Bernstein Starts Chinese Internet Names: Most Initiated At Underperform

Bernstein Research initiated seven key Chinese internet stocks traded on American exchanges Wednesday, pegging the sector as a whole as Underweight and telling investors the issues unique to China’s internet users aren’t fully understood by the market.

Of seven key Chinese internet stocks traded in the American market, Bernstein has rated five at Underperform, one at Market Perform and, most positively, Alibaba Group Holding Ltd BABA as an Outperform.

The limited amount of time Chinese workers have to surf the internet — and the challenge of monetizing that time — creates a boundary for the country’s internet sector and tempers growth, according to analyst Bhavtosh Vajpayee.

While end markets in the Chinese internet sector grew at an annual average of 55 percent over the last three years, the Bernstein report estimates that growth number could slow to 25 percent annually over the next three years.

7 In Focus

Here's a summary of Bernstein's take on the individual stocks:

• Alibaba, started by Bernstein at Outperform, with a target price of $117, is dominant among Chinese e-commerce platforms, the analyst said, with a lead on payments and cloud, a growing video presence and international expansion plans.
• Ctrip.com International Ltd (ADR) CTRP is started at Market Perform by Bernstein, with a target price of $41. The online travel agency space has seen price wars and consolidation, according to Vajpayee. “We worry that Ctrip, despite upward trajectories in the top line and margins, has set a high bar to outperform,” Bernstein said.
• Baidu Inc (ADR) BIDU is started at Underperform by Bernstein, with a target price of $150. The company’s share of digital ads is likely to drop in the coming years as its core search business slows, Bernstein said in its report. Baidu’s profitability was “wrecked” by the 020 lifestyle business, Bernstein said, but the report added that a return to the company’s core tech business could serve it well.
• JD.Com Inc(ADR) JD is started at Underperform by Bernstein, with a target price of $21. The e-commerce company has gained market share with affluent urban residents and same-day or next-day delivery, the report said. At the same time, seasonal peaks and valleys leave the business with staffing issues.
• NetEase Inc (ADR) NTES is started at Underperform, with a target price of $200. NetEase depends on the gaming business, one that’s limited by the amount of time users can spend online, Bernstein said — a factor that points to “more modest” growth in the future.
• Vipshop Holdings Ltd - ADR VIPS is started at Underperform, with a target price of $10. As much as 3/4 of the retailer’s business is in flash sales, a sector that accounts for about 25 percent of the e-commerce market, according to Bernstein. “We expect 2017 to be the last year when Vipshop could show above-industry growth, after which it begins to lag in 2018 and beyond,” Vajpayee said in Wednesday’s report.
• 58.com Inc (ADR) (WUBA is initiated at Underperform, with a target price of $25. A holding company for listings and classifieds providers, 58.com’s business will be “squeezed as shares shift within digital advertising,” Bernstein said in its report. The company’s platforms depend on localization and small merchants and are therefore difficult to scale, the report said.