Chinese Tech Stock Weekly Report

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

Internet

• Sina Corp. (SINA) reported a 15 percent decline in quarterly earnings to US$11.7 million from US$13.7 million a year earlier while revenue grew slightly to US$56.4 million from US$51 million. China’s largest online portal said revenue posted a 42 percent rise to US$35 million, a performance that beats the second-largest portal, Sohu, whose online brand advertising registered a 30.2 percent growth. Sina's revenue from wireless valued-added services registered a 23 percent drop to US$20.6 million. Following Sohu (SOHU), Sina’s decline in its wireless services has been ascribed to China Mobile’s (CHL) new rules, which required double confirmation before subscribing to new valued-added services. These measures have reduced the number of new subscribers and increased the ranks of users terminating their subscriptions for many wireless valued-added providers. In a separate development, Shanda, China's second-biggest online games operator, announced that it is cutting an additional stake in Sina, marking the second time Shanda (SNDA) cut its Sina stake. In November last year, it sold 3.7 million shares, which generated some about US$101 million to finance the payment of US$200 million of convertible bonds that would fall due in the second half of this year.

• Sohu.com (SOHU), the second-largest online portal in China, reported a 32 percent decline in its fourth-quarter profit to US$6 million compared with US$8.9 million for the same period last year. The company said revenue posted a 15 percent growth to US$34.3 million from US$29.6 million a year earlier. Sohu said its revenue from brand advertising went up 30 percent to US$22 million from the fourth quarter of 2005, accounting for 64 percent of total sales compared with 57 percent a year earlier. The company revealed that expenses from product development went up 40 percent to US$4.9 million, pushing its total operating expenses by 16 percent to US$16 million. Sohu said it is spending money on acquiring premium content to compete with larger rival Sina. The company estimated first- quarter total revenue at US$32 million to US$34 million. For the full year to December, net income posted a 13 percent decline to US$25 million from 2005 while revenue went up 28 percent to US$134.2 million.

• A court in Beijing has ordered PICA to stop violating Tencent's rights and pay 2 million yuan (US$258,000) to the Shenzhen-based instant communications service provider in compensation. In May 2006, Tencent sued PICA after rounds of negotiations, accusing it of providing its QQ service without its approval and asking for 5 million yuan (US$645,000) to cover its losses. But PICA argued that it was providing Tencent's QQ instant communications services to users as a way to link the company's respective services. Tencent said that PICA has done harm to it by violating its computer copyrights, intellectual property rights and causing improper competition. According to local media, both sides seem satisfied with the court's judgment.

Media, Entertainment and Gaming

• Market sources indicated that Airmedia Advertising, a mainland flat-screen advertising company, announced plans to raise about US$200 million from an IPO in the third quarter in Hong Kong or New York. Sources said the company planned to award the deal’s mandate to investment banks soon, with the company stating that it has plans to sell shares as well. Airmedia sells space to advertisers on flat-screen televisions located in 52 mainland airports and on eight domestic airlines, including Air China, China Eastern Airlines, China Southern Airlines and Shanghai Airlines. Toyota Motors, Motorola, Samsung Electronics and Lenovo Group are among the companies that advertise on the company's screens. Mainland private equity firm CDH Investment paid more than US$10 million for a stake in the company in 2005. In a separate development, Digital Media Group, which sells flat-screen space in China's subways, also planned to raise US$150 million on the NASDAQ next year. According to a report by Deutche Bank, China's flat-screen advertisers attracted an estimated US$359.2 million of mainland advertising last year, about a third more than the US$240 million garnered by all the magazines in the country combined. The report indicated that the market for flat-screen advertising may more than double to US$771 million by 2008.

Mobile/Wireless

• The country’s State Administration of Radio, Film and Television announced its issuance of a mobile phone TV license to Beijing TV Station [BTV]. The license will enable BTV to conduct mobile phone TV services in cooperation with Beijing Mobile this year. The license BTV received is the sixth issued by SARFT. The other five have been given to Shanghai Media Group, CCTV.com, SMC, China Radio International and China National Radio, respectively. BTV has already initiated a test of the network TV service and will sign a general strategic cooperation agreement with Beijing Mobile in the second half of this year.

