Wired for Profit: How to Play China's Internet Boom

It’s no surprise that computers, video games, cell phones, and the Internet have become a fact of modern life in America. After all, we live in a very wired country.

But you may be surprised to learn that we aren’t the most wired country in the world.

Recent numbers from the well-respected BDA Research group show that China has just leapfrogged over the U.S. and now has more Internet users than any other country in the world.

Yes, China had 210 million Internet users at the end of 2007. And that figure is expected to hit an astonishing 280 million users by the end of this year because they’re adding around 200,000 new users each and every day.

A number of companies are poised to cash in on the Internet boom in China, but I’ve whittled the roster down to just ten that offer the greatest profit potential to investors. Today, we’ll take a hard look at this A-list.

First off, however, let’s talk about the enormity of this mega-trend …

China Has Only Scratched the
Surface of Its Wired Potential

There are 228 million Chinese Internet surfers right now. That translates into only a 16% penetration rate, well below the global average of 19.1% and the U.S.’s whopping 69.7%.

The Internet boom may be mature in the U.S., but has a long ways to grow in China!

Crunching the numbers is exciting, but let’s drill down on the details. In order to understand WHY this boom is happening now, you must first understand the role of the Internet in China.

With nearly 200,000 new users coming online daily, internet cafes have exploded in popularity across China.

Chinese youth don’t watch much TV. The reason is that Chinese television is controlled by the Communist Party and its programming is more boring than watching paint dry. That probably explains why the average Chinese youth spends more time (20 hours per week) on the Internet than the typical American youth (12 hours a week). And that’s why advertisers who want to reach the free-spending Chuppies (Chinese yuppies) are using the Internet and cell phones to reach their target audience.

That, of course, has some very important implications for investors. Any businesses that are successfully tapping into this booming audience are going to make a mountain of money and enrich their shareholders. Here are …

Ten Chinese Companies Cashing
In on the Internet Boom

There are actually over 100 Chinese stocks that are traded on U.S. exchanges so investing in shares of China Mobile, for example, is just as easy (and cheap) as investing in Verizon or Sprint Nextel. The following A-list of 10 “wired” Chinese companies’ shares trade in the U.S. on the New York and Nasdaq stock exchanges.

1) Air Media (AMCN) operates digital TV screens that display advertisements in airports and airplanes. China saw its retail spending grow by 17% in 2007 and advertisers will undoubtedly spend accordingly to capture those dollars.

2) Bidu.com (BIDU) is the Google of China. BDA estimates that China’s online advertising market reached $1.3 billion in revenue in 2007, while U.S. Internet ad spending was expected to reach $21.4 billion in the same period, according to New York-based research company eMarketer Inc.

3) China Mobile (CHL), with 360 million subscribers, is not only the largest cell phone company in China but in the world.

4) Ctrip.com (CTRP) is the largest and most trusted online travel agency in China.

5) Focus Media (FMCN) has hundreds of thousands of flat-panel television displays placed in high-traffic areas all around China: elevators, karaoke parlors, golf country clubs, auto shops, banks, pharmacies, hotels, airports, supermarkets, and convenience stores.

6) Linktone (LTON) delivers “value added” wireless services for cell phones like ring tones, screen savers, animated cartoons, text messaging services, and news.

7) Netease (NTES) delivers Internet-based video games that are wildly popular with young Chinese males.

8) Sina.com (SINA) is an Internet portal company that hosts the most popular blogs in China. Young Chinese girls, in particular, swarm to Sina’s blog to keep track of famous Chinese celebrities.

9) Shanda Interactive Entertainment (SNDA) also offers online video games, including the popular Dungeon & Dragons, as well as wireless games such as chess.

10) The9Ltd (NCTY) is another online video game company and its World of Warcraft is the most popular game in all of China … by far. World of Warcraft is so popular that the Chinese government passed a law restricting its play to no more than 4 hours a day. Talk about dedicated customers!

I believe all ten of these companies have great long-term potential, but am not advocating that you rush out and blindly start putting in market orders. As always, timing is everything. Most of these companies are a little too rich for my blood so I’m patiently waiting for them to come down before jumping on board.

Bottom Line: I am absolutely convinced about one thing. There is some huge money to be made by investing in the country with the biggest pool of dedicated Internet junkies in the world: China!

Best wishes,

Tony

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