Is Apple really worth 45x Lenovo’s market value or Samsung 21x, given the shift in incremental smartphone penetration growth to emerging markets? Is Facebook worth more than 10 times Sina and Qihoo combined? I very much doubt it and although the valuations of US web stocks are touching euphoric levels, there is no question that we are now seeing similar investor excitement over the potential of the mobile internet as the original PC based model back in 1999 (reflected in China’s buoyant Shenzhen market). The winners from the current land grab in China’s mobile search and social networking markets will likely become leading emerging market technology brands over the next 5-10 years by bundling localized versions of their services in the new wave of cheap Chinese smartphones. Local pure internet plays are highly valued; the cheapest, Sina, trades at 4.3x book and 8x EV/sales, Baidu on 9.5x book and 11x sales while star performer Qihoo, is on 21x EV/sales and 17x book. The hottest web stocks in the US like LinkedIn and Yelp are valued at about 20x EV/sales range, but all are further along with monetizing their audiences. However there are several credible Chinese stocks offering pure play exposure on low double digit earnings multiples, from Giant Interactive to NetEase and in a global tech portfolio, I’d be switching Chinese for US mobile internet exposure.
China is the only country in the world with a domestic technology sector of sufficient scale to compete against the US web giants, and the breadth of software innovation combined with an indigenous hardware sector makes it unique among emerging markets. As the PC cycle ebbs (although reports of its death are exaggerated) we are already beginning to see Chinese brands expand beyond their home market – Tencent’s WeChat for instance now has 100m subscribers outside China while Baidu has launched a range of its services in Indonesia. The symbiotic relationship between Chinese smartphone makers and local internet brands monetizing web services via gaming and advertising revenues is crucial. Back in the 29th January note on the potential for a breakthrough by Chinese smartphone manufacturers, I noted that: ‘The rise of the ultra-cheap smartphones from upstart vendors which run on Google’s Android OS and use off the shelf chip designs is going to transform the industry over the next couple of years, which will see the sort of price and margin pressure experienced in LCD/LED TVs, where sustaining a brand premium has proved impossible amid endless discounting.’ Samsung and Apple wouldn’t disagree with that analysis. The recipe is to take MediaTek chipsets, Korean touch screens, add say 8GB of flash memory, and load the phone with the Android OS stripped of all traces of Google but pre-loaded with about 30-40 Chinese apps, which are increasingly being localized for Asian export markets.
The internet sector is unique within the Chinese economy in that it is dominated by a handful of forceful self-made entrepreneurs, and yet has benefitted from de facto protectionist government policies shutting out global competitors. The local media market is already highly sophisticated and focused on mobile. Compared to the US, where Americans spend 42% of time watching TV and a combined 38% on internet (mobile plus PC), the Chinese spend a much larger percentage of their media consumption on the web. This in part reflects the dismal quality of local TV and the need to go online for American TV steaming downloads (under 25s in China watch foreign TV series on tablets rather than TV sets), but it should still enable and encourage Chinese innovation in the mobile space.