Tuesday, August 30, 2005

Gravity president sells stake

Gravity(NASDAQ:GRVY) president JUNG RYOOL KIM sold his 52.4% stake in Gravity to Japanese investment firms EZER and Techno Groove, the latter is a wholly owned subsidiary of Asian Groove, of which Taizo Son, a Korean citizen, is serving president and holding 81.7% stake.

Masayoshi Son, Taizo Son's brother, is a Japanese citizen. He holds 32.7% of the common stock of SOFTBANK, which controls 44.6% of common stock of GungHo Online(3765 JP) by its wholly owned subsidiary SOFTBANK BB Corp.

Furthermore, Gungho Online and Gravity are business partners, GungHo derives more than 90% of its revenue from RagnarkOK Online, a flagship game made by Gravity.

Yesterday, GungHo stock surged 48% in Japan market, looks like some investors have known this information beforehand and thought the merger is beneficial to Gungho.

Based on my understanding, it seems these bankers may seek to merge Gravity and Gungho into one business. GungHo is valued at more than 3.5 billion USD as of yesterday's trading, while Gravity is only priced to 200 million USD. It makes sense for these pros to do some financial engineering to close the valuation gap.

JUNG RYOOL KIM has sold his 52.4% stake for 40 Billion YEN, the Japanese buyers are valuing Gravity at about 700 million USD, which is around 3.5 times of the market price as of yesterday's trading. However, the new Japanese owners said in their SEC filing that they are going to buy remaining ADS for no more than 7.1$. And they may delist the stock from NASDAQ.

It is a hard decision for ADS holders. Compared to what Kim get, the current market price is way too cheap. But since the new controlling owner may threats to delist the stock, ADS holders have the risk to be screwed. However, I think the new owners will try their best to get all remaining outstanding shares at reasonable price, a forced delisting would be unpleasant for all. If that happens, not only ADR holders get screwed(it will be very hard to match a order in OTC market), also it will take a long time before the Japanese buyers can break even in their investments, remember they paid about 28$ per ADS for the 52.4% stake, it is their best interest to buy out all remaining stocks and sell the Company to GungHo through a stock deal to take advantage of super high valuation of that Japanese game operator.

I have sold half of my holdings in today's surge, will hold the other half to see how it goes.

Thursday, August 25, 2005

The9(NCTY) Q205 Update

The9(NASDAQ:NCTY) reported a quarter with more revenue, but unfortunately more revenue did not save the company from a loss of 2.8 mil USD:

" -- Net revenues for the second quarter of 2005 grew by 354.5% quarter-
over-quarter and 386.0% year-over-year to RMB55.7 million (US$6.7

-- Net revenue attributable to the operation of World of Warcraft®
("WoW") for the second quarter of 2005 was RMB52.3 million (US$6.3
million) following its commercial launch on June 7, 2005.

-- Net loss was RMB23.0 million (US$2.8 million), compared with a net
loss of RMB10.5 million (US$1.3 million) in the first quarter of 2005.

-- Loss per share (one ordinary share representing one American
Depositary Share "ADS") was RMB0.95 (US$0.11) for the second quarter

Actually, the revenue generating power of WoW is quite impressive, given only 23 days of commercial operation in Q2, it brought in about 6 million USD revenue. Revenue from game playing time would be much less since a big portion of this revenue should come from one time sale of CD packages and CD-KEY certificates.

Although the impressive revenue generating power of WOW, it may not bring The9 as much profits as other top tier online games did for other companies such as NetEase and Shanda. The problem is that The9 paid too much on the licensing fee ,revenue sharing, and marketing. The gross margin of operating this game is lower than many of its peers.

I have been a bear for this stock, previously I have estimated EPS for Q205, Q305 and Q405 are 0, 17 cents and 19 cents respectively. Now, after Q2 report, my revised EPS estimates for Q305 and Q405 are 11 cents and 14 cents respectively, based on revenue estimates of 21.6 mil USD and 24.2 mil USD. I maintain my Hold/Sell rating for this stock. I will publish my valuation model when I have in a better format.

