Fund managers cast wary eye on valuations of Chinese internet firms
Fund managers in Hong Kong have turned cautious on China's red-hot internet sector as valuations for such firms approach nosebleed levels.
Their concerns were heightened when Sina Weibo said on Tuesday it plans to raise about US$500 million in a US listing at a time when its user growth has slowed to the lowest level ever.
The number of users on China's Twitter-like microblogging service rose just 4.2 per cent between September and December.
The planned initial public offering of Weibo, in which e-commerce giant Alibaba holds an 18 per cent stake, follows on the heels of Chinese e-commerce firm JD.com's announcement of plans for a US$1.5 billion offering in the US.
It also comes in the wake of some recent big ticket acquisitions in the sector, with Alibaba snapping up Autonavi in a deal that values the mapping app's maker at US$1.58 billion, and Alibaba competitor Tencent investing HK$1.5 billion in logistics and trade centre operator China South City Holdings.
"The mainland internet sector is getting much closer to its peak valuation," said Seth Fischer, chief investment officer with Oasis Management, a Hong Kong-based hedge fund.
However, Fischer said the timing for taking a short position had not come yet.
"The stock market has priced in the best-case scenario in China's internet sector, which is driven by strong buying momentum at the expense of fundamentals," said Raymond Chan, Allianz Global Investors' chief investment officer for Asia-Pacific equities.
"Investors should think twice before blindly throwing their money [at] a rosy picture."
Hong Kong-traded shares in Tencent, which owns social networking and messaging app WeChat, have doubled in the past year, with a trailing price-earnings ratio of 55 times. That is much higher than Google's ratio of 33 times and eBay's 22 times.
Meanwhile, analysts were valuing Alibaba at an average of US$153 billion early this month, even though its third-quarter growth in revenue and profit had slowed sharply owing to fierce competition on the mainland.
Alibaba, in which US internet portal operator Yahoo has a 24 per cent stake, generated US$1.78 billion in revenue in the three-months to September, up 51 per cent year on year. Revenue growth decelerated from 71.4 per cent in the first quarter and 61.3 per cent in the second quarter.
Chan warned that the premium on the internet sector was reflecting the monetisation of technology firms at the expense of traditional industries such as department store retailing.
"The notion of tapping into China's rising middle class can be [applied to] other interesting sectors, including tourism and gaming, with more clarity over their expansion plans," Chan said.
After share prices doubled in recent months, the mainland internet sector now trades at a price-earnings ratio of 30 times based on projected earnings for this year, compared with an average ratio of under 21 times for their technology peers trading on Nasdaq, according to data provided by British private bank Coutts.
However, high-flying US internet firms such as Facebook and Amazon are trading well above 100 times earnings.
Ken Wong, a Hong Kong-based portfolio manager at Eastspring Investments, a unit of Prudential, said the valuation of the internet sector has surpassed the peak level before the global financial crisis of 2008.
"Earnings in the mainland internet sector are not growing as substantially as before, prompting questions on the justification for paying a lofty premium," Wong said.
When Alibaba.com went public in Hong Kong in 2007, shares initially soared. Later, they were largely ignored by investors, because of slowing growth, and the firm was taken private.