Chinese Tech Stock Weekly Summary

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

Internet

• Vivendi, Sony (SNE) and Warner Music Group (WMG) are seeking record damages from Baidu.com (BIDU) on claims the operator infringed copyright by offering Web links to pirated music. The lawsuit filed by the International Federation of the Phonographic Industry [IFPI] was accepted by the Beijing No1 Intermediate People's Court last week. The US$9 million in damages sought from Baidu and US$7.5 million from Sohu.com (SOHU) are the most asked for by record companies in China. Baidu, which controls 60 percent of the mainland search market, was the biggest roadblock to creating a market for legal digital music on the mainland. More than 99 percent of online music on the mainland is pirated.

• Dell Inc. (DELL) has started selling its products via Taobao.com, the customer-to-customer online trading platform in China. It is the first time that Dell has introduced a third-party online marketing partner. The in-between cooperation will create a large-sized advertising and distribution platform with low cost, for the PC titan. Moreover, the deal will reduce Dell's management risk. The penetration of Dell's retailing and distribution is a big challenge to Dell's top management, especially the management group for Dell's direct model. However, Dell is confronted with enormous pressure because customers are doubtful about product quality on Taobao.com and the site's credit rating.

Mobile/Wireless

• More than two-thirds of consumers in China are aware of Apple's (AAPL) iPhone even though the product is not on sale there. China Mobile (CHL) has discussed a local launch of the iPhone with its developer, Apple, but the two companies have so far failed to reach agreement. Despite this, iPhones are readily available in stores in the country's major cities. The phones are purchased in the U.S. and imported to China. Their internal software is hacked to unlock the phones so they can work with local mobile networks. The high price tag of US$500 or more was the most mentioned reason for disinterest in purchasing an iPhone in China along with Apple’s inexperience in mobile phones. The iPhone’s high profile has spawned Chinese copycats that duplicate iPhone’s features at a fraction of the price, retailing for US$200 to US$300.

• Baidu.com has partnered with China Netcom (CN) to jointly develop a 3G mobile search engine. Market observers noted that the partnership between China Netcom and Baidu would on the one hand improve China Netcom’s competitiveness in the upcoming 3G era and on the other hand accumulate experience for Baidu to tap China’s mobile search market. Trial commercial use of 3G started on April 1, but 3G licensing and telecom industry restructuring will not formally kick off until after the Beijing Olympic Games. While 3G is approaching and Chinese telecom operators are expected to conduct full-range telecom and value-added services in the future, competition on China’s telecom market is expected to intensify.

Telecommunications

• The mainland's homegrown TD-SCDMA 3G mobile service was launched but faces many of the same technical and service-related problems that beset Hong Kong operators four years ago. China Mobile has launched commercial trials in eight cities with about 60,000 mobile phones and 15,000 3G data cards made available to the public. Ten sales representatives were on hand during the launch to explain and demonstrate 3G services. Five customers aged 20 to 40 and with a strong interest in mobile technology subscribed to the TD-SCDMA service during a 90 minute period.

• The China Telecom Academy was founded by China Telecom (CHA). The new academy, which will serve as a training center for the company, plans to organize 109 training sessions this year, half of which will focus on new services connected to the transformation of China Telecom into a full business operator and information service provider. China Telecom aims to develop the training center into a top-ranking enterprise academy in the next three to five years. The carrier will integrate intellectual resources from both inside and outside of the company to build a scientific, systematic and authoritative training system.

• Great Wall Broadband Network Service Co., Ltd. will receive 150 million yuan (US$21.4 million) from CITIC Networks Management Co., Ltd. and Great Wall Technology Company Limited respectively. After that, the Beijing-based company's registered capital is to climb to 900 million yuan (US$129 million) from 600 million yuan (US$86 million). CITIC Networks will hold a 50 percent stake in Great Wall Broadband with 450 million yuan (US$64.3 million) and the Hong Kong-listed company's holding will add to 40 percent. China Great Wall Computer Shenzhen Co., Ltd. and Shenzhen Kaifa Technology Co., Ltd. will each take 5 percent shares in the Beijing-situated company with 45 million yuan (US$6.4 million), respectively.

• Jiangsu Telecom, China Telecom's branch in Jiangsu Province now offers 8,000 Wi-Fi hotspots in Jiangsu and expects to expand Wi-Fi hotspots to cover the entire province within three years as part of a government initiative. Jiangsu Telecom hopes to receive funding from the provincial government for the project. Jiangsu Telecom's current 8,000 Wi-Fi hotspots in Jiangsu cover over 4.22 million square meters, including 436 hotels, 41 schools, 265 office buildings and 503 shops and entertainment venues. The entire downtown area of Nanjing will have Wi-Fi coverage within the year, and next year coverage will expand to the city's outskirts.

