On the environmental front, the government is committed to hosting a ‘Green Olympics’ with everything from solar powered showers in the Olympic Village and a fleet of electric buses for transportation to lithium-ion garbage trucks. The problem is that as athletes from around the world compete to break records and win medals, Beijing’s other reality may come settling down from above. Beijing’s horrific air position problems are exacerbated in the summer when Beijing is hot and humid and often windless. Images of Olympic athletes gasping for breath and of smog obscuring the skyline are not what China wants broadcast around the world from its big event.

We believe revenue in Q2 will decline slightly. First, Q1 is seasonally strong due to the Chinese New Year. Second, MMS and WAP will be impacted further as mentioned above. Third, ad revenue, although growing rapidly, is not significant to total revenue. LTON lost USD3.4 million in net profit, mainly due to the upfront cost for enhancing TV ad segment. Ad revenue increased 81% QOQ in 1Q07, but it accounted for merely 4% of total revenue. Management believes the ad segment will make profit in 1Q08, but they also estimate that the Company will lose another USD3 million in Q2. LTON could be an acquisition target. LTON's market price is close to book value deducting goodwill and LTON has an attractive cash balance close to 50% of total asset. We have a BUY rating on LTON.

Revenue Stable

FMCN’s net revenues in 4Q06 increased by 11.8% QOQ. The commercial location and frame segments were strong in 2006, and the in-store segment was restructured successfully. In 4Q06, net revenues of commercial locations, the largest segment, increased by 7.8% QOQ. Gross margin improved 1.6 percentage point QOQ. The sell-out rate in all tier-I cities and 5 of tier-II cities reached 100%. Slots sold in tier-II cities increased dramatically by 49.3% QOQ following a road show. FMCN increased prices in tier-I cities at the beginning of 2007 and planned to raise prices every 6 months. 4Q06 Revenue from the frame segment, the second largest segment in FMCN, increased by 22.1% QOQ. In 4Q06, frame prices rose by 18.6% QOQ, which reflects FMCN’s bargaining power. Gross margin improved from 70.7% in 3Q06 to 75.4% in 4Q06. In-store network got the lowest gross margin among three main businesses, but FMCN continues to withdraw from supermarkets and convenience stores who charge more, and migrate to hypermarkets who charge less. Management believe gross margin can reach 55% - 60% at the end of 2007, much higher than 34.8% in 4Q06.

Operating expenses, excluding share-based compensation, increased 26.3% reflecting FMCN’s aggressive expansions. We believe EBIT will improve when sell-out rates rise in newly explored cities. On February 28th, FMCN announced acquisition of Allyes, the monopolist of Internet advertising agent and software in China. We believe the acquisition will raise FMCN’s revenue significantly. 1Q07 will be seasonally weak, but we believe FMCN will grow strongly from 2Q07. We project a target price of $96.51, 29.5% higher than the current market price. Taking Allyes into account, FMCN should be worth more. We rate FMCN a BUY recommendation.

We believe that there are some good value names to buy, but would wait before buying. As outlined below we are most interested in companies with hard assets (RoadKing) and undervalued consumer plays (China Netcom, Beauty China and Shanda).

Note that this most recent action was an attempt to reduce foreign demand for Thai currency as a result of its recent strength. The 1997 action resulted in concerns about the stability of the economy and attacks on the currency. This time around it is a step being taken as a result of things going too well, not too badly.

We believe CN will be allocated the home-grown standard [TD-SCDMA] and that this will bring revenue to CN in 2H2007. MII released an anti-trust law on broadband, but we believe it will not impact CN, because broadband dominance is based on its monopoly of the fixed line network. Revenue remained stable in Q3, because the increase in broadband and value added services offset the decrease in voice businesses. We note that CN’s P/E and Price/Sales multiples are below half of industry averages. Furthermore, the first mover advantage that we expect for CN in 3G should be taken into account. With conservative variables, we calculate a target price of $48.78, 26.1% higher than the current price. BUY.

3G Network Will Generate Revenue
Recent progresses on 3G networks suggest that CN’s revenue in the future will be much more than just stable.

click to enlarge

The more encouraging developments include the commencement of exports sales of instant noodle to Sweden and Greece and more recently to Tesco plc, a leading international supermarket group based in the United Kingdom. Meanwhile, it has recently received a 100-ton soybean powder order from a leading global beverage company. These developments, along with the acquisition of several state-owned facilities at inexpensive prices in the past two years, have enabled the Company to expand its production capacity and distribution network.

As a result, we expect the Company to enjoy steady revenue and net income growth ahead. However, the restatement of New Dragon Asia’s financial statements for FY2005 and FY2006, with a significant amount of non-cash items and gain or loss on fair value adjustment to embedded derivative would have confused investors and widened its valuation discount relative to peers. Our EV/EBITDA valuation indicated the stock is inexpensive and based on 15x estimated 2007 P/E, our price target for the stock is $2.12. With a further 24.7% upside potential, we maintain our BUY recommendation on the stock.

Recent comments by management about ‘unlocking shareholder value’ have us thinking about the value of a break-up of the company or spin-off of one or more businesses. In this note, we examine the possible value of each of the parts of the business and note that the sum-of-the-parts valuation could be as much as double the current share price.

