Greenberg: Hot Chinese Stocks Get Analyst Cold Shoulders

With the post-IPO quiet period now over for Youku and E-commerce China Dangdang, two of the hottest Chinese deals in years, analysts from the firms' investment banks are out with a dash of reality: Unless you’re a long-term investor, these things are expensive.


And even then, it may pay to read the fine print as it relates to risks.

On Dangdang , billed as the Amazon of China: Piper Jaffray’s Gene Munster, known best for his early and excellent call on Apple, says the stock is fully-valued.

His 12-month target: $30. (It is currently around $31.) At current levels, he says, investors “are investing for the five-plus year opportunity.”

Cowen analyst Jim Friedland, noting Dangdang’s 112 percent rise since its IPO, “already reflects a strong growth scenario in an environment that remains highly competitive.”

Competitors include Amazon’s, (China’s largest online merchant of consumer electronics), and Taobao, which operates China’s largest online marketplace.

Co-Lead bankers Credit-Suisse and Morgan Stanley have not yet chimed in. Morgan Stanley says it’s not unusual to be a banker on the deal and not issue a report on the company for some time.

On Youku , China's YouTube/Netflix: Munster of Piper is equally neutral, with a target of 40, or higher than the current price. “We expect Youku to be a significant beneficiary of the growth in online video ad dollars in China,” he says. “However, we note that current market valuations appear to price in similar expectations."

James Mitchell of lead banker Goldman Sachs also weighed in with a neutral rating and a target of $37. He said the company could get profitable quickly—perhaps as soon as late this year or early next year. He also noted the cost of content is rising rapidly.

Two of Goldman's comments regarding Youku that I found especially noteworthy:

In China, online video companies are paying fixed prices for content rather than revenue share.

Reason: “We believe that studios prefer fixed fees rather than revenue shares because they may not trust distributor sites to report revenue accurately,” Mitchell wrote.

Youku has unusually high receivable days outstanding—140 days as of the last reporting period. That’s higher than other businesses in China that rely on advertising, all of them also high.

Reason: “Historically the high level of DSOs for the China new media group as a whole has reflected advertising agencies withholding payments for several months to maximize interest income, rather than end-advertiser inability to pay.”


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