Chinese Tech Stock Weekly Summary (June 1-7, 2009)

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

* * *

Internet

• Dangdang.com is targeting sales volume of more than 2 billion yuan (US$292 million) in 2009. The company's average gross margin is near 20 percent, while net profit is 3-5 percent. The site booked revenue of more than 1 billion yuan (US$146 million) and passed the break-even mark for the first time. Dangdang.com originally planned to list on the Nasdaq in third quarter of 2009, but it has delayed its listing indefinitely for a higher company valuation. Co-President Li said they would not consider less than US$1 billion. The company is growing quickly and he won't consider selling it within the next three years. The site plans to establish regional storage over the next four months for the daily life products it now sells on its site.

• Alibaba Group (ALBCF.PK) plans to spend at least US$200 million in acquisitions and other investments in the next few years. The company, in which Yahoo Inc. (YHOO) has a 39 percent stake, has already invested US$73 million to date in 10 companies, including a mobile-phone software company called UCWEB Technology Ltd. The company has committed an additional US$200 million to US$300 million to the unit over the next two to three years. The investment plan is another example of Alibaba's aggressive spending despite the slowing global economy. The company has also committed US$30 million to marketing one of its Web sites, and plans to expand its workforce by over 40 percent to 17,000, even as other companies have had to cut staff to save on costs. Ms. Zhang will focus investments on companies specializing in mobile Internet, electronic payment and other technologies. In most cases, the group plans to retain a minority stake and companies it invests in would double as strategic partners for Alibaba, which owns several companies, including Hong-Kong listed international online trading platform Alibaba.com Ltd. and Chinese retail Web site Taobao.com. Alibaba.com earned 3 billion yuan (US$439 million) in revenue, and transactions on Taobao.com totaled US$15 billion.

Mobile/Wireless

• China GrenTech Corporation Limited (GRRF) announced that its board of directors has approved a share repurchase program. Under the terms of this share repurchase program, China GrenTech may repurchase up to US$7.0 million worth of its issued and outstanding American Depositary Shares from time to time in open-market transactions on the Nasdaq Global Market. The timing and dollar amount of repurchase transactions is subject to the board's discretion depending on market conditions and will be subject to Securities and Exchange Commission ("SEC") Rule 10b-18 requirements. The share repurchase program does not have an expiration date and may be modified or discontinued at anytime by the Company's board of directors. In addition, the previous share repurchase program approved by the board of directors on September 21, 2007, shall be superseded in its entirety by the new share repurchase program, all sales plans will be terminated and any unutilized purchase amount under the previous repurchase program will not be included in the aggregated value of the new share repurchase plan.

Telecommunications

• China Telecom (CHA) and Chunghwa (CHT) will jointly build a cross-strait undersea cable that would stretch 50-60km, from Taiwan's Kinmen County on the western edge of the strait to the Chinese port of Xiamen. China Telecom chief engineer Leng Rongquan confirmed that the companies are in the final stages of negotiation. Both Chunghwa and China Telecom have collaborated previously on club cable projects, but this is the first cable venture involving just carriers from Taiwan and mainland China. Company executives said the cable would cost less than 100 million yuan (US$14.6 million), and both parties would share the costs, according to the Taipei Times. The project requires approval from authorities on both sides of the strait, but Chunghwa has already applied for a permit from Taiwan's transportation ministry.

• China Mobile (CHL) is all set to launch multi-function handsets and the sale of mobile applications to raise the stakes for attracting and retaining users in the highly competitive 3G market. China Mobile is expected to sell the first smart phone based on its self-developed Open Mobile System next month. It is being manufactured by Taiwan smart phone maker HTC Corp. China Unicom (CHU) (Hong Kong), which operates the more internationally recognised WCDMA 3G mobile network, is still negotiating with Apple for an exclusive deal involving the iPhone. China Mobile's new phone, Dopod G2, will have the same look as the HTC Magic selling in Hong Kong. It will be 2.75G-compatible and sell for 5,000 yuan (US$731.60). HTC expects the 3G-compatible model to be launched by the end of the year. The Open Mobile System phone is based on Google's (GOOG) Android operating system and will enable China Mobile to provide exclusive, tailor-made applications for it. The new phone would have China Mobile's dedicated home screen with all the exclusive services, such as the Feition mobile instant message service, a mobile music station, mobile e-mail, mobile internet portal and mobile search engine.

• Huawei Technologies Co. Ltd. expects to a sales boom from Wimax equipment sales overseas and from the launch of 3G networks in China. Sales of Wimax, a wireless broadband technology rolled out by Huawei last year, are expected to be around US$5 million this year and to increase 100 percent to US$1 billion in 2010. Sales will continue to grow rapidly in emerging markets such as Asia, Africa and the Middle East where fixed line networks are less developed. The number of Wimax subscribers worldwide is expected to increase to 100 million by 2012 even though China's mobile subscribers, who number over 600 million, are expected to mostly continue using a different technology. In the meantime, Huawei also expects its share of CDMA equipment sales in China to grow from the current 38.9 percent.

