Chinese Tech Stock Weekly Summary (May 11 - May 17, 2009)

by: IRG Ltd

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

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Tencent increases revenue as internet advertising slips. Tencent (TCEHF.PK) announced first quarter revenues of RMB 2.5 bn (US$366 mm), an increase of 19.4% MoM and an increase of 74.8% YoY. Internet value-added services revenues increased 28.8% QoQ to RMB 1.9 bn (US$278 mm) and represented 76% of the total revenues in 1Q 2009. Mobile VAS revenues increased 9.9% QoQ to RMB 439.5mm (US$64.3 mm) representing 17.6% of total revenues. Online advertising revenues however decreased 30.1% QoQ to RMB 146.6 mm (US$21.5 mm) and represented 5.9% of total revenues as customers imposed more cautious cost control measures, including delaying the budget approval process and signing of framework contracts given the uncertain economic environment. Tencent's gross profit was RMB 1.7 bn (US$251.7 mm), an increase of 21.5% QoQ and an increase of 64.5% YoY, as gross margin increased to 68.6% from 67.4% last quarter. Net profit was RMB 1.1 bn (US$154.2 mm), an increase of 20.3% QoQ or an increase of 94.4% YoY, with net margin increasing to 42.1% from 41.8% last quarter. The Company indicated that the second quarter of 2009 will present a weaker seasonality for the company's IVAS business. At the end of March 31, 2009. Tencent's cash position stood at RMB 6.6 bn (US$966.2 mm).

• Joint venture of NetSun and China Telecom established in Hangzhou., the Chinese B2B e-commerce subsidiary of NetSun, formally announced a joint venture with China Telecom (NYSE:CHA). Located in Hangzhou, the joint venture aims to promote technology development in China's rural areas. With an initial investment of CNY10mm (US$1.46mm), the joint venture will hire about 100 employees and will cooperate with China Telecom to develop the joint venture's Internet platform. The platform s currently in a research and development stage, and the platform is expected to be launched in the next few months. Sun Deliang, chairman of NetSun and the main promoter of this joint venture, said that the establishment of this joint venture is a specific implementation of its "small portal + alliance" development strategy and it will promote the development of NetSun's B2B professional website industry cluster and its comprehensive B2B e-commerce website

• Ctrip announced decreased hotel bookings but increased profit. (NASDAQ:CTRP) said profits were up 23% YoY for the quarter ended March 31, 2009. Total revenues came in at RMB 429 mm (US$62.8 mm) million, representing a 17% YoY increase and a 1% QoQ increase. Net revenues were RMB 401 mm (US$58.7 mm) for the first quarter of 2009, up 18% YoY, and net income was RMB 121 mm (US$17.7 mm), up 23% YoY. Hotel reservation revenues was RMB 187 mm (US$27.4 mm) for the first quarter of 2009, representing a 9% YoY increase, driven by a 17% increase in hotel room reservation volume, which was partially offset by a decrease in commission per room. However hotel reservation revenues decreased 11% from the previous quarter due to decreased hotel booking volume during the Chinese New Year holidays. Air ticketing revenues for 1Q 2009 were RMB 18mm (US$2.6 mm), a 16% YoY increase driven by a 40% increase in air-ticketing sales volume, which was partially offset by a decrease in commission per ticket. Air-ticketing revenue increased 11% QoQ due to increased air-ticketing volume. As of March 31, 2009, the balance of cash and short-term investment for Ctrip was RMB 1.4 bn (US$204.9 mm). Ctrip stated that it expects to continue the year-on-year net revenue growth of approximately 10-15% in China for 2Q2009.

• 51 (NASDAQ:JOBS), the internet classifieds and online job recruitment company, reported unaudited 1Q financial results with total revenues decreasing 24.6% YoY to RMB 178.3 mm (US$26.1 mm) as print and Internet advertising showed significant declines. Print advertising for 1Q decreased 42.4% YoY to RMB 70.6 mm (US$10.3 mm) compared with RMB 122.4 mm (US$17.9 mm) for the same quarter in 2008. Online recruitment services revenues were RMB 68.2 mm (US$10 mm), representing a 13.0% YoY decrease from RMB 78.4 mm (US$11.5 mm) from the prior year. Net income for the first quarter of 2009 decreased to RMB 9.4mm (US$1.4 mm) from RMB 22.2 mm (US$3.25 mm) for the same quarter in 2008. The Company com stated that the decrease in print advertising was due to fewer print advertising pages in its 51job Weekly, which was impacted by a decline in market demand resulting from the global economic crisis and slowdown of the economy during 1Q. The number of print advertising pages generated in the first quarter of 2009 decreased 36.5% to 2,916 compared with 4,593 pages in the same quarter in 2008. Print advertising prices charged in each city were relatively unchanged YoY, but average revenue per page decreased 9.2% due to a greater contribution of advertising volume from lower priced cities. The decrease in Internet advertising was primarily due to lower average revenue per unique employer, which was partially offset by an increase in the number of unique employers using the company's online recruitment services. Average revenue per unique employer decreased 17.4% QoQ in the first quarter of 2009 as employers reduced expenditures for online recruitment products or chose lower priced products. Gross profit for the first quarter of 2009 decreased 24.1%YoY to RMB 94.7 mm (US$13.9 mm). As of March 31, 2009, the Company had cash and short-term investments totaling RMB 1.1 bn (US$159 mm) compared with RMB 1.1 bn (US$157.2 mm) at December 31, 2008.

