KongZhong: The Uncrowned King of Chinese Wireless Value Added Services (KONG, LTON, TOMO )

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Includes: KZ, LTON, TOMOY
by: SA Editors

Daniel Adams of RealMoney believes that the wireless value-added services industry (WVAS) is unjustifiably below the radar screen of many investors. Currently a $20 billion industry, projections have this pegged to grow 20% each year through 2010. And, says Adams, "with that kind of growth rate, the industry can afford to trade significantly higher than the current average price-to-earnings ratio of just 18.7."

Adams looks at three WVAS players:

Tom Online

  • Market Cap: $1.25 billion; largest WVAS player
  • Revenue: Grew 39.6% in 2005 to an estimated $171.4 million
  • EPS: Up 13.6% to 85 cents; current expectation is for $1.03 EPS with revenue of$211.7 million translating into forward P/E of 21.8
  • Summary: "With a market cap nearly three times that of its next largest competitor, Tom Online has a size advantage that gives it more leverage in negotiating contracts with carriers. Because of this, it trades at a premium to the industry, but it still has room to grow. With industrywide multiple expansion, shares could easily move above $30."
  • Linktone

  • Market Cap: $185 million
  • Revenue: After spectacular growth in 2004 of 203%, growth rate shrank to 44.7% in 2005 with revenues of $73 million.
  • EPS: Consensus estimates forecast 57 cents per share on 2006 revenues of $92 million translating to a forward P/E of 12.6. Compare with industry average of 18.7.
  • Summary: "Still, its revenue stream is heavily concentrated in more basic, commoditized, SMS-based services, limiting its prospects with the adoption on 2.5G and 3G handsets. On Wednesday, the company warned that fourth-quarter and full-year 2005 earnings would fall short of previous estimates, citing higher costs and weak sales, highlighting the margin risk from its SMS revenue concentration."
  • KongZhong

  • Market Cap: $425 million
  • Revenue: Estimates are for $76.5 million, up 143% over last year.
  • EPS: Estimates have EPS up 33% to 80 cents; consensus forecasts are for EPS of 90 cents on $95.7 million revenues.
  • Summary: "With positive 2.5G adoption trends and the expectation that China will begin awarding 3G licenses some time this year, KongZhong is positioned to accelerate its growth rate ahead of its competitors...Because of KongZhong's balanced revenue stream and wide operating margins, shares should trade at a premium to its competitors and could move above $18 in the coming quarters."