• China Voice Holding (CHVC) has entered into a partnership and revenue sharing agreement with China Netcom. The amended agreement now includes the use of allocated funds originally targeted for Candidsoft Software licenses to be used to provide connectivity, network expansion, installation, billing, collection and on-going support of CHVC's government contracts. The initial phase of the new agreement is for the GuangXi Autonomous Region where CHVC has contracts for the installation of its SKY O/A integrated Office Automation and VoIP solution to approximately 55,000 seats, or over half of its current contracts which consist of 103,000 seats.

• China Mobile's Guangdong Branch published its 2007 annual report in April which shows that the company's 2007 net profits rose by 21.09 percent year-on-year to 19 billion yuan (US$3 billion). Furthermore, as of December 31st, 2007, the Branch had 59.8 million mobile phone users, 9.15 percent more that at the end of 2006. Calculated on the number of Guangdong Province's mobile phone users as released by the Province's Communications Administration, Guangdong Mobile accounted for 76.3 percent of the mobile telecommunications market.

• China Communications Services Corp. gained operating revenue of 23.5 billion yuan (US$3.4 billion) in 2007, up 21.9 percent from the previous year. Net profit reached 1.167 billion yuan (US$167 million), surging 42.9 percent from 817 million yuan (US$117 million) in the prior year. Earnings per share stood at 0.214 yuan (US$0.03). Revenue from the telecommunications infrastructure services reached 11.093 billion yuan (US$2 billion), accounting for 47.1 percent of the total. And revenue from the business process outsourcing services rose 51.8 percent from the prior year to 9.365 billion yuan (US$1.3 billion). Meanwhile, revenue from applications, content and other services soared 39.7 percent year on year to 3.08 billion yuan (US$431 million).

• China Communications Services Corp. a Chinese telecommunications outsourcing service provider, plans to expand into overseas markets including Africa and the Middle East in the next two years. The subsidiary of China Telecom Group has earmarked 100 million yuan (US$14.3million) to 200 million yuan (US$29 million) from the 1.5 billion yuan (US$214 million) raised in a share placement for overseas growth.

• China Communications Services Corp. is to spend 505 million yuan (US$72 million) acquiring China International Telecommunication Construction Corp. [CITCC] to expand overseas presence and improve its competitiveness. CITCC mainly provides telecom infrastructure construction services, including fixed-line and mobile telecom construction, and TD-SCDMA network construction. Its net assets reached about 469 million yuan (US$67 million) at the end of December 2007 and after-tax profits (excluding non-recurring items) 29.46 million yuan (US$4.2 million). The buyer, the biggest telecom infrastructure construction service provider in the nation, was regrouped from subsidiaries under China Telecom, the largest fixed-line telecom operator, in six provinces and cities.

• Goldman Sachs (GS) maintained its “Neutral” rating on China Telecom Corp. Ltd. on the assumption that the company will benefit little from pending industrial reshuffle: News that China Telecom acquiring the CDMA network under China Unicom (CHU) is unlikely to influence earnings per share and its compound growth rate. Goldman Sachs expects the company to issue A-shares on China's stock market, although the possible financing could not be a large scale one, as China Telecom has sufficient capital for development. The target price of China Telecom stock set by Goldman Sachs is HK$5.50.

• Deutsche Bank (DB) newly downgraded China Unicom to “Sell” from “Hold”, but raised the target price to HK$14.00 from HK$13.70. The bank believed that the recent advance of the company's share price resulted from expectation for premiums it may get from selling its CDMA network to China Telecom during the pending industry restructuring. Upon completion of the acquisition, China Unicom is expected to increase investment in high-cost businesses. However, the move could hardly shake the dominance of China Mobile, its chief competitor on China's telecommunication market, as it may take three years for China Unicom to resume competitive strength.

Media, Entertainment and Gaming

• The Walt Disney Co.'s (DIS) videogame arm has agreed to buy a Chinese game developer as the company seeks to expand its presence in China. Disney Interactive Studios plans to buy Chinese company Gamestar. Terms of the deal were kept confidential. Founded in 2002, Gamestar employs more than 90 staff members and runs offices in the Chinese cities of Shanghai and Wuhan. Disney Interactive Studios General Manager Graham Hopper was quoted as saying that Gamestar will contribute to his company's global growth plans and new products. Disney Interactive Studios used to hire Gamestar for outsourcing work, the Hollywood trade publication Variety reported on its Asian news Web site. Following the acquisition, Gamestar will help with existing projects but may move on to developing original games for the Chinese market, Variety reported. Disney movies and merchandise are already common in China.

