Oberweis China Opportunities Fund, the best-performing U.S.-based fund investing in Chinese stocks, said Internet companies from NQ Mobile Inc. to Qihoo 360 Technology Co. will extend a rally after jumping more than three-fold this year.
NQ, a developer of mobile-security software, gained 4.7 percent last week, extending its 2013 surge to 278 percent. Qihoo, an online security company, increased 13 percent this month and is set for a 197 percent advance this year. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. climbed 0.8 percent in a third weekly gain.
China, which last year overtook the U.S. as the world’s biggest smartphone market, will capture 35 percent of global handsets shipment this year, up from 30 percent in 2012, according to Bloomberg Industries. Recent data have signaled a recovery in the world’s second-largest economy. While the Shanghai Composite Index rebounded 12 percent from a four-year low on June 27, the measure still trades at a 17 percent discount on average to those in the MSCI Emerging Markets Index.
“We are still extraordinarily bullish on China, and to justify the relatively low valuations we see, the nation’s growth rate would have to be much worse,” Jim Oberweis, the co-manager of the $158 million fund, said in a telephone interview on Sept. 18. “The monetization of Qihoo’s mobile app could become an important driver for its earnings in 2014. Growth in use of smartphones made by companies like Samsung is helping driving mobile security demand.”
Oberweis forecasts Qihoo’s earnings will grow 60 percent to 70 percent in 2014, while NQ is likely to increase profit by 30 percent next year.
The fund, started in 2005, has returned 39 percent this year, the best among 39 U.S.-listed funds investing in Chinese stocks, according to data compiled by Bloomberg.
“Even after a pretty good year so far, valuations are still attractive,” Oberweis said. “It’s become more expensive, but some names are still significantly below their true value based on our earnings expectations.”
Companies on the China-US measure for New York-traded stocks reached a five-month high of 13.3 times estimated profit last week, still 27 percent below a multiple of 18.1 reached in May 2012. The Shanghai stock benchmark traded at 9.6 times forward earnings, compared with 11.5 for the MSCI gauge for emerging-market equities.
Chinese stocks traded in the U.S. slumped on Sept. 20, paring earlier gains in the week, after Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year, said a small tapering of bond buying is possible next month. The Fed announced Sept. 18 that it will maintain its pace of bond purchases, which stoked a global rally in stocks.
Sohu.com Inc., which sold a stake in its search unit to Tencent Holdings Ltd., advanced 11 percent for the week to $72.06. It retreated 5.9 percent Sept. 20. Tencent, China’s biggest Internet company by market value, paid $448 million for a 36.5 percent stake in Sohu’s Sogou unit last week and merge its own search service with Sogou.
Sohu’s slump is just “volatility driven by hype on these partnerships and agreements,” David Riedel, president of Riedel Research Group Inc. in New York, said by phone. “We still think Sohu is a good company, and see upside to the current price. The correction is a buying opportunity.”
E-House China Holdings Ltd., a real estate brokerage, gained 9.2 percent to $9.70, extending it advance to a third week. Its American depositary receipts retreated 3.1 percent Sept. 20 from the highest level since May 2011.
Web clothing retailer Vipshop Holdings Ltd. surged 27 percent to $60 last week, rallying the most since the week ended Feb. 8. E-Commerce China Dangdang Inc. jumped 11 percent in the steepest climb in six weeks to $9.84.
Phoenix New Media Ltd., a TV and Internet news outlet, gained 11 percent last week to $11.66 in New York, bringing its surge this year to 220 percent.
“Some smaller companies that are not involved in acquisition activities are also benefiting as the general valuation for Chinese companies has risen,” Tan Chiheng, an analyst at Granite Point Capital Inc., which invests in Chinese equities, said by phone from Boston.
The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., climbed 0.6 percent last week to $38.43 in New York. The Standard & Poor’s 500 Index slipped 0.7 percent Sept. 20 for a weekly rally of 1.3 percent.
The Hang Seng China Enterprises Index jumped 2.2 percent to 10,769.54 in a shortened week. The Shanghai Composite Index retreated 2 percent to 2,191.85 in the three-day week.