According to a survey of China Online Advertising Market Tracker 2006 by Analysys International, Sina Corp. (SINA) maintained No. 1 in online ad revenue market share in 1H2006. The Company accounted for 20.7% of total market size.

High net profit growth rate came from continuous margin improvements. Revenue increased $0.3mn, while cost of service decreased $0.2mn. Therefore gross profit margin rose by 1.9 percentage point. Further, 2Q operating expense maintained the same level as 1Q. But we note that LTON restructured operating expenses. ‘Selling and marketing’ expense rose by $1.5 mn, while ‘Product development’ and ‘General and admin’ expenses declined by $0.5 mn and $1.0 mn. Development expense reduction and selling expense rise reflect a severe competition, while admin expense reduction is always reasonable at any time.

Short Messaging Services Segment Declined
As mentioned above, ‘Super Girl’ program hosted by Hunan Satellite TV is not as popular this year as last year, therefore Short messaging services [SMS] revenue (2G segment) decreased by 12.7% QOQ to $13.0 mn. But ‘Super girl’ will have nothing to do with LTON in the following quarters, because LTON’s agreement with ‘Super Girl’ expired and Hunan Satellite TV would not like to continue the partnership with LTON. Hunan Satellite TV is going to cooperate with China Mobile (NYSE:CHL). It is another case of content providers [CP] skipping over service providers [SP] to cooperate with the mobile operator directly.

Strong Revenue and Profit Growth
CDC achieved strong financial performance in 2Q2006. Revenue increased by 19.2% to $77 mn, while net profit grew sharply to $7.90, compared to $1.48 mn in 1Q2006. 61.9% of QOQ incremental revenue came from 17game shareholding increase. On March 23, china.com (HKSE:8006), a subsidiary of CDC, increased its shareholding of 17game from 48% to 100%, so that CDC can fully consolidate 17game’s revenue of $7.7 mn in 2Q.

Riedel recently wrote:

UTSI announced a loss of $10.6 mn in 1Q2006, about 23.5% of loss in 4Q2005. The narrower loss is caused by shrunk revenue and costless cancellation fee of $22 mn from Japan contracts. We believe in the next quarter revenue will maintain its downward trend, while loss will swell. Before we see IPTV revenue, no business segment can be appreciated. UTSI disclosed two bribery scandals in Mongolia and India, which may negatively impact UTSI, if UTSI is sentenced guilty. We calculated a target price of $6.30, which is below the Company’s current market price and net asset. Bottom line: SELL.

Second, CHL announced a new regulation against service providers. Though there is a negative impact on SP through this new regulation, it is not as hard as was expected; this regulation is merely a show, due to the pressure from the Ministry of Information Industry. CHL need SP before it can be SP itself. We reduce the value added services revenue growth rate for 1H2006 and 2H2006, and calculated a target price of $30.04, though lower than before, this price is 14.0% higher than the current market price. Our rating: BUY.

As incomes in both rural and urban China increase, demand for better quality food products such as wheat flour and instant noodles also increase. Thus, management’s strategy to aggressively expanding its production capacity and vertically integrate its business through acquisitions of a noodle factory in Chengdu, a soybean product factory, a distribution company and a packaging company in the past year should provide a strong base for accelerating revenue and earnings growth in the coming few years. Meanwhile, the somewhat unexpected loss in the first quarter of FY2006 due to non-recurring, non-cash expense items has dampened sentiment in the stock and caused price weakness.

Despite the hype surrounding China telecom plays, there are still some hidden gems. One is Hong Kong-based China Netcom Group (CN), whose American depositary receipts now trade on the Big Board at 34, says David Riedel of Riedel Research Group, which specializes in foreign stocks. Netcom is the top provider of fixed-line phones in 10 Chinese provinces, but its stock has slumped to 33 since hitting a 52-week high of 40 in mid-May. Nonetheless, growing demand for broadband DSL could energize Netcom's sales and earnings this year and next, says David So of Standard & Poor's (MHP). He rates the stock, at 33, a "strong buy," with a 12-month price target of 46. Increasingly, customers are switching to broadband from slower dial-up connections, he says. Also, demand from bandwidth-hungry users such as online gamers is expected to grow. "Investors have yet to appreciate the impact of increased broadband demand on Netcom's earnings," says Riedel. He figures it will add 11% to revenues and 18% to operating profits in 2006. S&P's So expects Netcom will earn $4.60 per ADR in 2006 and$5.20 in 2007, based on a yuan/dollar exchange rate of 0.129.

Through expansion and acquisition, ACH increased alumina and primary aluminum production capacity 29% and 81%, respectively. Due to high energy costs, shortages of alumina supply and over-capacity, majority primary aluminum manufacturers in China experienced a downturn in 2005. ACH was the only alumina manufacturer in China and supplied 50% of domestic alumina demand.

CHU's revenue in 1Q2006 amounted to RMB22.90 bn, a 9.81% YOY increase and a QOQ increase of 5.19%. Profit rose by 30.55% YOY, and 22.30% QOQ to RMB1.39 bn. High growth rates are not only due to low comparison bases in previous periods, but also due to high profit margin value-added services from upgraded GPS networks in four major Chinese cities.