Friday, July 29, 2005

JOBS: Update before Q205 Earnings

I am reintegrating my 'Sell' rating on (JOBS), based on the protracted overvaluation of the shares and the weakness of its fundamentals. My 12-month price target for this stock is 10$ per ADR, which is derived by 13 times of 2006 EBITDA plus cash, or 21 times of 2006 earnings plus cash. I believe these multiples used are too high for 51JOBS, since its growth rate is far from extraordinary, thus I won't be surprised to see quotes that are well below this price target.

My View:
* JOBS is not the of China, as boasted by brokers. If it is, there will be way too many in China.
* Ironically, JOBS is a online recruiting service company, but online revenue accounts for a small percentage of its total revenue. The majority of revenue comes from print ads, which can not enjoy the same margins as the online business.
* Growth rate is far from extraordinary, can not justify current high valuation.
* Brokers, Piper Jaffray in particular, has been pumping this stock in the past 10 months after this stock's IPO. People may need to be cautious when they see their high-in-the-sky targets.

My past discussion of JOBS could be found at

Here is some financial details:

JOBS Update Before Q205 Earnings Posted by Picasa

Thursday, July 28, 2005

SOHU Reported

After SOHU Q2 report,I reiterate Neutral rating for SOHU, as I previously discussed in

A few takeways from SOHU's report:
* Good searching revenue.
* Wireless is stablizing, good news for other players: TOMO,KONG,HRAY,LTON.
* Ad growth maintains.

although this quarter SOHU is negatively affected by poor E-commerce revenue,overall,the business is still in good shape. In particular, its search and online ad businesses are doing quite well.

That said, I think the share price already pretty fairly reflect these prospects, thus I see no need to rush to pick up SOHU shares at this moment.

GSI Commerce Q2 Report (GSIC)

Yesterday after market close, GSI Commerce(GSIC) reported mixed Q2 earnings, with higher than expected sales and lower than expected earnings.

The full year guidance is good if you think in terms of revenue, but bears may worry about the earning power.

I rate this stock as 'Neutral', with a 12-month target of 17$, which is derived by 17 times of projected 2006 EBITDA, or 30 times of 2006 earnings plus cash. I do not think this stock is a buy unless it drops to low teens.

Here is projected financials:

GSIC Posted by Picasa

Gravity update(GRVY, Buy/Hold)

Reason for report: Business update from the Company, forecast cut.

My view:
I am lowering Gravity rating from 'Strong Buy' to 'Buy/Hold', target price changed from 30$ to 20$. The target price is derived from 8 times of 2006 EBITDA plus cash, or 10 times of 2006 earnings plus cash. The change is because of short-term revenue pressure as of result of increased competition. As you can see, the multiples used are extremely conservative to reflect the protracted neglect and lack of interest. But there is no justification for this to keep going for ever, so I expect there is a lot of room above this 20$ target.

It seems that the management has misjudged their business future twice. Indeed, the gaming business is hard to predict, but the mistake of the management is that they went too optimistic when giving guidance. I rather they stay conservavtive and beat than be bullish and miss. These guys do need to take a more serious attitude toward the capital market.

The bottom line is the business is holding up pretty well this year, I expect it to make 80 to 90 cents per ADS in 2005. Next year, I am expecting revenue to be about 108 mil USD, EPS to be around 1.6 USD(Assume KRW/USD rate is 1100:1)

I still hold my view back in May
That is, as long as they make roughly the same amount of money this year as they did last year, there is no need for extreme panic.

The reasons are:
* This stock is already with very low valuation.
At 6.5$ per shares(market price as I wrote this), the market is valuing the business to be worth about 80 mil $ (MktCap+Debt-Cash). If I have enough money, I may think to buy this out completely at this level. Why? Suppose I get this deal done, then I can dispose all developers and most managers, only leave a few people to receive license and royalty fees from RO and ROSE online in the next one or two years. In my opinion, those fees could roughly make up the 80 mil USD premium(with near to zero operating costs) I paid to get the business. Then, most likely I can also put RO2 on sale, given the hit of RO, it should be not hard to sell RO2 operating rights as well as codes,copyright,etc. for anywhere between 50 mil USD to 200 mil USD. At last, I can put up the company itself for sale, possibly somebody can pay anywhere between 20 mil USD to 100 mil USD for Gravity's brandname and worldwide distribution channels. All considered, it seems that the liquidation value of the business (including 100 mil USD cash) is above 8$ per ADS share.

However, nobody thinks business in pure liquidation value terms, the business is ongoing and its future has value too.