• ZTE Corp. (ZTCOF.PK) is expected to win the largest share in the third-stage homegrown TD-SCDMA tender by China Mobile Communications Corp. ZTE, Huawei Technologies, Datang Mobile, New Postcom, together with foreign vendors Ericsson (ERIC) and Nokia Siemens Networks, are bidding for the contract valued at 8.6 billion yuan (US$1.2 billion). ZTE would solidify its leading position in the TD-SCDMA market by winning about 30 percent of the contract that covers 200 cities across the mainland. ZTE would end up with 35 percent of the tender, while Huawei and Nokia Siemens Networks could each win 30 percent. ZTE and Huawei, the mainland's two biggest telecommunications equipment suppliers, had slashed selling prices by as much as half in this latest round of mobile network orders. ZTE would have a composite gross margin of 32.5 percent for the company's wireless products. The bank upgraded ZTE to overweight from neutral and raised its target price by 10 percent to HK$33.00, which valued the company 17 times its estimated profit.

Media, Entertainment and Gaming

• Chinese companies are trying to expand into game development, breaking free from their dependence on foreign titles and boosting incomes. After long relying on foreign hit games such as U.S.-based Activision (ATVI) Blizzard's "World of Warcraft" (WoW) and "Kartrider" from South Korea's Nexon, China now wants to develop its own blockbusters and eventually lead the fast-growing market. It may be a while before China overtakes South Korea, which dominates Asia's online gaming market, but there are growing signs that Chinese firms such as Netease.com (NTES) and Tencent (TCEHF.PK) are now in a strong position to compete globally and are catching up with rivals quickly. Successful online games can generate earnings for years from monthly service fees, character customization and other micro-transactions and carry higher margins than classic console games. Developing games in-house also reduces uncertainties over license contracts and renewals. The Chinese online game market may have had a late start, but it is growing faster than anywhere else. As the success of an online game depends on content that appeal to players' cultural backgrounds, Chinese developers enjoy a natural advantage at home and in neighboring Asian countries that China has historically influenced.

• Giant Interactive Group Inc. (GA) will launch its first 3D massively multiplayer online role-playing game (MMORPG) in the second half of 2009. Along with King of Kings 3, Giant Interactive also plans to launch its second 3D MMORPG within the period, although the company declined to reveal the name of the game, which was developed by a Chengdu-based team acquired by Giant Interactive one year ago. Giant Interactive has seven online games in the pipeline, which include the two 3D MMORPGs and one Web game. Giant Interactive announced the launch of an online game research and development center in Chengdu City in southwestern China's Sichuan Province and the acquisition of a Chengdu-based game R & D team specializing in 3D MMORPGs. Prior to the launch of the center, Giant Interactive had online game R & D teams working on 2D and 2.5D games.

• Shanda Interactive Entertainment (SNDA) expects solid growth this year after robust demand lifted its first-quarter revenue to a record high and its net income 25 percent year on year to beat analysts' estimates. The Shanghai-based company reported revenue in the quarter to March climbed 42 percent to 1.1 billion yuan (US$160 million). Net income increased to 361 million yuan from 288.8 million yuan (US$42.2 million). Shanda's first-quarter revenue would hit 1.07 billion yuan. Shanda's net income also topped the 342 million yuan (US$50 million) median of nine analysts' estimates in a Bloomberg survey. Despite lingering global economic weakness, chief financial officer Grace Wu expected Shanda's revenue in the second quarter would rise sequentially between 8 percent and 10 percent. That forecast would be buttressed by Shanda's release in April last year of its highly anticipated new multi-player online game.

Hardware

• Dell (DELL) sees the mainland's computer market becoming the first in Asia to recover, because of Beijing's 4 trillion yuan (US$585 billion) economic stimulus initiative. Dell was the No.4 personal computer brand on the mainland, with shipments of about 3.5 million units last year. The top three suppliers in the country are Lenovo Group (LNVGY.PK), Hewlett-Packard (HPQ) and Founder Technology. Dell had seen traction on the mainland with the stimulus efforts in the areas of health care and education. The scheme was designed to provide 20 billion yuan (US$2.9 billion) in subsidies for purchases of home electronics and appliances, helping generate rural consumption worth about 150 billion yuan (US$21.9 billion). Dell, Asia's No3 personal computer supplier behind Lenovo and HP, reported its regional revenue for the three months to May was down 20 percent year on year to about US$2 billion due to an 11 percent decline in computer shipments.

Alternative Energy

• Solargiga Energy Holding Ltd. announced that it would acquire a controlling 78.93 percent stake in solar-cell maker Kinmac Solar Corp. of Taiwan, making it the first partnership of its kind. Solargiga plans to buy the Taiwanese company for NT$973 million (US$29 million) through a holding company named STIC. Industry watchers says the acquisition would help Solargiga achieve integrated production, from wafer-ingot manufacturing to cell-module manufacturing, and offer Taiwan’s solar-energy industry one more chance to tap China’s vast solar-energy market. Kinmac was co-founded by LED maker Taiwan Oasis Technology Co., Ltd. and IC designer Kinsus Interconnect Technology Corp. The solar-cell maker made NT$10.84 million (US$328,000). Solargiga has set up close business ties with Taiwanese solar-energy manufacturers. Silicon-ingot maker Wafer Works Corp. held a 21.2 percent ownership in Solargiga and has worked with Taiwanese solar-energy manufacturers to supply Jinzhou City Government in Liaoning Province with 10 megawatts of solar-cell modules for its “solar-roof” plan.