There is not much direction to find in market sentiment lately. While February turned to be a comeback for Chinese shares listed in the Hong Kong Stock Exchange, the same stocks nosedived in the U.S. the last trading day of the month tracking major U.S. indices lower. As the chart on the page demonstrates, February was somewhat an improvement over January for stocks in Hong Kong measured by the blue chip Hang Seng Index. Stocks posted their best monthly gain since October in Hong Kong. At the same time, the selloff on February 29 in the U.S., a day the DJIA fell 315.79 points, left the stock market stuck in a rut with no clear indication to get any better. As the saying goes, it will get worse before it gets better… The U.S. listed stock universe, measured by the China ADR Index (CAI) has not been able to recover January losses and fell heavily on Friday along overall market sentiment.

With the market unable to muster any conviction about the future let’s concentrate on corporate earnings instead. Nevertheless we are in March, right in the middle of earnings season for Chinese and U.S. stocks alike.

The 2007 fourth quarter earnings season kicked off with Semiconductor International Manufacturing Inc. (SMI) reporting on January 29. The stock has been on a losing streak ever since issuing a revenue guidance below analysts’ estimates in last October. The stock is down over 20% year-to--date (YTD) with no signs of improvement.

Then came Sohu.com (SOHU) on February 2, one of China’s leading portals, reporting a jump of 90% in revenues and 150% in earnings vs. last year; just to send its shares lower by –5.4% for the day. The problem with Sohu is that revenues and earnings grew on the spectacular performance of Tian Long Ba Bu, a multiplayer online game, surprising investors with a tenfold increase from a year ago. But revenues from its core ad-driven business grew by a modest 35% from a year ago and only 6.9% from last quarter, a sign that quality earnings has to accompany one time spectacular gains in order to keep investors happy. Investors have to remember that the online game industry is extremely volatile thanks to the relatively short life-cycle of online games and unless a company constantly feeds its game pipeline, earnings derived from games can dry up just as fast as they came.

Small cap Xinhua Finance Media Ltd. (XFML) reported next on February 13, sending its shares down by  7.0% for the day. Despite spectacular gains on a year-over-year (YoY) basis, net profit fell 54% sequentially from $9.0 million from the third quarter of 2007 to $4.2 million in the fourth quarter. The stock is down over 30% YTD and is expected to remain volatile for the rest of the quarter.

The first positive news came from Baidu.com (BIDU), China’s leading search engine company. Share price of Baidu rose 6.4% after its fourth quarter earnings rose 79% as its online marketing revenue jumped. Taking a closer look at Baidu’s financial report, it is obvious that the company commands the lion share of the search engine market in China, thanks to its proprietary search technology of Asian characters (Chinese and Japanese in particular) and brand recognition. Besides healthy revenue growth the company has been successful in keeping cost at bay by lessening reliance on third-party vendors. By the end of 2007 the company had a direct sales force in six main Chinese cities including Beijing, Shanghai, Chengdu among others. Yet the stock is down by 35.5% YTD leaving many investors in the red and asking where the stocks is going to go from here. We have been bullish on the stock from a fundamental point of view for a long time and we see no reason to alter our opinion on that. Investors have to keep in mind that Baidu offers a spectacular growth profile and as such is a good company to own for a long-term. At the same time the stock offers trading opportunity for the short-term investor due to its volatile trading characteristics.

Small cap AsiaInfo Holdings (ASIA) reported better than expected revenues and earnings the next day, sending its shares up 25.7% for the day, erasing most of the losses it suffered YTD. More importantly, strong revenues and improved profit margins are derived from major contracts with China’s prominent telecom companies, such as China Mobile and China Netcom. This implies that recent improvements in revenues and earnings are most likely sustainable, at least for the rest of 2008.

Next came five companies to report on the 20th of February. Giant Interactive (GA), a relatively young player in the online-gaming industry reported a  mere 15% net income growth YoY, sending its shares further down by 3.2% for the day. There was a lot of fanfare last November when the company became the first Chinese online gamer to list on the NYSE. The rally lasted for only two days, reaching an all-time high of $20.46 on the first day of trading followed by a steady erosion ever since. The stock hit an all time low in late December when shareholders filed a class action suit against the company on allegations that it withheld critical information from investors before the maiden IPO. The stock has been trading sideways ever since and looking at the latest developments we don’t see much reason to cheer.