Tuesday, August 23, 2005

GRVY after Q2 result

Gravity(NASDAQ:GRVY) reported another disappointing quarter for shareholders, me included. Revenue and net income both come under previous guidance. After failed twice to guide the public properly, the Company refused to give any forward looking guidance at this moment. Indeed, it is hard to forecast revenue from a game, especially the majority revenue is generated from its overseas partners, which Gravity has no control of them and may has no more insight into those businesses than you and I do. Regarding my previous practice to value this stock based on forecasted revenue and earnings, I am not going to continue this practice for this Company, given the high business volatility.

The stock will be affected by a few factors going forward:
* Potential take-over. At 6$ per ADS, the market is valuing this company at about 67 mil USD(market cap - cash).
* RO updates and ROSE improvement.
* Earing power of casual games, which I do not have any clue to estimate.
* Developments of next two MMORPGS: Requiem and RO2.

Friday, August 19, 2005

NTES(72.19$,Strong Buy,12-Month Target $95)

Regarding my previous call on NetEase right after Q205 earning release, I realized I was too conservative. After careful rethinking, I am increasing my 12-month target from 78$ to 95$. The target price is derived by taking the average of two valuation methods: 16 times of projected 2006 EBITDA plus cash, 22 times of projected 2006 EPS.

I think taking an average of above two numbers makes sense, since in terms of PE, the multiple used is too low, but in terms of EBITDA, the multiple used is pretty fair. The discrepancy is caused by the fact that the Company is paying little tax and charging little on depreciation and amortization. In the long term, I expect policy makers of China to expose higher tax rates on companies such as NetEase since they are so profitable, also I expect the Company to charge more aggressively on depreciation since they will need more and more servers to support their games.

Here is the financial detail:

NTESQ205 Posted by Picasa

Brain Teasers

I saw some brain teasers online that are interesting, they are said to be interview questions from Goldman, anyway, here they are:

1. At a train station: there is a south-bound train every 10 minutes; there is a north-bound train every 10 minutes. Every day you arrive at the train station at some random time, and you board the first train that arrives, whatever that is. After a year you found that 90% of time you get on the south-bound train. Why?

2. You are by yourself on an island, waiting to be rescued. Help will arrive on the 10th day (today is day 0). You have two types of pills: A and B, 10 tablets each. In order to survive to the next day, you need to eat one A and one B. However, you incidentally mixed the pills, and you cannot tell which is A, which is B. What do you do now?

3. There are 25 horses, each runs at different speed. You can race a maximum of 5 horses each time. What is the minimum number of races needed to determine the three fastest horses? (You need to determine which is No.1, which is No.2 and which is No.3).

Since they are quite easy, I have a better one, which I heard when I was at school:


1 1

2 1

1 2 1 1

1 1 1 2 2 1

What is the next line?

VCLK(13.8$, Buy,12-month 18$)

After ValueClick(VCLK) says it is going to acquire FastClick(FSTC) for 214 million USD, and after I played with various scenarios, I think this acquisition will be a few cents accretive to my previously forecasted 2006 EPS of $0.69. Thus I hold my previous view that this stock is a long term buy, with a 18$ 12-month target.

Since this acquisition involves selling of new shares, FastClick stock also runs up to mirror ValueClick.

Thursday, August 18, 2005

Google selling shares

Google said it is going to shares that will raise about 4 billion dollars, use of which is not specified. Many investors and analysts are 'surprised' by this news, arguing that Google has no immediate needs for more cash.

I agree that based on public information, Google has more than enough cash to maintain operation, that 3 billion dollars cash sitting on its balance sheet was good enough to meet capital investment needs for many years, not to mention that Google is generating hundreds of million cash from operations each quarter.

However,Google guys may have a bigger plan than being the No.1 search engine. Search is such a profitable business that competition landscape will change in the future as Microsoft and Yahoo shake up their own engines. Margins will be under pressure if a pricing war for advertising and paid search happens. I am sure Google guys are well aware of the competitiveness of those two rivals, thus I assume they have some long term plan to hold their foothold and meanwhile look for new cheese.

