3 Big Tech Winners in China

NEW YORK ( TheStreet) -- China may be the looming threat to America's status as the global economic powerhouse, but the People's Republic also represents a major revenue boost for Silicon Valley heavyweights Apple ( AAPL), Yahoo! ( YHOO) and Microsoft ( MSFT).

Figures recently released by the International Monetary Fund predicted that China will surpass the U.S. to become the world's largest economy by 2016. Economists polled by Reuters expect strong economic growth of 9.5% in China this year, at a time when the U.S. is eyeing growth between 3.1% and 3.3%. Figures released by the Chinese Government put the country's Internet users at 457 million at the end of 2010, a 73 million hike on the prior year.

Set against this backdrop, experts see lots of upside for some American tech firms, despite the censorship issues there that have presented major challenges for Internet-based firms like Google ( GOOG) and social networkers like Twitter.

"The U.S. companies that do the best are the ones not in sensitive areas, like user-generated content -- I believe Facebook and Twitter don't have a shot here -- but those with investments or autonomous operations here," said Lucas Englehardt, CEO of Shanghai-based research group BloggerInsight. Apple, he added, is doing very well in China, and will continue to do so.

Yahoo!, with its significant stake in Chinese Internet behemoth Alibaba Group, should continue to see upside, while Microsoft is expected to turn the country's economic growth into new software revenue.

Other CEOs across the tech sector have been highlighting the opportunities there, as well.

"I was in Shanghai last week and there's a lot of government investment going on in the country in terms of infrastructure, and there's a growing middle class," Abhi Talwalkar, CEO of semiconductor specialist LSI ( LSI) told TheStreet after the company's recent earnings.

"We're doing well in the large dot.com fraternity in China and the rest of Asia," added John McAdam, the CEO of F5 Networks ( FFIV), pointing to China's growing Web sector, led by the likes of Baidu ( BIDU), SINA ( SINA) and Sohu ( SOHU).

"China e-commerce is very, very compelling," said Sandeep Aggarwal, senior Internet and software analyst at Caris & Company. "It's a perfect storm happening in this market."

Read on for more details on how Apple, Yahoo! and Microsoft are riding China's tech wave.


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Apple is on a tear in China. iPhone sales in greater China (which includes Hong Kong and Taiwan) grew almost 250% during its recent fiscal second quarter. The region brought in just under $5 billion of revenue during the first half of this fiscal year, accounting for just under 10% of the company's overall sales.

"We believe this percentage will expand over the next five years as 'Apple fever' spreads throughout the country," said Brian White, an analyst at Ticonderoga Securities, in a recent note. "A couple of years ago, Apple generated just 2% of sales from China."

Although Apple doesn't break out specific China shipment numbers, White said there is plenty of room for growth thanks to the country's growing middle class. "The high-end mobile phone opportunity in China is estimated to be approximately 100-125 million subscribers," he said. "We continue to remain long-term bulls on Apple's position in the Chinese market."

Last week, China's Ministry for Industry and Information Technology said that the country saw 890.3 million mobile subscribers at the end of March. That translates into lots of headroom for future iPhone and iPad sales, say analysts.

"The country's mobile Internet ramp provides Apple with a significant incremental growth driver," said White. "As such, we believe that Apple could be one of the biggest beneficiaries of China's mobile Internet buildout over the next decade."

Apple itself has been making very positive noises about China. "We're extremely happy with how we're doing in China," said Tim Cook, the Apple COO, during the firm's second-quarter conference call. "It's a sea change."

The tech giant already has four retail stores in China and will open its fifth store sometime over the coming year. Apple has already outlined plans to have 25 stores in China by the end of the next calendar year, underlining the opportunities ahead.


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Yahoo! may be struggling to challenge Google in the U.S. search market, but China's Internet boom could still spell upside for the company and its embattled CEO Carol Bartz.

"Yahoo, ironically, is probably the best positioned in China given its large stake in Alibaba, which is very hot," said Englehardt of BloggerInsight. "This includes Alibaba.com for cross-border trade and contract sourcing, its Taobao the 'eBay of China,' with 70% of China's ecommerce, and its Alipay, which is the 'Paypal of China.'"

E-commerce in China is undoubtedly hot. The country's business-to-business e-commerce market alone was worth 3.8 trillion yuan ($585 billion) in 2010, according to the China e-commerce Research Center, a figure that will rise to 4.8 trillion yuan and 6 trillion yuan in 2011 and 2012.

The good news for Yahoo! is that it owns more than a third of Alibaba Group. There has even been speculation that the 40% stake may be worth more than Yahoo!'s own core assets.

Alipay said last year that it had surpassed PayPal in terms of registered users and transaction volume. Morgan Stanley estimates that 2% to 3% of all retail sales in People's Republic last year were done via Taobao.

Analysts estimate that if Taobao and Alipay were to go public, the companies would command a combined valuation of $65 billion; Yahoo!'s market cap is currently around $23 billion.

Sandeep Aggarwal of Caris & Company puts Taobao and Alipay's valuation lower, at a combined $40 billion, but notes that the firms are key Yahoo! assets. "We estimate that Taobao is going to be the world's largest e-commerce company in terms of gross revenue by 2013," he told TheStreet. "We also believe that Taobao is the second most valuable Internet company in the world after Facebook."

There is plenty of runway ahead of these firms, according to the analyst. Aggarwal explains that the Chinese e-commerce market is growing at between 60% to 80% a year, compared to growth of 15% to 18% in the U.S. "If I was Carol Bartz, I would sit on these assets for as long as possible," he said.

Yahoo! shares closed up 2.49% on Monday after hedge fund Greenlight Capital established a "significant" long position in the company, citing, in particular, the 40% stake in Alibaba Group.


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Notwithstanding China's reputation as a hotbed for software piracy, the country is still fertile ground for tech giant Microsoft, say analysts.

"Microsoft is making money here, as Windows dominates the market," explained BloggerInsight's Englehardt. "Despite the fact that much of the country is running pirated software, many large PC companies are bundling legitimate copies of Windows and Office. "

China's energetic PC market could thus spell good news for Microsoft, particularly at a time of concern about computer sales elsewhere in the world. Tech research firm IDC predicts that despite some recent inflation-related sluggishness, China's PC market is on track to grow at a decent 10.8% this year. The U.S., however, is expected to grow just 4.7% year-over-year, behind the global PC market at around 7%.

In December, Gianfranco Lanci, the then-CEO of Asian PC giant Acer, also said that China would overtake the U.S. to become the world's largest PC market within three years.

"If we had no software piracy in China, it would be the second largest revenue-producing country for Microsoft after the U.S," said Caris & Company's Aggarwal. "As the world's second-largest PC market, it's still a very high profit margin opportunity for Microsoft."

The Shanghai-based analyst also told TheStreet that Microsoft's MSN portal has a strong presence among educated white collar workers, with its Windows Live Messenger IM client proving particularly popular.

Working out China's impact on Microsoft, however, is tough -- the Redmond, Wash.-based firm does not break out sales numbers there. Aggarwal estimates that China accounts for about $1 billion of the firm's overall revenue, but added that this would be around $3 billion for software piracy wasn't so widespread.

The tech giant is said to be making some initial progress in its attempts to thwart Chinese software pirates, although this is clearly the start of a much bigger push to wring dollars out of the country. "There's still a big opportunity for Microsoft there," said Aggarwal.

>>To see these stocks in action, visit the 3 Big Tech Winners in China portfolio on Stockpickr.

--Written by James Rogers in New York.

>To follow the writer on Twitter, go to http://twitter.com/jamesjrogers.

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