* This year the business could hold, next year could be much better, given the products lineup. It is true that the competition is heating up, but so is the gaming market, money will be harder to make, but there is money to be made by somebody in the field. Given Gravity's product lineup and worldwide distribution,Gravity's has its own competing advantage.

Here is my projected financials:

Gravity Update072805 Posted by Picasa

Tuesday, July 26, 2005

Amazon, InfoSpace reported Q2 results

Amazon's report is impressing, the bottom line is sales is still growing fast and the free shipping program did not affect its margin as worse as most Street analysts worried. Net income fell because of higher tax rates. Stock is up about 11% in after-hour trading.

This reminds me the EBAY story again, seems to me only when most street analysts are neutral and have 'concerns' with these high quality names, will there be opportunities for value investors.


InfoSpace reported a good quarter but cut forecasts, stock crashed 31% in after-hour trading.

In the long term, I feel good about its mobile business, while think its meta search has no future. As for its online directory, I think it is a strategic mistake for the management to investment big dollars in this segment. People now are going to Google and Yahoo local search to find address and telephone numbers of restaurants, stores, etc, not

However, this company has a super strong balance sheet and it announced a 100 mil USD buyback. If the stock can drop to teens,it could be a good value play.

Friday, July 22, 2005

Google and Internet Sector

Google reported another good quarter, although not as good as many greedy analysts.

Making a decision to buy these high flyers like Google is always painful, fundamentally it is a great business, but there have always been a high premium paid by the market over its business value. Thus, playing with such issues is very technical, research more in various technical indicators or street moods(although I am not a fan of these methods) may be more useful than researching the fundamentals.

As we have witnessed the rise and fall of EBAY in later part of 2004 and early 2005, it is human nature to be easily over-optimistic, people's imagination can run far ahead of business itself, but sooner or later, the two will converge for a while. The EBAY story is interesting, after one slow down quarter, people dumped it, analysts punched it and everybody said in conservative tones with various concerns(Where were the concerns when shares were shooting to sky?). After Q2, EBAY rebounded 20% in one day and now analysts raised targets one after the other, perhaps a new bubble will be pumped before then next burst, the old game.

I will give a serious at Google again when most bullish analysts have concerns on Google some time in the future, maybe that day may never come, who knows.

In my opinion, the Internet sector has been doing quite well and could do better down the road. Google, Yahoo, EBAY are growing at spectacular rates, although may not be as fast as Wall Street analyst expected, they are still fabulous businesses with little additional capital investment needs, high margins and high growth rates. During the mania years of the 90s, too much capital have been pumped into the Internet land, much of those money will be burned by numerous ventures which spent big money for nothing more than eye balls.However, after 5 years of shakeup, the majority weak players have been wiped out, the few survivors are making big fortunes. We do see many kinds of business models that actually worked and could last to the future, like the online retail model of AMZN, online/search marketing model of Google and Yahoo, online auction model of Ebay. Thus, although nowdays the stocks for the Internet leaders are still enjoying rich valuation that will scare away most conservative investors, there is one major difference between now and the days of 90s, that is all these issues are supported by solid fundamentals in terms of earnings, cash, and growth.

I believe that we are still at the beginning of the Internet market growth. Besides several well established business models, such as those mentioned above, there are new ones emerging on the horizon. A few promising areas could include online gaming(SNDA,NTES,GRVY,WZEN), online digital music(AAPL,RNKS,MSFT,SNDA), online brand marketing(VCLK), online E-Commerce stores(GSIC,DRIV), online discount market place (AMZN,OSTK,ECST).

I like a few things in common among these Internet business models:
* They are proven to be profitable and could be sustainable.
* They require little additional capital investments to handle bigger business.
* High gross margins ( could be as high as above 80%). Also since operation costs will not increase in proportion with the increase of revenue, the law of economy of scale works very well in these models, as a result, earnings tend to grow faster than revenue growth.

That said, I believe the Internet sector to be a good place for long term investment in the coming years.

Thursday, July 21, 2005

Chinese Yuan reevaluation

Finally, news came out at most people's surprise, just as primiere minister Wen JiaBao said several months ago, Chinese Yuan reevaluation will be done, but at a time that most people can not expect.

As always said, buy Chinese stocks with solid fundamentals will be rewarding.

Wednesday, July 20, 2005

Are we at the beginning of a sustainable bull market?

This is a useless question by itself, since no one can say for sure.

I have been reluctant to make market predictions and made investment decisions based on them. In the past a year and half, I have been quite skeptical about the general U.S. economy and were worried about the high valuation of many stock issues, especially in tech space.