There are already too much speculation on how Google will deal with the newly raised cash, one prevalent speculation is that Google may buy its way to China. Buy Baidu out with 3 to 4 billions? That sounds very pricey to me. However, nothing is impossible, given the continued mania on China. If Yahoo can buy a 40% stake in Alibaba with 1 billion cash plus all China division, Google may be encouraged to spend billions to try to take over Baidu. Google recently hired a high ranking manager from MicroSoft,Kaifu Li, to head its China operations, looks like they want to have a stronger presence in there.

Another obvious explanation would be Google just wants to get more cash in bank to take advantage of the bullish market. Google guys may be worried by the technology crash in 2001, and may think it is smart to take advantage of the market when shares are richly valued.

In my view, Google is a good business to get in, but defensive people may need to keep being patient to buy in at a good price.

Wednesday, August 17, 2005

CFA Exam Result Out

CFA institute said 56% candidates passed 2005 Level II exam, I am glad to be one of them.


KONG and HRAY are similar in many ways, they are in same business, similar revenue, similar marketing strategy, similar products,etc. After Q205, I did a comparison between these two. Due to the unpredictability of government regulation change, thus I did not bother to guess revenue growth for 2006. My general feeling is that the easy money era for WVAS guys is gone and they may have to face declining margins. Also, KONG and HRAY are paying little tax, effective tax rate will pick up sooner or later.

Having said that, I am looking ahead only two quarters and trying to get some sensible price estimate for each stock after 6 months:

KONG Vs. HRAY Posted by Picasa

Tuesday, August 16, 2005

WVAS plays update

Chinese WVAS plays

Tom Online reported an impressing quarter, due to more distribution channels and events like NBA basket finals, while Hurray reported a quarter that showed little growth over previous quarter.

This sector has been under pressure since last year, and several months ago I have been calling to buy this group since most bad news were reflected in prices. After the recent runup of TOMO and KONG, however, I think the concerns with these business models may put a cap to their upside potential.

A few things will keep me away from this sector:

* The business model may not be sustainable.
- Hurray said China Unicom is providing some free stuff to subscribers. This could be a bad start for WVAS players if telecom guys continue to expand these free services to attract more customers. After all, how much money will it cost to put some pictures and ringtones on to a website and let people to download? Very little.

- Even telecom guys will not get rid of these WVAS guys completely in the future, I am concerned that revenue share may have been lean more and more to the telecom guys. Hurray said recent revenue share changes should have little impact to Hurray since that change applies to small players only who rely on China Mobile or China Unicom to promote products. However, no one can say for sure that telecom guys will not flip their minds going forward. Since money was made too easy in the past for most WVAS players, in the long term I do not think they can maintain current level fat margins.

* Commodity business.
The WVAS business has quickly become a commodity business, new players can enter into the play field with little capital, technology and human resource. In fact, most Chinese Internet firms have entered this field to compete those who focus on only WVAS. Web portals, online game operators all have set up their divisions for WVAS service.

* Unethical behavior.
After China Mobile's MISC platform rolled out, TOMO and Hurray said their revenue was impacted by the removal of some 'silent users'. Well, those users were not really silent, actually they did not know that they are being stolen every month by some stealthy guy. Basically, WVAS players have been charging monthly fees without notifying users. Since in China people pay by calling time(about .40 RMB per minute), so it is not easy to spot some stealthy charges. Suppose you were told by your cell phone carrier that you have used about 1000 minutes last month, and your bill for that was about 500 RMB(after adjusting long distance,night discounts, etc.), suppose 40 RMB out of those 500 RMB was charged by some WVAS players that you have no idea who they are and have never used their service, you may not be able to find this out since most people do not have or read their phone billing details, as a result, you may keep paying that 40 RMB for many months.

The roll out of MISC system will prevent these unethical behaviors to happen in the future, since this platform requires users to double confirm before WVAS providers can charge money.

But at this point, I am not sure whether all so called 'silent users' have been removed, if not, future revenue will also be impacted. Hurray CEO answered this question in a pretty smart way, he said how to define 'silent users' is a question and thus he did not know how many more customers are going to be removed by China Mobile.

