The 'Link' to a Great Investment Idea

| About: Linktone Ltd. (LTON)

We recently finished acquiring a new position in Linktone (NASDAQ:LTON). The investment has a huge margin of safety because the company is trading at half of its cash value ($104mm cash and only a $51mm market cap), and has significant upside potential because there are some good things going on with the company. When the company reported Q3 Earnings several months back they gave the following guidance:

"For the fourth quarter ending December 31, 2008, Linktone expects gross revenue to be approximately $16.5 million to $17.5 million. The lower revenue projection compared to total revenue for the third quarter is mainly due to the reduction of its advertising revenue."

This guidance is down substantially from the gross revenues they had just reported for Q3 of $20.3mm. The company did not quantify how this drop in advertising revenues would affect their bottom line, but if one looks at the Q3-08 Income Statement they had $3.74mm in Advertising Revenues and the Cost of Advertising Revenues was $5.96mm, leaving them with negative gross margins of $2.2mm. Exiting the advertising business will dramatically improve the bottom line, not even assuming any savings on the SG&A lines. We think that these steps could have led the company to be cash flow break even in the soon to be announced Q4 2008.

The company should also be a beneficiary of the roll out of 3G in China as they are planning on offering new 3G wireless entertainment services. This should prove to be a great growth opportunity for the company. Another growth initiative for Linktone is that they are expanding into Indonesia. Indonesia is an interesting opportunity because the market is still under-penetrated and as such there is not much competition.

Here is the CEO, Mr. Li, commenting on the Indonesian expansion:

"We are confident of our international expansion plans for Indonesia, due to our ability to combine Linktone's expertise in the Chinese WVAS market with the dominant position of our majority shareholder, MNC, in the Indonesian media industry to create synergies and position the Company for long-term growth and profitability. We are hoping to start this operation soon and expecting tangible results in the early part of 2009."

It should be noted that MNC paid $3.80 for newly issued shares back in March 2008 to take a controlling interest. The stock offers a rare combination of a huge margin of safety and significant upside potential. Heck, even if the stock gets back to cash value, that is 100% gain and the business would still be valued at zero.

About this article:

Tagged: , , , Wireless Communications, China, SA Submit
Problem with this article? Please tell us. Disagree with this article? .