But now, I feel a change is undergoing subconsciously inside me. I still see a lot of stocks with nose-bleeding valuations, also I see distressed issues with good quality, like some pharmaceutical and financial companies. The tech space is still rich in valuation, but there is a difference between now and 2000, it is that most tech issues are supported by solid earnings and growth prospects, like what we see from Google, Yahoo, Ebay.

On the other fronts, many macro economic data shows that the overall U.S. and global economy is doing well. Greenspan has been iterating the 'sustained' growth of U.S. economy whenever he raises interest rates, as a result, inflation is well under control. U.S. dollar recovered with incredible strength, thanks to the low inflation, higher interest rates, and lower trade deficit.

On the other side of the equation, higher oil prices will for sure be head wind for economy growth. But I tend to agree that since high price is driven by demand, not supply, it should not be as disastrous as it will be otherwise. And, going forward, we may have to get used to the FACT that oil is 50 bucks per barrel, not 30 any more.

The other day, CNBC listed the two conditions for a bull market to begin:
1) Good earnings
2) More retail buys

Who knows, perhaps when more and more people heard Jim Cramer talk about the upcoming rally, many may shout out: BOOOYAH!

Ebay reports

Ebay reported a spectacular quarter:

Now what? As I said in previous post, I guess those analysts will rush to pump up enthusiasm again, as we witnessed last winter.

Fundamentally, I like the business a lot. Being the dominant worldwide online market place, it is very solid and highly profitable. As more users get online as a result of the continuing penetration of broadband network, there will be more people that buy and sell goods online. Also, EBAY's next growth driver may come from China and India. The Internet market in China(games, auction,jobs, advertising,search,travel,wireless value added service,etc.) is already big and keeps growing at double digit rate, although EBAY's China unit is facing strong head to head competition from Taobao(, a subsidiary of Alibaba), Yahoo China and 8848, one thing for sure is that EBAY will be one of the few leaders in the online auction market of China. When Chinese people go online and make transactions of books, clothes, cars, bicycles, sporting goods,music,movies,etc., EBAY will be ready to make decent money. The Internet market in India is not that hot yet, but in the end it could be in similar situation as where China is now.

The business itself is great, but EBAY shares may have outperformed the business for a long period of time. It is always a hard decision to make to buy this stock, because that decision can not meet the two basic characters of an investment, defined by Benjamin Graham as 'Safety of principal' and 'Required return'. But in EBAY, it was rare to find the feeling of safety.

Gravity(GRVY,9.5$,Strong Buy), target raised to 30$

As a record, I am raising 12-month target for Gravity from 25$ to 30$ after a few recent developments:

* RagnarOK Online agreement with Shanda. This is the milestone for Gravity to make some money from China, maybe not only from RO, but ROSE Online and RagnarOK Online2 as well.

* ROSE Online commercialized in Japan. This is in line with schedule.

* Ragnarok Online 2 will be in close-beta test after September.
This is almost one year ahead of my expectation and company guidance. Given the success and popularity of RO, Ro2 will most likely be a hit as well.

For 2005, I expect revenue to be between 74 to 78 mil USD, EPS to be about 1.1 USD per ADS; For 2006, I am expecting revenue to be between 130 to 150 mil USD, EPS to be around 2.5 USD per ADS. My revenue forecast for 2006 does not factor in STYLIA yet, which I need to learn more to get some idea, also I think 2006 revenue has the possibility to beat my estimate nicely, given that I am still conservative on revenue contributions from ROSE, RO2, and Requiem.

My 12-month target is derived by 10 times of 2006 earnings plus cash. The price multiple used is extremely conservative. Based on market perception, I believe there is still a lot of upside above the 30$ target provided with a price multiple that is comparable to industry peers.

Currently, Gravity is trading at about 2.5 times of my projected 2006 earnings after excluding cash.

That said, I believe Gravity is one of the most absurdly undervalued stocks in tech land.

* Poor acceptance of new games: RO2, Requiem, STYLIA.
* Instability in Korea peninsula
* Korean Won exchange rate fluctuations

(Note, for simplicity, I assumed the exchange rate between USD and WON is 1 for 1000)

Full disclosure, I am long GRVY.

Tuesday, July 19, 2005

Yahoo, Intel reports:

Yahoo reported an impressive second quarter:

The business is doing very well, but not the shares. After earning report, shares were down 11%.

Similarly, Intel also reports a good quarter with strong sales of processors, especially those used in notebooks, but even with higher than expected sales, its shares were down 3.5% in after-hour trading because of worries of margins.