Most Chinese WVAS companies look cheap in terms of low P/E, but if there is some fundamental problem with the business model itself, it is hard to say that a low valuation compared to other sectors means undervaluation.

Monday, August 15, 2005

NineTown(NINE) crashed

NineTowns Digital(NASDAQ:NINE) saw its share crashed to new low of $4.8. This software provider in automating import/export processing in China for enterprises and government agencies said its full year revenue and EPS guidance will be lower, due to the upcoming tools that may be distributed by government free of charge.

The main problem for NINE is that its business depends too much on the relationship with the government, which is unreliable or unpredictable, thus any damage in this relationship and adverse change in regulations will give NINE a blow, since its revenue is only generated from two software products in this field. Furthermore,since these software is relatively easy to make, NINE do not have a competition advantage that can fend off new rivals.

Friday, August 12, 2005

Shanda RichMan

Have you ever played MONOPOLY? I guess the answer is 'yes'. I found that MONOPOLY was invented by Charles B Darrow in 1934. In the 65 years from 1935 to 2000, over 200 million games have been sold worldwide, and about 500 million people have played!
Here is a more detailed history of this game.

The original MONOPOLY was a card board game, I used to play with my nephew couple years ago. It is a good game, but playing on a card board with small tokens is not easy, sometimes a small accident could ruin the whole game, like a sudden move from the kids or some splashed coffee. Also, since the essence of this game is to invest and get rich, thus money management is critical. Money are paper bills with various face values. When you need to pay or collect payment, it is a pain to count those bills, not to mention that you will run out of change from time to time. Beyond these hassles, there are more pain to deal with to enjoy the game. Since there is a price for each property(those hotels, hospitals, power plants,etc.), you need to remember the price tags of all your properties. Since you have many properties, it is not an easy thing to remember all prices. Thus whenever other people get on your land, you need to flip on your property token to check how much to charge. To make thing worse, since you will keep investing into your properties, thus your property price will go up after every investment, thus most players will have a very hard time to keep track of a dozen of property prices that keep changing.

What if MONOPOLY can be played on a computer? That is a good idea, thus what players need to do is to click mouse to roll the dice, the computer will pay your bills, collect payments, and keep track of your properties. SoftStar,a TaiWan game company, has such a product, you can check http://rich.joypark.com.tw/RICH7/Product/01.asp to see the latest version. Back to 2001, this game (version 4) was very popular, I was one of the fans. I still remember those nights when a few friends and I sit in front a PC to play that game, it was so much fun that we kept playing for hours. Since that game runs on a PC, thus we took turns to use mouse or keyboard to take control.

Now, at the age of online gaming, it is a great idea to have this game run over Internet when people can easily team up to enjoy this classical game. Shanda guys must have thought the same way. This game is going to be in closed beta test at the end of this month.

Shanda RichMan Posted by Picasa

Da Tang: New Game From NetEase

News said Da Tang is going to closed beta tested as early as Aug 18th. You can find a trailer here.

Awesome game, if I have time, that will be the game I will play. If you understand how much Chinese love those Chinese ancient Kong Fu stories, you may think that NetEase is pushing out the right things at the right time.

DaTang Posted by Picasa

SOHU: CEO Buys more stock

SOHU CEO Charles Zhang is buying more of his own stock again. He is the only Chinese CEO that I know that have been buying its own ADR stock consistently. That signal is quite clear: he thinks his company is undervalued.

I tend to agree with him, SOHU is one of the tiny companies in Chinese Internet and technology sector in terms of market capitalization, but I think its actual business now much more valuable than what the market thinks on a relative value basis.

Thursday, August 11, 2005

Oil: 100?

What is going on with oil? Sep oil future touched $66 a barrel! How high can it go? 100?

Even with the rising price, reports said demand keeps rising. Global petroleum consumption is expected to rise 2 percent to 83.7 million barrels a day this year versus that of last year.On the other hand of equation, the OPEC members are already running at their limits, there is not much spare capacity in supply. I guess oil will continue to rise until people cut their use of oil products, especially those who drive multi-thousand pound SUVs. We may need to change to more gas efficient cars and use more public transportation.

