Chinese Tech Stock Weekly Summary (May 4 - May 10, 2009)

The following is excerpted from IRG's weekly stock report:

• • •

Mobile/Wireless

• Chinese investor group raises offer for Hurray (HRAY). The Chinese investor group seeking to buy 51% of Chinese ringtone provider Hurray Holding Co. raised its offer to US$4 per American depositary share from US$3.50 each, according to a letter sent by the investor group to Hurray's chief executive. According to the letter, the investor group has set a deadline of Thursday 5 p.m. Beijing time for Hurray to respond to the offer, saying it will withdraw the offer "completely" if it doesn't receive a response by that time. The investor group is led by Jacky Tung, a Chinese media entrepreneur, and is seeking to replace Hurray's management and turn the company into a diversified media platform.

• China Unicom (CHU) announces results, mobile margin shrinks. China Unicom posted Q1 net profit of 5.99 billion yuan (US$878 million) in its first quarterly result since its merger with China Netcom. Revenue was 37.77 billion yuan (US$5.5 billion), with 16.74 billion yuan (US$2.5 billion) of this generated by the mobile business with ARPU of 41.3 yuan (US$6.05). Fixed-line revenue was 20.58 billion yuan (US$3 billion), with revenue from broadband services totaling 5.76 billion yuan (US$0.8 billion), with broadband ARPU of 61.2 yuan (US$8.97). The company did not give comparative figures from a year earlier, as it switched to a new accounting standard and it had not prepared the adjusted figures for Q1 2008. Unicom added 4.32 million mobile subs with an EBITDA margin of 37.9%, down from 43.6% in the first half of last year. For the full-year 2008, net profit grew 58% to 33.91 billion yuan (US$5 billion) due to the sale of its CDMA network to China Telecom (CHA). Adjusted profit fell 5.8% to 14.3 billion yuan (US$2.1 billion), mobile revenue grew 4.3% to 65.25 billion yuan (US$9.6 billion), fixed line revenue declined 4.4% to 82.77 billion yuan (US$12.1 billion) and fixed broadband revenue grew 23.9% to 25.17 billion yuan (US$3.7 billion).

Media, Entertainment and Gaming

• Sohu (SOHU) and newly listed subsidiary Changyou (CYOU) reports 2Q guidance. Management’s 2Q advertising trend was weaker than consensus' expectations and management guided positive year-on-year trends for 2H2009 despite difficult comps against Olympics in 3Q2008, suggesting higher full year advertising growth rates and that timing allocation may be more back-end loaded than expected. While games was robust in 1Q2009 on both revenues and margins, Sohu's recent share price run-up may already reflect this performance and further upside on games depends on DMD performance.

Internet

• Ctrip (CTRP) increases stake in Home Inns (HMIN) to 18%. Ctrip announced that it had entered into a definitive agreement to acquire an additional 3.76 million ADS or a 9.5% stake in Home Inns for US$50 million. This raises Ctrip's shareholding in Home Inns to 18.25% from 8.7%. The US$50 million purchase price is not insignificant at > 25% of Ctrip's US$184 million cash and ST investments balance at end of 2008. Ctrip's rationale for the purchase is unchanged as it continues to treat its Home Inns stake as a long-term strategic holding to improve cooperation with its hotel suppliers, in particular the leading player in the fastest-growing economy hotel segment. With the additional shareholding, Ctrip will be able to have better access to Home Inns's backend systems, including more guaranteed allotment, although commission terms will still be negotiated at arm's length. The purchase price is US$13.31 per HMIN ADS and the transaction is expected to close on May 21st. Ctrip will now account for the 18% stake using the equity method; previously it had used the cost method.

• Alibaba (ALBCF.PK) announces results. The Company announced the transformation of its business model in mid-November and further announced in mid-March significant planned investments for 2009. The Company’s 1Q results show that business model transformation is ahead of schedule. The company was able to grow the absolute number of paying customers and Alibaba has added nearly 25,000 new Gold Supplier customers in the past 2 quarters to stand at 55,000 vs. 28,000 a year ago. The company announced revenues of 807 million yuan (US$118.3 million) (flat quarter-on-quarter, +19% year-on-year) in 1Q which were in-line with Street's 808 million yuan and net profit of 253 million yuan (US$37.1 million) (+27% quarter-on-quarter, -16% year-on-year) which was materially above the Street's estimate of 221 million yuan (US$32.4 million). Gross margin was 86.5% vs. 85.3% in 4Q08 and 88.4% in 1Q08 while operating margin was 34.3% vs. 22.0% in 4Q and 45.9% in 1Q08. International revenues were 506 million yuan (US$74.2 million) (+8.9% year-on-year) with net customer adds of 12,782, while domestic revenues came in at 301 million yuan (US$44.1 million) (+39% year-on-year) with net adds of 35,318.