I do not want to comment on business details of these companies, they are interesting to me in the way that they show how technical the general market could be in short term. Good businesses may not be good investments, largely because of the pervasive optimism that speculates the business could be even better, as reflected by shooting stock prices.

Thus when the poor managers come to the street with pride and joy to announce their spectacular sales and earning stories, they will be laughed off by the public, simply because of such reasons as "I know you are good, but I expected to be better", or "Well done, guys, but what else do you have?'(the so-called "sell on news"?).

I have been looking at Ebay shares these days, which is down 40% from its high last December. Last year, when it was trading 87, I started buying put options which matures in December. Too sad my puts were wiped out completely by numerous optimistic analyst calls(with targets around 120) from those well known brokerage houses and the optimism of the investing public(let's call it investing public, although there are a lot of speculators), when the final judgment day came in Jan 2005, my puts already expired worthless. Now EBAY shares are trading close to its price level of Dec 2003, when I look at it again, I found research reports from the same group analysts with cautious tones, citing the in-line growth and providing much lower guidance than they did before.

All these are interesting to me from a psychological point of view, knowing the business itself is not enough, it is also necessary to know how others think of it. Everyone in the group tries the same thing to guess thoughts of others, in the end, who knows if judgment based on these guesses of others are superior than those derived from flipping coins. Maybe when one day we have less analysts, buy and sell decisions could be more close to investment judgments.

Updates on Chinese stocks before Q2 earnings

I reviewed some Chinese stocks listed on NASDAQ before Q2 earnings release, here is what I wish to share with you:

*SINA (27.12, Neutral)
I continue to believe the Shanda and SINA merger will go nowhere in the near term, I doubt Shanda will be able to make it, if it does, it may take a year or two before Shanda can get itself into SINA's board and get control of the company. Nor do I believe that Tianqiao Chen will give up SINA easily, he expressed his dream of a dominating entertainment empire publicly many times, SINA is one strategic point he must seize to fend off challenges from other strong superpowers like Yahoo, as well as other players such as Sohu,Netease and Tecent.

Wireless --- SINA's wireless business may have touched a bottom, the China Mobile new billing platform risk is passing by, with little impact to big players(but we may see some shrinking margins to some extent). However, SINA's wireless revenue is mainly generated from 2G services, which may have matured and growth have slowed down. In Q105, about 25% of wireless revenue is from 2.5G services, which is growing fast and will be the key driver for wireless growth. If Sina can manage to hold its 2G revenue while significantly increase its 2.5G revenue, we may see some upward reaction in stock price.

Gaming --- So far, Sina's rush to online gaming business can not be called successful. Sina has set up a JV with NcSoft to operate Lineage II(which is a very successful game in Korea). In Q105, Sina recognized a gain of mere 0.3 mil USD from this venture. Revenue from it casual game portal (I-Game) was not disclosed, but it should be quite small due to the fact total 'Other' revenue(including search, casual game and other unknown categories) was about 2.4 mil USD. Thus, there is still a long way to go for Sina to find a way of making money out of games. I think what they lack is management vision and strategic thinking.

Online Advertising --- Sina is the No.1 player in this field and may continue to be so in the foreseeable future. As more and more companies put their marketing campaign online, Sina will benefit as overall market grows, but so far there is no further strategic move from Sina to take advantage of its leading position to capitalize more from it.If there is anybody who can challenge Sina in this area, I bet it will be Sohu. In the past year or two, Sohu has made a few acquisitions to expand its service portfolio, including Go2Map,17173,Focus housing, Good Feel. I think 17173 is the best investment Sohu has made by far. The online gaming market keeps growing in China, with hundreds of games offered and tens of millions of players willing to pay, the market may reach 400 mil to 500 mil USD this year. Competition is intensifying, companies are spending more and more money on marketing campaigns to promote their products, a large amount of money is spent online.
As the leading gaming portal, 17173 will contribute to Sohu's advertisement revenue nicely in the future.

Back to Sina, I believe it will be inline with the general market.

* Sohu(22.69, Neutral):
Revenue is catching up to SINA, we may see a sustainalbe upward trend because of contributions from 17173, see above analysis.

Similar to Sina, 2.5G service revenue will be key to growth.

Its MMORPG game has been unsuccessful so far, revenue in Q105 was a mere 1.9 mil USD.