It may not be realistic to expect Americans to give up driving because of higher gas prices, at least I won't(though I am not American). When gas is 2 bucks per gallon, I drive, if it hits 3 bucks per gallon, I will still drive, because other than driving, I do not have another choice to go around. The American life has been built on wheels, if the freedom of driving is taken away, the society will be a much different one.

If Americans will not sacrifice, who will give up first then? The Chinese? China has been sucking up more and more oil as it keeps building up its modern economy, tens of thousands foreign companies have outsourced or contracted their production to China. Those numerous plants will for sure keep sucking up more oil in the future, simply because they keep growing in number and they can not operate without oil. Thus there is way to let Chinese industrials cut oil use. On the other hand, petroleum consumption by consumers in China is still very small compared that of U.S., not many Chinese have cars in the past, the majority of Chinese still commute by public transportation: trains, planes,subways and buses. In the past year or two, as more and more foreign car makers, like GM,Toyota,Honda, invested more into China market, also as more emerging domestic car makers joining this race, more and more affordable cars are available on the market, Chinese people are buying more and more of these modern gadgets. Those we are driving for sure are feeling the pain of high oil price and will continue to suffer for a while. The average annual personal disposable income for China is less than 800 USD, while people need to pay the same gas price as Americans do. I guess people will continue to use public transportation until gas drops to a more affordable level for ordinary Chinese people. But since there were not much people driving so far, thus we can not expect to squeeze out much unnecessary demand from China either. By the way, do not forget China still has one weapon to fight higher energy costs: the RMB. So far, RMB is adjusted upward by a tiny 2%, but if oil keeps rising like this,the Chinese government one day may find that the cost savings from a stronger currency will far offset other negative results, such as job loss and slower export growth. If that is the case, China will buy more oil with a stonger currency.

Similarly, you can analyze other parts of the world that are big oil consumers or potential big ones. I guess you may not be able to find much room to cut demand without sacrificing in one way or the other.

That said, our future does not seem rosy, the world has to sacrifice something for the expensive oil. It is not a matter of whether or not, but a matter of how and when.

What about the market? It is amazing to see how well the market is holding up so far facing with rising oil price, which is at the high of recent 20 years. It is interesting to keep watching how the future will evolve, time will answer my previous question: Are we at the beginning of a long term sustainable bull market?.


YAHOO finally got 40% stake in Alibaba with 1 billion USD cash payment. This should be accretive to Yahoo in the long term, and will question Ebay's future in China. However, remember that Ebay only paid 180 million USD to take over EachNet completely, while Yahoo is paying 1 billion USD for a 40% stake in Alibaba, the No.2 player in the field, I will say Ebay managers are better deal makers than Yahoo ones. Yahoo's China operation will also merge into Alibaba, which implies the true cost of this acquisition is more than the 1 billion USD cash payment. That is why I am applauding this deal from a strategic point of view while concerned from a financial perspective.

Also in the news, ValueClick(NASDAQ:VCLK), one of the leading online marketing player, says today that it is taking over FastClick(NASDAQ:FSTC) with a stock offer. I am concerned with this move by ValueClick management, they seem to be restless and can not sit tight to do their business. Rather, this confirms one of Warren Buffet's argument that managers love to make deals rather than work day to day to increase shareholder value. I may need to rethink about my past judgment on ValueClick after digest more information.

Wednesday, August 10, 2005

Shanda: an inline quarter.

Shanda reported an quarter that is generally inline with my previous expectations:

" Summary of the second quarter 2005:

* Net revenues increased 88.0% year-over-year and 8.5% quarter-over-
quarter to RMB539.5 million (US$65.2 million);

* Online games revenues, including MMORPG and casual games, increased
72.0% year-over-year and 5.7% quarter-over-quarter to RMB466.7 million
(US$56.4 million), accounting for 86.5% of total revenues;

* Other revenues, which primarily include revenues from online
advertising and other value-added services and products, increased
365.1% year-over-year and 31.3% quarter-over-quarter to RMB72.7million
(US$8.8 million), accounting for 13.5% of total revenues;

* Total peak concurrent users for all Shanda games in commercial service
reached 2.5 million; and

* Net income increased 58.2% year-over-year to RMB223.0 million
(US$26.9million), and diluted earnings per ADS increased 50.0% year-
over-year to RMB3.06 (US$0.36).
I am not upset that Shanda missed street consensus by 1 to 2 cents, rather, I think this is a pretty good quarter given there were no news games introduced in Q2.

