall grade of C-plus, equivalent to a "hold" recommendation and one notch from "buy" territory. Baidu's stock is more volatile, jumping 36% in the past three months but falling 30% over a year. Baidu has tripled in three years.