News said Sohu has released a package of casual games, this could gain them a standing in this sector, but it is still too early to cheer on it. Casual games are not newly invented things at all. Back to 2000, many Internet companies like Ourgame, Sina,263,etc. started to offer basket of free casual games, like chess, poker, Majiang,etc. Nowadays, many companies have found ways to profit from these little games. Casual games from Tencent are very popular now and are earning good money for the company. Netease has just released a portfolio of casual games, Sina already has I-Game platform, Shanda has been doing well in this sector and will keep strengthening up its position(its recent release of 'Shanda RichMan' could be a huge winner given the popularity of the PC version of that game several years ago).

That said, I will keep watching Sohu's performance in this sector, before they can show some positive sign, I won't be excited about recent release of casual games.

Sogou engine is doing well in terms of both market share and technology. As search market grows, Sohu will benefit from its position as one of the most often used engine.

That said, I believe Sohu's share is fairly valued at the moment, in the long term, it has some upside.

Its two MMORPG games XYQ and XY2 continue doing well. PCUs has broken 1 million and new servers keep being set up nation-wide,Netease is penetrating deeper and deeper to provinces, cities,and counties, from south east corner province GuangDong to north west province of XinJiang. I expect Q2 and Q3 earnings will handsomely beat estimates.

In the pipeline, Da Tang and Tian Xia are going to rolled out some time next year. Netease have devoted a lot of time and resource to these two 3D games, rumors said these two games are well made and may have the power to challenge World of Warcraft.

Given Netease's success in making the current two popular games, XYQ and XY2, it is reasonable to assume that they have the ability to make the next popular games as well. Further more, Tian Xia is adopted from an previously very popular text based game, which already had a large user base, thus if this game from Netease is well made, those hidden users from the old text based game may be players of the new game as well.

Netease's advertising revenue continue growing with the general online ad market growth.

We may see some bottom to the revenue decline in this sector, given the small percentage of revenue contribution, this sector has very little impact on the whole business. But Netease still has the platform to conduct wireless services busiess, in case the company decides to devote more resource to this sector, they have the necessary platform and experience to do that.

Overall, I am bullish on Netease in the long term, the valuation starts looking attractive after the sell-off in the past few days.

Shanda(33,Strong Buy):
I believe Shanda remains to be the best investment among Chinese ADRs for the following reasons:

* Strong management. Shanda has a strong management team, which can make good things happen. This is one thing I like most about Shanda.

* Excellent record. Shanda's success in MMORPGs and casual games proves it is a solid company that has rewarded shareholders handsomely, it may continue to do so. Its two flagship games, Mir2 and World of Legend may have been little impacted by WoW. Its casual games should be doing well.

* New initiatives:
New MMORPG game contracts of Ragnarok Online,Dungeons and Dragons, and commercialization of Magical Land(although not a big success yet, I doubt it will be so in short term) will keep revenue from RPG games to grow in the next couple years.
Shanda's strength lies in game operating and marketing, since they have already built up the both technology platform and distribution channels, it is easy and cheap for them to license and operate new games. Shanda has been trying to develop games by itself, so far it is not successful yet. The three titles(The sign, The Age, Magical Land) did not have many players, largely because Shanda had little experience in game development and also because it was hard to find good developers, artists,designers, etc. Going forward, I expect Shanda to continue its experiment in building games(casual games in particular, because they are relatively much easier to make), it may need to team up with other established game development studios(such as those Korean companies: NCSOft, Gravity,Webzen,HanbitSoft,Nexon,etc.) to learn more.

On the casual game front, it has been growing fast and Shanda may devote more resources to expand it further. Shanda is going to release more casual games, one such example is Shanda RichMan, which is a modified version of a previous popular PC game, I think this game has the potential to be as popular as PaoPaoTang, Shanda's current casual flagship that had a record PCU of 70,000. Other efforts to expand this business further includes the development of QuanQuan, a real time messenger tool, to compete face to face with Tecent's QQ and Netease's PaoPao. Rumors said that Shanda is close to lease Kart Rider, one popular casual game in Korea, based on posting from Billsdue at

Shanda is also well positioned for mobile games, which could be the next hot arena after online games played via Internet. Shanda's acquisition of Digital Red, a leading mobile game developer in China, did not show much reward yet, but when the mobile gaming market explodes, Shanda is there to make fortune. Unofficial news said Shanda has built an independent mobile gaming platform, which does not require support from China Mobile or China Unicom, if it succeeds, then it will provide Shanda with more competition power over its peers(KongZhong,LinkTone,TomOnline,etc.) by relying less on others to do business.

