Thursday, June 30, 2005

The9(NCTY,26$. Sell)

Lock-up period for The9 shares expired on June 12, 2005 for 2005. One day after, managers of this company and venture capitalists filed to sell about 355,000 shares of stock. Why they rush in such a hurry?

The answer is obvious, the share are not cheap, even at insiders' eyes.

I hold my recommendation to sell this stock, it seems to have very limited upside while plenty of downside at current price levels.

WoW has been a hit, with a claimed PCU of 500,000. However, even such a popular game may not be able to justify hefty expectations from the market. I expect the9 to make about 35 cents for 2005. My estimated EPS for the next three quarters are 0, 17 cents and 19 cents.

My previous posts on the9:

2004 Gravity Annual report

Gravity 2004 Annual report
It is interesting to read.

After read it through, it confirmed my thought that this company is well managed. Good management is one of the key factors that I evaluate companies. I noted a few things:

* Gravity has two whole owned subsidiaries, one in U.S., the other in Japan. Through these subsidiaries, they are well positioned to launch their own operations in target markets, which will save revenue sharing costs. Going forward, Gravity may seek to establish other wholly owned subsidiaries or create joint ventures in other markets to get more exposed to the end markets. That said, Gravity may eventually manage to build up an independent global publishing network.

* Unlike many tech companies, Gravity is relatively conservative in issuing large amount of stock options to managers. Up to now, 36000 options of common shares have been granted to officers with an exercise price of 55431 WON, which is equivalent to 13.5USD per ADS. However, the company issued 235000 options of common shares to 290 employees with exercise price of 45431 WON, which is roughly equivalent to 11.3 USD per ADS. All these options can only be vested after DEC 2006 at four equal annual installments. The number of options issued to employees does not seem as conservative as those to the managers, but consider these options will stimulate morale, stabilize work force, and decrease cash bonus that should be paid otherwise, the benefits of these options may outweigh the cost from them.

* There are small shares trading at OTC markets:
Our common shares are not listed on any stock exchange or organized trading market, including in Korea. There is no public market for our common shares, although a small number of our common shares are traded in off-market transactions involving private sales primarily in Korea.
* RO contracts have been extended with contractors:
Most contracts that existed between Gravity and overseas contractors were renewed at favorable license fees and revenue sharing. Gravity managed to increase a few more percentages in revenue share in several key contracts, that shows the strength of the product, which is aged but still gives Gravity the pricing power.

* New partner in China? Or a joint venture?
All RO contracts are extended to about end of 2006 except China. RO contract for China has been extended for 3 more months till August 2005. This is interesting. I do not believe Gravity will get out of China market, nor do I think they will shut down RO operations in China either. Rather, I thought they may be working to get a more able partner or set up a join venture. Value Central, a subsidiary of Soft World, has been the RO contractor in China. Due to its limited size and influence in Chinese market, Value Central is not a good long-term partner for Gravity. Instead, they need to find someone who has a better brand name and a solid user base, such as Shanda and NetEase. I will not be surprised to hear that Gravity says it has found an able Chinese partner or has set up a JV in China in the next a few months.

Monday, June 27, 2005

VCLK(Buy, Target 15$)

Today ValueClick(VCLK) announced it has closed the acquisitions of Web Marketing Holdings, Inc, and E-Babylon. It also raised 2005 revenue forecast by about 45 million USD. Meanwhile, EPS estimate is increased by merely 2 cents.

Without further disclosure, it seems that the two acquisitions will be near to break even this year in their own businesses. It sounds too early to assert that these acquisitions will add values to shareholders.

Plug in their numbers to my earnings forecast, it looks like the company is spending cash to buy revenue at the expense of margins. I hold a Buy rating, with a 12 month target of 15$, based on 12 times of 2006 EBITDA plus cash.

Here are the financials:

VCLK Posted by Hello

Friday, June 24, 2005

GRVY: Strong Buy. Target 20+

GRVY(8$, Strong Buy, 12 month target 20+)

Since I have been holding my belief that Gravity is one of the most attractive stocks in tech sector on NASDAQ from a return vs. risk respective, and since up to now not many investors are aware of this opportunity, I'd like to step out as volunteer to start covering this stock. I reiterate a Strong Buy rating with 20+ 12-month target. The target is derived by 8 times of 2006 projected EBITDA plus cash, that gives a target price of 25. I do not think this target is too bullish, since the majority Internet service stocks are trading far more than 8 times of 2006 EBITDA.

Full disclosure, I started buying GRVY when it was 11, after it crashed to 5.6, I more than doubled my position. Currently, this is my only stock position.

Here is the historical and projected financial data:

GRVY  Posted by Hello

For my previous research on Gravity, please refer to the following links: