Jim Sun of Evolution Securities China released a note to clients earlier today on KongZhong (ticker: KONG). Key extracts:
No rating change. We are maintaining our HOLD recommendation on Kong Zhong but are revising our price target down a fraction from US$12.80 to US$12.20.
Introducing our FY07 forecast. We value Kong Zhong at 9.9x adjusted FY07e EBITDA (excluding stock based compensation), 9.0x adjusted FY07e diluted EPS ex- cash and 12.5x adjusted FY07e diluted EPS. Our 9.9x adjusted EBITDA multiple is premised on 16.4% long-term net income growth in 2007 to 2010 and a benchmark 0.6x PEG ratio.
Sharp Edge to drive 2G revenue growth in FY06. We are increasing our FY06 estimate for 2G-derived revenue 63.4% from US$26.5m to US$43.3m. While we expect organic growth derived from Kong Zhong’s existing 2G operations – SMS, RBT, and IVR – will account for roughly 10-15% of segment growth, we anticipate the acquisition of “Sharp Edge