Still skeptical about IPTV? You have every reason to be skeptical about this ambitious plan, since in the past several years, there were many companies selling this idea and ended up with nothing, people similarly doubt Shanda has the ability, resource and luck to achieve its ambition to penetrate into living rooms. But think the other way, what will they lose if they can not make it happen? Not much, its core business of gaming will continue to do well no matter whether IPTV plan succeeds or fails, however, if they do manage to make it happen, a whole new market and business segment will be created, Shanda will be not only a game operator any more, but a leading digital entertainment content provider(Games,music,movies,etc.). Having nothing to lose and having everything to gain, that sounds to me a perfect investment idea.

* Merger/Acquisition:
As said above in Sina section, I do not think Shanda can get the deal done any time soon. If it does happen in the end, it will be a lengthy battle with the SINA management and board, Shanda may have to put itself onto Sina's board to gain control first before any deal can be negotiated. I think it is still too early to say this is a good or bad move, acquisition of Sina could be a good long term investment for Shanda shareholders given that Shanda management won't pay a too high price.

On the other hand, if the deal fails in the end and Shanda sells out Sina shares, then Shanda will use those free cash to search for next best investment ideas.

That said, I think Shanda is very attractive after the sell-off in the past few days.

Given the recent purchase of the remaining interest in C9I, The9 has 100% ownership of WoW's operating right in China. If the game continues to do well, its shares may hold. I changed my rating from Sell to Hold/Sell.
Please refer my previous update on the9:

Pure Wireless Players(BUY):
I am grouping a few pure wireless service players here.
TOMO is the No. 1 player in this field and is well positioned for 2.5G and 3G services. I think shares are attractive in the long run.
KongZhong and Hurray are very similar in products, thus it is hard to say which is going to do better than the other. KongZhong relied more on China Mobile, while Hurray mainly relies on China Unicom. News said the recent revenue sharing reform from China Mobile and China Unicom has little impact on large players such as Kongzhong and Hurray, due to their own efforts of promoting products.

It is interesting to note that Kongzhong is paving its way to mobile gaming front by buying a mobile game development studio. Also, KongZhong has been selling the idea of mobile portal, if they can manage to be the place where people will read news, stock quotes, messages, etc., it will be very positive to this stock.

I think shares of Kongzhong and Hurray are worth buying.
Similar to KongZhong, Linktone keeps building its wireless service business and moving into mobile gaming filed. I think LinkTone will be in line with the overall Chinese wireless sector.

Online Travel Service:
CTRP(52, Neutral): is the leader in China in online travel service, followed by This business model and solid and proven to be successful, and because of limited competition, we have the reason to believe that Ctrip will have a much bigger market cap (say well above 1 billion USD) in the future.

What concerns me is its valuation, looks like that people are feeling good to pay for high prices all the time, being a conservative investor, I can not find the comfort of safety in this stock.

LONG(9.88, BUY/Neutral):
Given Elong's big cash cushion and the No.2 standing in its space, I think Elong's shares are fairly valued right now and has the potential of good upside when operating costs consist of less and less a portion of total revenue as business grows.

JOBS(13.44, Neutral/Sell):
I continue to believe that shares of JOBS are overvalued. People think JOBS as the of China, I don't think so, because JOBS does not have the dominance power as does. Majority of revenue is generated from paper ads, not online. Its website portal has been facing fierce challenges from rivals such as ChinaHR,,etc.

For my previous thoughts on JOBS, please refer to the post "JOBS: Not Everything from China Is A Gem" at

FMCN(18.76, Neutral):
I am neutral to this stock:

To do.

Thursday, July 14, 2005

Baidu IPO to come.

Baidu, a Chinese search engine company, filed for IPO, here is the prospectus:

Rumors said Baidu targets to value itself at 1 billion USD. If that is true, it will be interesting to see how many are going to pay for this Chinese search engine train ticket. For those who missed the Google train, Baidu may be a chance to make up.

Baidu is a good company, the No.1 player in search market in China. But since most investors are not as mad as the mob in 2000,let's drill down to some business fundamentals.

In 2004, total revenue was 13.4 mil USD, net income was 1.4 mil USD. In Q105, total revenue 5.15 mil USD, up from 1.9 mil USD of Q104, net income was 0.33 mil USD, versus a loss a year ago. I did some play with future revenue projections, ending up with the following optimistic scenario, which assumes a more than 100% YoY growth rate for 2005 and 2006:

Rev 2004 2005 2006
Mar 1.90 5.15 10.30
Jun 2.59 6.50 13.00
Sep 3.60 8.00 16.00
Dec 4.84 10.00 20.00
FY 13.40 29.65 59.30

NET 2004 2005 2006
Mar NA 0.33 4.30
Jun NA 1.50 6.00
Sep NA 2.50 9.00
Dec NA 4.00 12.00
FY 1.40 8.33 31.30

Given these optimistic numbers, I still find it hard to justify a one billion market cap.