This sector holds up well, facing stronger competition from WoW and NetEase's games. This confirms my past assessment that WoW and NetEase games were not going to steal much market share from Shanda because the overall gaming market continued growing.
Going forward, I believe Magical Land and Ragnarok Online will help this sector grow throughout the year. In 2006, D&D will be another driver for revenue growth.

Casual games:
The sequential decline is caused by 'seasonality', as explained by Shanda's management. I think it is possible.
In Q3, there are 3 more games to come out, and one more in Q4. These games will help reintroduce the growth of this sector. Plus, Shanda has acquired 100% interest in HaoFang as of end of Q2, this subsidiary will also positively contribute to casual game revenue. I do not have a clear idea of how much HaoFang can earn in a quarter yet, Q3 report will tell some clue.

Shanda is also benefiting from the healthy online advertising trend. I expect this sector continues to grow in double digits for next 12 months.

I hold my view that this is an ambitious plan that shareholders have room to gain but do not have much to lose. Shanda said on the conference call that most things are ready for the box except the right catalyst, and thus they will not incrementally investment considerably more capital.

Back to financial details, I am holding my previous 2005 full year net revenue estimate of 270 mil USD. I am revising full year EPS from 1.61 USD to 1.60 USD. For Q305, I am expecting net revenue to be 68.9 mil USD, EPS of 41 cents. I am holding a 55$ 12-month target, derived from 26 times of estimated 2006 EPS.

Tuesday, August 09, 2005

Shanda Earnings in Spotlight

Shanda will report after market close, here is my call as disclosed before:

"Back to the financials, I think the market has a fair expectation for Shanda in 2005. For Q205, I am expecting net revenue to be around 61.3 mil USD, of which 40 mil comes from MMORPGs (a -5% QoQ decline to reflect heated competition), 18.7 mil USD comes from casual games (a 15% QoQ growth), and 9.4 mil USD comes from other categories(a 15% QoQ increase). I am expecting 36 cents per share earning for Q2, assuming a 44% net margin.

For full year 2005, I am expecting net revenue to be 270 mil USD, a 72% growth from that of 2004. I expect EPS to be 1.61 USD, same as the consensus.:

I believe these estimates are a little bit conservative, expect Shanda to provide some upside, but I doubt there is big upside surprise for this quarter.

For my another previous discussion, please refer to here.

Monday, August 08, 2005

CTRP(56.45$, Neutral)

Someone asks me about CTrip.com(NASDAQ:CTRP),here is what I can share:

I think the share in the past year have been reflecting the growth, potential and market leadership of Ctrip fairly well, it did not fall into my range which I saw it as a bargin,thus I never got a chance to touch it.

In the long term, I do believe this is a good compnay to put money in, the question is at what price. I am holding a 'Neutral' rating of CTRP shares with a 60$ 12-month target, derived by about 30 times of 2006 EPS.

Here is my projected financials:

CTRPQ205 Posted by Picasa

Yahoo to buy Alibaba?

Yahoo declined to comment on the rumor that it is spending 1 billion to bid for 35% stake in Alibaba, the No.2 online auction site in China.

I rather treat this as a rumor, Alibaba is a good company, and I think its TaoBao site is very promising to be a long term rival of Ebay's China branch EachNet. However, I do not think its 35% stake is worth that much now, unless all Chinese stocks are going to be priced at valuation level of Baidu.

Friday, August 05, 2005

BIDU(122$,Sell): What a joke.

Surely the bulls of 2000 find their day back, when worthless penny stocks are sold at nose blowing prices, and when everything is about sentiment. I respect a lot on those who dare to buy some share at today's close and hold it firmly for a year or two, they will be my heroes.