Media, Entertainment and Gaming

Chinese wireless value-added services firm KongZhong (KONG) announced revenues for the first quarter of 2009 increased 38% YoY and increased 11%QoQ to US$29.6 mm. Mobile games accounted for 17% of total revenue in the quarter, compared to 10% in the fourth quarter of 2008, while WVAS revenues in the first quarter increased 19%YoY and increased 2% sequentially to US$23.7 mm. The Company's net income was US$2.5 mm, compared with net income of US$520,000 in the last quarter of 2008. As of March 31, 2009, the company had US$141.7 mm in cash and cash equivalents.

Shanda rumored Hurray’s white knight to fend off Best Prospect’s hostile offer. Best Prospect is trying to buy a 51% stake in the beleaguered WVAS firm and has expressed frustration at Hurray’s unresponsiveness to its offers to buy the Company. According to various media reports Chinese online game company Shanda Interactive has been in discussions to acquire Hurray since April and has entered into a one month exclusivity period. Shanda is rumored to have considered acquiring Hurray two years ago. For 4Q 2008, Hurray's revenues increased to US$14.4 mm, an increase of 6.7% QoQ and a decrease of 9.2% YoY. Of that total, WVAS revenues were US$11.5 mm, representing an increase of 3.8% QoQ and an increase of 4.2% YoY. Music revenues were US$3.0 mm, an increase of 19.2% QoQ and a decline of 39.3% YoY with a total net loss of US$9.2 mm. For the entire 2008 total revenues were US$54.0 mm versus US$60.5 mm, while net loss was US$12.0 mm compared to net loss of US$42.0 mm for 2007.

Information Technology

• VanceInfo Technologies (VIT) announced solid quarterly results. VIT delivered another solid set of results, with top line coming in higher than estimates and above company guidance. The Company stated that it continues to face uncertain demand in the current challenging economic environment. However, with expanded relationships from existing accounts, an encouraging pipeline as well as efficient cost control, VIT stated that it is confident that it will emerge stronger when the economy recovers. The Company announced total net revs of US$30.1 mm (+47% YoY) which exceeded market expectation of US$27.8 mm. Non-GAAP EPADS (ex-SBC) was US$0.10, above the Street's US$0.10. The Company increased 2Q2009 revenue guidance to US$31-$32 mm (+27%- 31% YoY), and Non-GAAP EPS was guided to US$0.11-$0.12. Guidance for full-year 2009 revenues was raised to US$128 mm (+25% YoY) from US$123 mm and the Company now expects non-GAAP EPS to between US$0.49 and US$0.51. In 1Q2009, R&D Outsourcing services grew 48% YoY to revenues of US$19.2 mm and accounted for 64% of total revenues, while IT Services revenues grew 44% YoY to US$10.9 mm and accounted for 36% of total revenues.


Software piracy rate down to 80% in China but up globally. Business Software Alliance (a US- based non-profit industry organization) published that the software piracy rate in China has decreased from 90% in 2004 to 80% in 2008. According to BSA, during 2008, the world's piracy rate continued to increase, including the piracy rate of PC software at 41%, resulting in losses of US$53 bn to the industry. Statistics show that the world's PC software piracy rate was 38% in 2007 and the number increased to 41% in 2008, although countries such as China and Russia gained some success in their anti-piracy campaigns. According to the BSA anti-piracy campaigns in some countries have gained successes and the piracy rate in nearly half of all countries showed decreases; while the piracy rate in one-third of these countries maintained the former level, the total pirated value was still rising. The piracy rate in the United States is currently about 20%, which is the lowest in the world. The software piracy rate in China however decreased from 90% in 2004 to 80% in 2008 and that in Russia also decreased by 5% to 68%. The result in the Chinese market is mainly attributed to the government's promotion of authentic software and the joint efforts of Internet service providers. At present, there are seven countries where the software piracy rate is still over 90%, including Georgia, Bangladesh, Armenia, Zimbabwe, Sri Lanka, Azerbaijan, and Moldova.


• Significant cuts in certain fixed-line interconnection fees. China’s MIIT announced on May 12 that the interconnection (“IC”) rate of local network inter-district traffic between fixed-line operators will be cut to RMB 0.06/min from the current RMB 0.15/min effective June 1, 2009. No other IC regime changes were mentioned. This rate cut effectively reduces the gap between the tariff and the IC rate, the result of which likely are likely to be insignificant as local network inter-district' traffic is a tiny portion of total traffic for China Telecom and China Unicom, given their respective incumbent/dominant market position in Southern and Northern China. Also as both IC revenue and cost will be reduced the net impact on EBITDA and net profit will be negligible. The notice did not come as a surprise as the MIIT had already mentioned in its Jan 23 policy paper that it is studying IC adjustments to facilitate a new full-service market structure, and to give some preference to TD-SCDMA.