China Internet: 'Buy Big,' PacCrest Says

According to a new report, Pacific Crest is as bullish as ever on Chinese mega-cap Internet stocks following their recent weakness. Analyst Cheng Cheng explains that Pacific Crest sees the weakness as only temporary and believes that traders should view it as a buying opportunity.

Fundamentals
Chinese Internet stocks reported mostly solid Q1 results, but issued mixed Q2 guidance. Cheng points out that aggressive spending remains one of the key issues with many Chinese internet names. Companies are throwing cash at user acquisitions, mobile transitions, and adjacent market opportunities. As a result, the valuations of many companies have suffered, and investors are forced to be extremely patient and trusting as the companies continue to build their businesses.

SMID consolidation
Among small- and mid-cap (SMID) companies, consolidation and potential consolidation has been a key driver or recent outperformance. Because of the recent relative strength, Cheng explians that it has become difficult to find stocks that remain compelling from a valuation perspective. However, the report names Qunar Cayman Islands LTD QUNR and 58.com Inc WUBA as top SMID stock picks.

Mega-caps play catch-up
Despite increasing their share of profits, Chinese mega-cap stocks have been losing share to smaller competitors in terms of market cap. Cheng believes that this market imbalance will soon correct itself and that mega-cap names should be bought.
“We also see benefits to mega caps from the industry shift to transaction models and industry consolidation,” Cheng adds.
Pacific Crest’s top mega-cap stock picks are Alibaba Group Holding LTD BABA and Baidu Inc BIDU.