Total 106 pages
China: Internet/Media
Asia Insight: Building a “Value
Portfolio” in Digital China
We believe deep value has emerged among Chinese
digital leaders, such as Focus Media, NetEase,
Giant, Sohu and Tencent. In a market with high
macro overhangs, they should offer a safer haven
due to their attractive valuations, resilient growth
and defensive business models.

Searching for Value amid the Market Swing: We are
introducing DCF-based price targets for our coverage
universe. Most Chinese Internet stocks now trade near
their historical (2008/09 financial crisis) low valuations.
But, on our calculations, these stocks have significantly
outperformed the NASDAQ and Hang Seng Indices (+1.7
times, vs. +20-60%) from January 2009 to date, on
resilient growth, high margins and market share gains at
the expense of weaker offline rivals.
We Favor the Undervalued Digital Leaders: Among the
Chinese Internet and media leaders, we like Focus Media,
NetEase, Giant, Sohu and Tencent, as: 1) their valuations
are near historical lows; 2) they have near-term catalysts,
such as Ghost and Cataclysm for NetEase, advertising
rate hike and stronger seasonality for Focus Media; and 3)
they offer free embedded “call options”, such as the
interactive TV panels for Focus Media, and Sogou search
services for Sohu. These stocks are among the
constituents of our new Morgan Stanley Digital China
Value Portfolio (Bloomberg ticker: MSMSDCVP).
Small Is Beautiful: For value investors who are less
concerned about near-term liquidity, we believe some
small-cap companies, such as AirMedia, SinoMedia,
VisionChina and Phoenix New Media, may offer
significant long-term upside. We attribute their recent
stock price weakness to concerns of potential ad
demand slowdown should China’s economy soften, yet
most of these companies have not seen such signs.
Trading at an average low-teens multiple on our 2012e
earnings, we think they should benefit from the secular
ad spend uptrend and enjoy ad pricing power as the
leading branding and promotion platforms in China.