Valuation and rating. We are maintaining our HOLD rating, and raising our target price from US$18.50 to US$20.00, which represents 16.3x adjusted FY07 EV/EBITDA (excluding stock based compensation), 19.9x ex- cash diluted FY07 EPS, and 22.0x FY07 EPS estimates. Our multiple is based on a 0.9x PEG and a 18.1% long-term growth rate (2007-2010) forecast. We are raising our PEG forecast from 0.8x to 0.9x to reflect the growth of online advertising revenue. Earning exceeds estimates, but guidance is not exciting. Tom Online’s 4Q05 revenue was US$48.1m, growing 4.7% qoq, 0.7% ahead of its high- end guidance of US$47.75m. Excluding gains from foreign exchange, 4Q05 net profit grew 8.3% qoq, which beat our estimate. However, 1Q06 guidance of -1% to 1% sequential growth looks very conservative, indicating that the wireless VAS market in 1Q06 is still volatile. We expect growth in 2006 and 2007 will be lower than consensus estimates. We forecast FY06 revenue will grow 13.9% and 5.4% yoy in 2006 and 2007, respectively. Music related wireless VAS business and online advertising are the main growth drivers. However, we anticipate that revenue from traditional SMS, WAP and voice service will be flat in 2006 and 2007 before 3G takes off in 2008.
Related: Full TOMO conference call transcript.