Also, Baidu is going to face fierce competition from rivals such as Yahoo, Google, SOHU and SINA. Although up to now Baidu is the market leader in terms of market share, a catch-up of technology and service from rivals may pose serious threat to its dominance. Also, a large portion of traffic to Baidu is generated by MP3 search and downloads, this can not last long since Baidu is in the danger of copyright lawsuits because of its service to download tens of thousands of songs for free. You can try the service out at

That said, it will be interesting to watch how Baidu will price itself and how it will be traded in secondary market.

Focus Media, another Chinese darling?

Focus Media(FMCN), a Chinese outdoor advertisement company, debuts it shares on NASDAQ yesterday. On the first trading day, shares closed at 20.2$ per ADS, giving this company a 740 mil USD market capitalization.

Look at its revenue, in 2004 total revenue was 22.9 mil USD, net income was merely 0.3 mil USD. In Q105, revenue was 8.4 mil USD, net income is 2.6 mil USD.

Deal underwriters and company managers are boasting the revenue growth rates, but consider that when you grow from near-to-zero revenue and income to some revenue and income, the YoY growth rate is always impressive, but as numbers grow bigger, you may find those super growth rates of early stage may not sustain.

Also, the business model is interesting to think carefully. Focus Media has built a network of display screens (most of them are LCDs,I guess) in buildings, shopping centers, elevator doorways,etc, based on that platform, they sell time slots to advertisers.

It is a new concept and new market, surely there is going to be some money to be made, the only question is how much. I am concerned with competition and cash investments needed to maintain its business in shape. In China, when a new profitable model shows up, it will not take too long to attract new players, if the old market dominators do not have a high entry barrier, they may soon lose market share to competitors. In Focus Media case, I can not see such a barrier, if they can rent some space, put on a flat screen, and sell time slots, so can others. My second concern is margin. Focus Media does business on its network of flat screens, which need to be constantly purchased and maintained, the platform itself is not scalable. Just assume they plan to double their revenue (assume there is no time slots left on existing flat screens), then they simply need to double their number of TVs and flat panels, if some of them are broken down, they need to be repaired or replaced. All these investment needs will adversely affect long term net margin.

That said, I do not see FMCN as a bargin at current price.

Monday, July 11, 2005

Gravity & Shanda

Today news came out saying that Shanda is licensing Ragnark Online from Gravity. In my opinion, this agreement is significantly value accretive to both parities.

For Gravity, this is a milestone for its penetration into China market. Gaming market in China is huge and continue to grow robustly, it is too big to ignore for any gaming company. Before Shanda, RO was operated by Central Value, a subsidiary of a Taiwan company Soft World. RO has been a success world-wide, but not so successful in China, it may partly because of the incapable operator. Now with Shanda being RO's operator in China, I expect significantly more revenue to be generated from RO from China.

Moreover, this licensing agreement has brought Gravity and Shanda to work together. If this relationship goes well, then Gravity will have no problem to bring its future products into China, including ROSE online, STYLIA and RO2. Naturally, RO2 will be operated by Shanda as well. As for ROSE and STYLIA, even Shanda will not license them, it will be much easier than otherwise would be for Gravity to find other good deals because of improved corporate image as a result of Shanda's promotion of its product.

Regarding Shanda, licensing RO is also beneficial. In the past few years, Shanda has been working with a couple of Korean gaming companies, they also have purchased 30% interest in Actoz, the marker of Mir series. Shanda made its fortune by licensing games and operate them in China, but it seems the management wants to do something more, they started to create their own games. Recently release of Magic Land is such a bold experiment. Magic Land is a cartoon game, targeting more on female players. It is a good idea and Shanda has spent big money to promote it, but the result may not be as good as hoped. To make a good game is similar to making a hitting movie, it is not as easy as finding a bunch of developers and spending some money, you also need to get outstanding director(game designer),good script(the game stories), excellent actors(developers), and good artists. Shanda's problem is that they can not find some of these resources. Reports said there are merely about 3000 people are capable of developing online games in China, far less than enough to support a near half billion USD gaming industry, not too mentioned the scarcity of good story writers and art workers.

