Alibaba M&A Fuels Gains as Sohu Jumps: China Overnight

Chinese Internet stocks are rallying in New York, led by International Ltd. and Inc., as acquisitions and investments in the industry boost shares of potential targets.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. jumped 4 percent last week, the most since January. Ctrip, China’s biggest web travel agency, soared the most since 2009 after better-than-estimated earnings spurred analyst upgrades. Internet retailer E-Commerce China Dangdang Inc. surged 19 percent, while web portal Sohu and search-engine operator Qihoo 360 Technology Co. rounded out the gauge’s top four best weekly performances.

Alibaba Group Holding Ltd., China’s biggest e-commerce company, fueled web stock gains after agreeing May 10 to buy a stake in digital map provider AutoNavi Holdings Ltd. less than two weeks after buying into Shanghai-based Sina Corp.’s Twitter-like Weibo service. Baidu Inc., which runs the nation’s most-used search engine, bought PPS Net TV’s Internet video business last week, and Sogou, a search tool owned by Beijing-based Sohu, may be seeking a strategic partnership, according to 86Research Ltd.

“Internet services and applications are a land up for grabs in China,” Michael Ding, lead manager of the China Region Fund at U.S. Global Investors Inc., said by e-mail May 10 from San Antonio, Texas. “We are seeing consolidations and top players are becoming stronger. The sector is one of those that has quality earnings and sales growth.”

M&A Announcements

The China-US gauge has climbed 3.3 percent this month, after losing 6.2 percent in the four months through April. Government data last week showed new lending at Chinese banks was 5 percent higher than economists surveyed by Bloomberg while money supply growth quickened. Chinese exports grew a higher-than-projected 14.7 percent last month and inflation held below the government’s 3.5 percent target, reports last week showed.

Nineteen mergers and acquisitions have been announced this year among U.S.-traded Chinese companies with a total value of $3.1 billion, compared with 23 deals worth $1.9 billion a year earlier, according to data compiled by Bloomberg. Internet content companies were the targets with the most value among five sectors, the data showed.

AutoNavi’s American depositary receipts surged 42 percent in a nine-day rally before the partnership with Alibaba was announced. The ADRs fell 9.9 percent May 10 to $13.31 in New York, retreating from the highest level since September 2011.

E-commerce Development

The Beijing-based company said Alibaba will invest $294 million for a 28 percent stake and the two will join forces to explore location-based e-commerce opportunities. AutoNavi reported first-quarter sales declined 3.9 percent and net income slid 36 percent from a year earlier, both missing analysts’ average estimates compiled by Bloomberg. Second-quarter sales forecast also trailed the mean projection.

AutoNavi’s slump after the announcements may have been caused by investors’ expectations that Alibaba would buy the whole company, according to Ming Zhao, founder of 86Research, which focuses on China’s Internet companies.

“Investors are likely to take profit in the near term given its strong run-up ahead of the announcements,” Andy Yeung, an analyst at Oppenheimer & Co. in New York, said in a note May 10.

Alibaba Offering

Alibaba, based in Hangzhou, China, had profit that doubled in the quarter ended in December to $642.2 million and sales rose 80 percent to $1.84 billion, according a May 8 filing to the Securities and Exchange Commission from Yahoo! Inc., which owns about 24 percent stake in the e-commerce company.

Anticipation is growing for an Alibaba initial public offering this year or next. The offer’s valuation may reach $62.5 billion, according to the median of eight estimates by investment banks and research firms since February, data compiled by Bloomberg showed.

Baidu, owner of China most-used search engine, prefers to expand by acquisitions as it moves to revive advertising sales growth and take advantage of a consumer shift to smartphones, Chief Executive Officer Robin Li said on its first-quarter earnings call April 26. Profit for the quarter increased 8.5 percent from a year earlier and sales rose 40 percent.

Baidu’s ADRs jumped 13 percent last week to $95.45, the biggest rally since October 2011.

Sogou Speculation

Sohu, a Beijing-based company providing online news, games, video and search services, surged 17 percent last week to a three-month high of $60.70, the steepest rally since 2011.

More acquisition deals should be expected in China’s Internet sector this year, and Sohu’s stock rose on speculation that its Sogou search engine could be taken over, 86Research wrote in a note May 9.

Sina climbed 5.2 percent for the week to $59.14, the highest level since October.

Goldman Sachs Group Inc. raised the stock rating to buy from neutral May 10, saying the aligned interests of Alibaba and Sina will help accelerate Weibo’s income in the next three years. HSBC Holdings Plc. also upgraded Sina May 8 to overweight, an equivalent to buy, from underweight.

Ctrip, the biggest online travel agency, surged 30 percent last week, the most since March 2009, to $29.38 in New York. The Shanghai-based company reported better-than-estimated revenue and net income for January-March on May 9, and forecast sales growth of as much as 20 percent for the second quarter.

Analysts at Morgan Stanley, Bank of America Corp. and CLSA Ltd. raised their recommendations to buy on the results.

Qihoo, owner of China’s most-used web browser and of the second-largest search engine, soared 17 percent last week to $40.22, the highest price since its U.S. listing March 2011.

The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., climbed 1.9 percent last week to $38.42 May 10 in its fifth weekly gain. The Standard & Poor’s 500 Index advanced 1.2 percent to a record high of 1,633.70.

The Shanghai Composite Index was up 1.9 percent last week to 2,246.83. The Hang Seng China Enterprises Index in Hong Kong gained 4.6 percent during the week to 11,347.41, the most since the five days ended Jan. 4.

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