To the contrary of Giant’s sluggish gaming performance, China’s second biggest online games provider NetEase.com (NTES) topped consensus Wall Street estimates by reporting  a 22% increase in fourth quarter profit fuelled by healthy growth at its current titles. ‘Fantasy Westward Journey’, NetEase’s most popular game attracted a record number of players, defying naysayers if older titles could keep players interested.

The last online gamer to report in February was The9 Ltd. (NCTY), a day after Giant and NetEase. Revenues for The9 grew by 34% quarter-over-quarter (QoQ) for the company on the back of ‘The Burning Crusade’,  an extension pack for The9’s one big title of ‘World of Warcraft’ (WoW). Still, profit margin remains a relatively low 20% compared to highly profitable Giant (GA), due to license fees attributed to WoW while Giant relies on in-house developed games with no license fees involved. Thanks to the 34% growth in revenues the company is closing in on Giant in terms of revenue to take the number three spot in the Chinese online game market. However despite significant revenue growth YoY, quarterly profit fell by 18% vs. same period in 2006 but it was still above market expectations. The news sent its shares up 9.6% the next day, erasing YTD losses for the stock. Looking into the future we like companies that beat analysts’ expectations not because expectations are so low but because of fast and healthier growth. From this respect The9 Ltd. has a long way to go before we can heartily recommend this stock for our subscribers.

When looking at the online gaming market in China, investors have to keep in mind that revenues derived from gaming are more than online advertising or the internet search market because people in China use the internet for primariliy for gaming. Total online game sales are expected to grow close to 40% this year close to $2 billion, according to market estimates.

Looking at this hot and fast growing sector, we continue to like Shanda Interactive (SNDA) and NetEase (NTES). Giant (GA) has growth problems at present but has a relatively healthy number of new games coming from its pipeline. But the number of new games marketed does not translate to success automatically and as such Giant’s pipeline carries significant risk as well. The9 (NCTY) has been closing in on Giant in terms of revenue; however, its gaming portfolio is ageing and its profitability is expected to remain low.

Going back to the earnings calendar we will reflect on two more major events. One is the Chinese solar industry with multiple players to choose from and the other is the Chinese online travel industry with flagship Ctrip.com (CTRP).

Ctrip.com reported that fourth-quarter net profit more than doubled from a year ago to hit $18.9 million, beating Wall Street consensus estimates. The growth is attributed to healthy growth in all sectors and right execution of strategy. We have been bullish on this company for a long time and we see no reason to alter our opinion on that.  To the contrary, the other  online travel agent from China, Beijing based eLong (LONG), reported that its accrued net losses increased by RMB 11.7 million to RMB12.1 million ($1.7 million) from continuing operations in the fourth-quarter of 2007.

So far, we had two Chinese companies reporting 2007 fourth-quarter earnings from the solar industry with an additional four coming in March.

Suntech Power (STP) released earnings first from this industry on February 20, sending its shares diving 12.3% for the day losing a staggering 54.9% YTD. Despite an impressive revenue growth investors let shares of the company freefall on lowered 2008 first-quarter revenue guidance and concerns of rising raw material costs. The company expects to generate $370 million to $380 million, far from previous estimates of $455 million.

We have been bullish on Suntech Power because the company has become most probably the preeminent Chinese crystalline manufacturer of solar cells. Besides production, Suntech’s spending on R&D is about double what lot of the other Chinese companies are spending. And if investors look at Suntech’s distribution channel, it is very mature and very well thought out and basically there is very little customer hesitation on buying a Suntech panel relative to perhaps some of the Trina Solars of the world that don't have quite the name recognition or the quality recognition that a company like Suntech Power possesses.

The real problem the industry faces for the short term is rising raw material costs coupled with slower industry growth.

Another Chinese solar company, LDK Solar (LDK) fell 6.2% after earnings announcement in February and is down by 39.2% YTD as weakness in the China solar industry looms. Sales for the quarter ended December 31 more than tripled for LDK, rising to $192.8 million from last year’s $61.9 million. Still, lowered revenue guidance for 2008 Q1 sent shares of the company down.

Looking ahead, it’s difficult to predict what companies will report and even more so what market reaction to expect. As we have started out, there is no clear indication where the markets are heading. Looking at the list of upcoming earnings we don’t see much reason to cheer for solar companies such as TSL, JASO or CSUN.

Long time favorites such as Focus Media (FMCN), energy companies such as PetroChina (PTR), CNOOC Ltd. (CEO), and Yanzhou Coal (YZC), China Life (LFC) and China Mobile (CHL) are likely to surprise investors on the positive side and may be able to defy negative market sentiment.

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