In Shanda's game portfolio, Magic Land is the only cartoon game. Cartoon games are becoming more and more popular, as evidenced by the sweeping success of Netease's two cartoon products: XYQ and XY2. Shanda needs such a game to diversify its revenue. After Magic Land's open test from May, it does not move into commercial stage yet, it could be largely because it does not have enough players yet. In contrast, Ragnarok Online has been a proven successful cartoon game, taking it over is not a bad idea for Shanda. As said by Shanda's CEO Tang Jun some time ago, there is little cost for Shanda to introduce a new game, given Shanda's ready-to-use platform and large user base. In particular, RO has been in China for almost two years and there is already an existing group of users, it is much easier than working from scratch.

In the past few years, Shanda has grown at exponential rates. Some are worrying about that the growth is coming to and end, and its stock may drop, as written by the author of following blog:
I do not think Shanda's story has come to an end, rather, I believe now is a very critical time for Shanda to plan strategically. Shanda has been collecting its revenue from online games, both MMORPG and casual, going forward I expect it to continue to do so. Operating games is still a very good business even with increased regulation from government, its fat margins are hardly matched by other businesses, plus, the economy of scale rule works better and better with larger and larger user base. Shanda has the leading distribution platform, the largest user base, solid financial positioning, as well as an extraordinary management team, all these will serve Shanda well to be the one of the most important players in China in the coming years. Furthermore, Shanda has plans beyond online games. Up to now, Shanda has made a few acquisitions whose synergy did not show yet, Digital Red is a good example. Digital Red the leading pioneer in mobile games, it has produced hundreds of little games for various handsets(Nokia, Motorola.). The mobile gaming market is still at its infant age, when it starts to grow, Shanda is well positioned for that. As for Shanda's acquisition of Sina shares and its plan for IPTV, these are very bold strategic moves as well, but it is still too early to draw any conclusion.

To conclude, Shanda has been doing well in games, it may continue to outperform its peers in the future. Beyond that, Shanda is well positioned for other lucrative opportunities as well.

Full disclosure, I long GRVY, have no position in SNDA.

Friday, July 08, 2005

Webzen: another inevitable

I started looking at Webzen(WZEN) at the beginning of this year, did not like it because of the poor performance of its sole flagship game (MU) and the lack of information of its future products . Recently, especially after the E3 game show, I learned more details of its upcoming pipeline of games, which are pretty impressive both in quantity and quality. Given the huge cash cushion and the low stock price, I think this is another 'inevitable', that is, it has no way to go except up in the next few years. I have a 12-month target of 10, which I think is conservative and leaves the room to be raised.

However, the business will not turn around before early 2006. For 2005, I am expecting it to lose about 8 million USD (-0.18 USD per ADS). The stock may still be trading sideways for a while before it turns around, but since I see it as one 'inevitable', I do not want to risk to timing the turning point ( I simply do not have the skill and vision to predict the next short-term move), rather, I simply jump in and wait patiently.

You can find more detailed analysis of WZEN at:

Full disclosure: I long WZEN.

Thursday, July 07, 2005

Regulations to come for games?

Reports said China government agencies are looking into regulations to limit people's exposure to games, the rationale behind this is that gamers easily get addicted to games, thus it wastes too much precious time, especially those of teenagers, who are thought to should have spent their valuable time in study and exercise, not in games. As a result, many people, including the press, has been criticizing the booming of games and urged government to put regulations to curb its expansion.

Those people's arguments and worries makes sense, if we agree with them that any economic activities that do not create real-world wealth are considered to be a waste of time. However, there are many such businesses that do no good to our society, but they have been existing throughout human history, such as alcohol and cigarettes, at least,games are better than them. Furthermore, movies, music, novels do not create tangible wealth, rather, they bring intangible entertainment experience to viewers, listeners and readers. Similarly, games bring intangible entertainment experience to gamers,why they should be considered as evil?

I saw some report saying the games market in some Asia countries has grown to the point that it is bigger than the movies or music market. Millions of people spend more money on games than they do on movies or music. It is a new market, it is too big to be ignored, it will not go away because of government intervention. Those interventions will create some short-term noise to industry players, but I see no material long term adverse effects on the whole industry, unless those officials go to extremes to define games as evils of human nature and ban it completely, that is unlikely to happen if we still believe most government officials are still thinking with their heads.

Back to the China gaming market, it is huge, so is the number of players. So far, the playground is too crowded. Going forward, we may see a big portions of weak players to either go out of business or to be acquired by stronger players. From an investment perspective, I think it is a good strategy to stay with proven leaders with solid brand, product, management and financial conditions.