• China Mobile (CHL) announced that it has secured a partnership with Google (GOOG) for providing mobile service and Internet based search services in China. With the deal, Google aims to popularize its own mobile technology specification among China Mobile's content providers and ultimately make it the industry standard. Wap.iask.com, one of the largest wireless search engines in China, is also reportedly aiming to get more content providers to embed its mobile services into their applications. Hardware

• Lenovo Group (LNVGY.PK) said it looks to its sales for the three months ended March to benefit from the introduction of Microsoft's (MSFT) Windows Vista. Earlier, Lenovo launched 20 new-style computers compatible with Windows Vista program when Microsoft started to sell its latest software the same day in Beijing. Lenovo said it plans to open 800 mini-stores or booths to teach customers how to use Vista. Technical support will be given by Microsoft, which will also help 1,200 sales partners worldwide to train their staff for use of Vista. Analysts, however, are not be impressed by the sale of new models. According to JP Morgan, the Vista overhang would hurt Lenovo’s fourth-quarter sales, as many PC buyers would choose to wait and see how the new system performed. According to IDC, sales of Windows Vista will be about US$20 billion, with the IT industry expected to receive revenue of US$360 billion. IDC also expected the new software to produce about 100,000 job opportunities worldwide. Lenovo, which bought the PC unit of International Business Machines Corp in May 2005, said its net profit posted 23 percent growth to US$57.7 million for the three months ended December from a year ago, beating analysts' estimates. Sales grew only 0.3 percent to US$4 billion. Lenovo said it made third-quarter profits in all overseas areas except for a US$4.1 million loss in the Americas. Semiconductors

• NXP Semiconductors, formerly named Philips Semiconductors, and Advanced Semiconductor Engineering (ASX) announced that they have entered into an agreement to form a joint venture in Suzhou focused on semiconductor testing and packaging. Under the agreement, NXP will hold a 40 percent share while ASX will hold the remaining 60 percent. Terms of the agreement are subject to final negotiations between NXP and ASX and the receipt of necessary approvals from regulatory authorities. No financial details have been disclosed. Observers see the joint venture as serving both the international and domestic Chinese markets, focusing on testing and packaging of a wide range of semiconductors in areas such as mobile communications, consumer electronics and automotive products. The venture is expected to begin operations in the second quarter of 2007.

Ventures/Investments

• Suntech Power Holdings (STP), the largest Chinese solar-cell maker by market value, announced its plan to raise US$300 million by way of convertible bonds. Suntech said the bonds could be swapped for cash. The company said it would use US$100 million of sale proceeds to expand production lines for photovoltaic cells and modules and US$50 million to buy raw materials, with another US$100 million to repay a one-year bridge loan it borrowed last year for the acquisition of MSK Corp, a Japanese firm that makes photovoltaic modules that convert sunlight into electricity. The rest would be used for general corporate purposes. Industry observers note that mainland solar power firms are tapping the U.S. capital markets to expand as demand for alternative energy rises amid high oil prices. In separate developments, JA Solar Holdings (JASO) has reported seeking US$225 million from a NASDAQ IPO, while Trina Solar (TSL) and Solarfun Power Holdings (SOLF) offered shares in the U.S. in December.

• A top official of Philips China indicated the company will increase investment in the China market and make it into one of the three major global research and development centers for Philips. As part of the move, Philips would conduct some acquisitions in the China market even as the company would focus more on medical and lifestyle products in China instead of consumer electronics. Philips revealed that it will put its Shanghai Innovation Park, which involves a US$500 million investment, into operation before the end of this year. Presently, Philips maintains some 11 R&D centers in China, with the company making an investment of about 40 million euros (US$52 million) each year for the last three years by way of its centers.

Telecommunications

• Rumors are circulating through the Hong Kong media that China Unicom (CHU) is planning to acquire a stake in Asia Pacific Broadband Wireless Communication, the first 3G broadband wireless service provider in Taiwan, for NT$6 billion (US$182 million). The report says that China Unicom may raise funds through some investment institutions including Merrill Lynch for the acquisition of APBW, a member of Asia Pacific Telecom Group. The limit imposed, however, by the Chinese mainland authority for mainland companies to invest in the Taiwan telecom industry, may push China Unicom to follow another route: it may first purchase and manage APBW's broadband and then wholly acquire it in two years when the limit from the government side is eliminated.