• NetDragon Websoft Inc. announced that on 30 March 2008, it officially started its black dragon testing client of the game "Heroes of Might and Magic Online", which is to be launched in 2008. "Heroes of Might and Magic Online" is a 2.5D MMORPG. This game is being developed based on the well-known PC game "Heroes of Might and Magic", licensed to the Group by UBISOFT. The game is set in a virtual medieval-style heroic fantasy world, where players control a virtual hero who leads an army. By capturing towns, players can also engage extra armies to help them in their conquests. The Group offers players a number of different 'virtual items' for use in the game, including various virtual weapons and game maps. The game is targeted at existing "Heroes of Might and Magic" PC game players worldwide, together with players who prefer strategic games.

• CDC Games has commercially launched “Yulgang 2.0”, its massive multiplayer online roleplaying game in China. This is the latest new content update for Yulgang that provides gamers with approximately 30 percent more content. “Yulgang” is CDC Games' original free-to-play online game and highest revenue generator to date. CDC Games has launched a marketing campaign that includes advertisements on 17173.com, a China games portal, in internet cafes and through ground advertisements. CDC Games intends to continue with such activity and add special gamers meetings in partnership with Mgame, Yulgang’s developer, host a celebration of Yulgang s third anniversary and expand online advertising.

• Beijing Perfect World Co., Ltd. (PWRD) announced on April 9th the introduction of the new version of its Rewu Paidui online game, which will be offered free of charge. Starting on the same day, the charging system of the game will be shut down and the gaming tools will be available without any fees. This is the first time that Perfect World has introduced a free online game; however the company has not specified how it plans to make a profit from it.

• Shanghai's online game publishing industry had sales revenue of 6.37 billion yuan (US$910 million) in 2007, a 63.8 percent growth compared with 2006, accounting for a 60.3 percent portion of the market in China. In the city, there are 70 online games currently operating and more than 5,500 people are engaged in the industry. The game product structure is going to be optimized by increasing the number of music dancing games, electronic sports games, and casual games, and the move will bring good economic and social interests. Shanda (SNDA), Giant Interactive (GA), The9 Limited (NCTY) and Nineyou International in Shanghai are among the nation's top five online game operators. And the games such as Crazy Kart, The World of Legend, and Magical Land developed by Shanda were launch into the Southeast Asian market in 2007.

• Chinese media and advertising group Asian Union New Media has signed an agreement to acquire the entire share capital of advertising agency Blower Investments Ltd. Under the agreement, the consideration for the acquisition shall be issued at HK$0.20 per share, and the acquisition will be for no more than HK$420 million. The acquisition will be completed over a three year period. Asian Union will expand in both traditional satellite TV as well as digital TV this year, and develop new media channels in China, including mobile TV and Internet TV. The company also operates "Travel Channel", the only satellite TV travel channel in China.

Technology

• Intel Capital will invest US$500 million into technology start-up companies in China and Hong Kong over the next 3 to 5 years as international demand grows for a stake in China's increasingly lucrative technology sector. Intel Capital, the venture capital arm of Intel Corp. (INTC), will target companies engaged in software development, chip design, gaming, and wireless broadband and digital health. The new fund will make its first investments in Holdfast Online Technology, a Shanghai-based start-up that makes technology for online gaming, and Beijing's Newauto Video Technology, which provides network solutions and digital editing for mainland television stations. Intel Capital launched a US$200 million China-focused technology fund, which has fully invested in around 30 local companies, far more rapidly than the company had anticipated.

Software

• CDC Software has completed its acquisition of a 51 percent stake in Integrated Solutions Limited, a Hong Kong-based vendor of ERP systems designed for small and medium-sized manufacturers in China. With this investment, the company expects to be well positioned to fully exploit the significant opportunities in China. The company plans to leverage ISL's track record of successful deployments in southern China as it expands its market presence. The popular Ross Enterprise applications for process manufacturers and the addition of ISL's applications for discrete manufacturers complete the solutions for the entire industry.

Information Technology

• EMC (EMC), an international data storage giant, announced on April 8th that it will establish a branch in Fuzhou City in a bid to enter the market of Fujian Province and better meet the demand from local customers. Prior to this, EMC cooperated with Fujian enterprises, such as Fujian Newland Computer Co., Ltd., Industrial Bank Co., Ltd, Fujian Mobile, Fujian Telecom and Fujian Electric Power Co., Ltd. Fujian is one of the developed provinces along China's southeastern coast, attracting a great number of SMEs with rising data management demand. This is the reason why many multinational companies, such as Cisco (CSCO), Oracle (ORCL) and EMC, have now established themselves in Fuzhou.

Disclaimer: IRG is not responsible for the accuracy of the news compiled within this article, which is based on publicly available information.

Comments

[AmesTiedeman]

GOOG screamed. BIDU next.

[investorslive]

WMG may be a great breakout here

www.investorslive.com/.../