Chinese Tech Stock Weekly Update

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

Internet

• Alibaba, the largest business-to-business e-commerce site in China, revealed its plans to go global in the next few years. The company’s top official said it considered the expansion following its US$1 billion merger with Yahoo China in 2005. Alibaba's popularity is reflected in its Chinese language site that counts some 13 million members. Its international site, which is in English and focused on import-export dealings, has 2.3 million members in 200 countries. To go with its planned global expansion, Alibaba disclosed that it aims to triple the size of its overseas staff within a year or two. The company said it is in search of local partners to assist its operations overseas, with the firm looking to publishers of trade magazines as good candidates for the posts given their network with local small and medium-sized companies. Alibaba stated that it has collected more than US$100 million in revenue last year and expected to make more than US$200 million this year, with much of the revenue coming from subscription services on its B2B site. Besides the B2B site, Alibaba runs Taobao, the largest online auction site in China.

Media, Entertainment and Gaming

• The display advertising market in China posted revenue of 1.5 billion yuan (US$189 million) in the second quarter, a performance that industry analysts ascribed to strong spending from the vehicle, computer and electronics, and fast-moving consumer goods [FMCG] sectors. The report by Internet media and market research firm Nielsen/NetRatings identified Nissan (NSANY) as the leading advertiser from the vehicle industry, Founder Electronics leading in the consumer and electronics space, as well as Coca-Cola (KO). The report said that those three sectors accounted for almost 60 per cent of China’s Internet advertising expenditure from May to July this year. It was noted, too, in the first ever mainland survey of online display advertisers that online display advertising spending closely approached mainland magazine advertising expenditure, which was forecast to hit 1.9 billion yuan in the same period by Nielsen Media Research, a sister company of Nielsen/NetRatings. The company's AdRelevance, an online advertising tracker service that scans more than 200 Chinese websites, reported 817 advertisers in July, compared with 587 in May. The number of campaigns jumped to 2,276 from 1,500 in May, while banner ads increased to 5,785 from 3,700.

• Sun New Media (SNMD) announced it’s entering into a strategic cooperative agreement with the China Periodical Management Center, the country’s principal regulator of magazines and periodicals nationwide. Sun New Media describes the agreement as enabling it to be more competitive within the country’s growing but increasingly regulated e-publishing sector. Under the agreement, Sun New Media gets exclusive access to a state-owned content library, which houses 6,500 books, 1,500 audio and video products, 44 journals, and 3 newspapers. With the agreement comes also the exclusive partnership with the Chinese Government to issue digital publishing permits for business-to-business (B2B) online publishing.

Mobile/Wireless

• ZTE Corp. announced a deal with BT Movio, the wholesale mobile TV provider division of UK incumbent BT Group Plc (BT), to develop a dual-mode 3G/DAB-IP handset for launch in 2007. BT Movio’s business model is to transmit the TV channels on the country's commercial digital audio broadcasting [DAB] radio multiplex, operated by a company called Digital One. The idea is to offer the content as a service on mobile phones, with its customers being the mobile operators, who in turn will market it to their subscribers, leaving their cellular networks free to carry voice or other content. It enables broadcasting for a mass market, while the point-to-point cellular connection can be used for other services, such as video-on-demand [VoD] or catch-up TV, where viewers can go back and see something thats already been broadcast.

• Motorola (MOT) announced the opening of an innovation center in Hunan Province, as part of its drive to increase research and development [R&D] in China. Called the Hunan Innovation Center, the center will focus on developing wireless applications to drive innovation in China's dynamic telecom sector. The move is seen as another step in Motorola's R&D strategy to aggressively transfer R&D to China. Motorola said it has established about 20 similar centers, and has invested more than US$600 million into these centers.

Software

• Sybase (SY), a U.S.-based supplier of enterprise and mobile software, is trying to gain entry to the mainland and its millions of mobile-phone users, a move that it expects will be its opportunity to help increase its revenue. Earlier, the firm acquired Mobile 365 in an all-cash deal worth US$400 million, an acquisition that is seen as giving Sybase a good foothold in the mainland's mobile value added services market, particularly short-messaging services [SMS]. Mobile 365's software makes it possible for carriers such as China Mobile, the country's biggest mobile-phone operator, and customers ranging from media companies to financial institutions to offer users ring tones, games and applications sold by third parties and allocate resulting revenue. The company's products also deliver cross-operator SMS and multimedia messaging services. Mobile 365 delivers more than 3 billion messages per month through connections involving 700 mobile carriers and eBay's (EBAY) Internet communications arm, Skype. It posted sales of US$90 million in the year to March. Sybase is seeking to boost revenue growth that it said might decline to between US$210 million and US$215 million in the third quarter from US$215.6 million in the three months to June.

• Hitachi (HIT), through its subsidiary Hitachi Data Systems [HDS], established a wholly foreign owned enterprise in China, with an investment of US$15 million. HDS, a supplier of digital storage products and solutions, said it will use the enterprise, which has a registered capital of US$6.3 million, as a base to increase investment in China and offer more comprehensive solutions and services to its local customers and partners. HDS first entered the Chinese market in 2001 and currently has representative offices in major cities such as Beijing, Shanghai, Guangzhou, Chengdu, Hangzhou and Nanchang. A top company official said the subsidiary's new enterprise aims to also establish its own subsidiaries in Shanghai, Guangzhou and Chengdu. According to Analysys International, the storage equipment market in China in the fourth quarter of last year was worth 1.9 billion yuan (US$249 million).

Telecommunications

• Three Chinese firms – Huawei Technologies, China International Telecommunication Construction and ZTE – announced their plan to invest US$1.5 billion over the next four years to upgrade Ethiopia’s telephone system. The three firms said they have plans of expanding the network as part of one of the largest ever-financial projects in the country. The Chines companies were among the eight international bidders, which included Ericsson (ERICY), Nokia (NOK) and Siemens (SI). The group said they aim to increase the number of mobile phone users in the area from the current 1.5 million customers to 7 million. The three also looked to fixed lines increasing from 1 million to 4 million users. Sources said that the Ethiopian government is looking for an extra US$900 million needed to completely overhaul its telecommunications infrastructure.

• China Telecom Group (CHA), China's major telecommunications operator, announced the inauguration of its European branch in London as a strategic step in its plans for overseas development. A top company official said the founding of China Telecom (Europe) Ltd. would increase China Telecom's competitive edge in the international telecommunications industry in addition to improving its brand values. China Telecom is China's largest fixed-line network operator serving some 220-million fixed-line subscribers and 27 million broadband users. The company pledges to continue its aggressive expansion into overseas markets to provide better worldwide communication services for all its customers, especially for Chinese companies outside the mainland. The European expansion is one aspect of the group's strategic growth plans and follows its move into North America, the Asia Pacific region and other key locations in central Asia.

Ventures/Investments

• The Ogilvy Group China announced that it will extend its local joint venture as Beijing relaxes restrictions on foreign investment in the fast-growing service industry. The firm is part of marketing firm Ogilvy & Mather. Under the agreement, Ogilvy said that its joint venture with Shanghai Advertising Ltd. will now extend until October 2021. The Chinese government has eased certain rules on advertising joint ventures and also eased limits on investment in other areas of the service industry. The country now allows foreign human resources consulting firms to control their Chinese joint ventures by allowing them stakes of up to 70 percent, up from a 49 percent threshold previously. In a separate development, Ogilvy said it has also agreed to acquire real estate advertising agency Black Arc Advertising, which reported its unaudited revenues of 27.9 million yuan (US$3.5 million) in 2005.

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