I guess not, today 22.5 million shares changed hands, while only 4 million shares are float, so every share have been changed hand about 5 times.

There are already too many people talking about Baidu now, including those 'China Experts' on CNBC (which should be called 'BubbleVision',according to Fred Hickey, author of "The High-Tech Strategist" newsletter). So there is no need for me to dig into details.

To make it simple, here are my points:

* I hold my 16$ 12-month target, which is calculated based on rational valuation methods.

* Baidu will have a hard time to fend off powerful rivals, since it has little competition advantage, no technology barrier for Baidu guys to feel elated.

* This is the best IPO ever since 2000, it is the biggest joke I ever see since I missed the miracles of 2000.

* For those who have guts and deep pockets, it may not be a bad idea to short. I won't do that since I have a shallow pocket, I will wait for the puts to come out,the sooner the better.

* 'Not everything from China is a gem'. Even it is a gem, with a super high price, it may be the last thing you want. LV bags should be good deals when they are sold at a couple hundred bucks, but they could be the worst crap when they are selling at tens of thousands bucks!

* Look at JOBS, it may shed some light of the future of Baidu's SHARES(the business is good, but SPECULATORS may be many years ahead of it).


Baidu raised IPO price again from 25$ to 27$! When will CBOT start offering options?

I keep a 'UnderPerform' rating and 12-month target of 16$.

Here is my analysis:

Thursday, August 04, 2005

VCLK(13$,Buy,12-month Target 18$)

I am reiterating 'Buy' rating for ValueClick(NASDAQ:VCLK) after Q2 report,which is inline with my estimate, while EPS beating consensus by 1 cent a share. I am raising 12 month target from 15$ to 18$,derived by 14 times of 2006 projected EBITDA or 22 times of adjusted EPS (Which is GAAP EPS plus amortization of intangibles, which I think should be added back to get a true picture of the earning power of the business).

For my previous discussion on ValueClick, please click here.

Here is the updated financials:

VCLKQ205 Posted by Picasa

Baidu(BIDU,25$,Underperform) IPO

Can not wait for the debut of Baidu(BIDU)? Sure it is for those who punched their chests for having missed the golden opportunity of Google. Now Baidu may be an opportunity for them to make up the past mistake.

However, Baidu guys and their smart IPO underwriters are not that stupid to sell investors a bargain. Baidu has done a terrific job in timing the IPO time, when Google is close to all time high and with a high valuation.

Since I am a bargain shopper, I do not find this deal attractive. But I am sure there is mounting expectation and speculation all across the globe, because I already saw many people said online that they have prepared funds and can not wait jump on the wagon, not only the retail players think this way, some institutions have similar view as some interview report showed.

As I said, the Baidu guys and their underwriters are not fools, they will sell the shares as high as possible, as long as there is demand, who cares the business fundamentals? The IPO price is raised to 25$ a share, valuing this so called Google of China at 800 million USD.

But I doubt this will scare away speculators. Those who want to get shares and hold firmly may have a tough time waiting them ahead, surely most people are smart enough to locate the exit door first when then step in. Unfortunately, the exit usually is not big enough to let all people come out at the same time. Those lucky and smart ones may be able to get out first, hopefully with a decent short term profit. Those who left behind may feel cheated.

There are a few majors risks in Baidu's business:
* Copyright issue.
Two Chinese firms already filed lawsuits against Baidu for break of copyright by providing free MP3 downloads. Surely there will be more to come and sooner or later Baidu has to shut down its free MP3 song download service,which generates about 23% of traffic.
* Competition.
So far, we can still call Baidu the Google of China, but going forward, its business is threatened by fleece competition from rivals, including SOHU,Google China,Yahoo, and Sina. SOHU has built up a new search engine 'SOGOU' and is gaining more and more traffic, SINA also have just launched a new self developed search engine in June 2005. Google search is doing well in China, ranked No.2 by market share, slightly behind Baidu. Yahoo has been operating in China for years, they have the knowledge and technology to be fight for market share as well. I do not think Baidu has a clear competition advantage in the long term.

Anyway, I am holding a 'Underperform' rating for Bidu, with a 16$ 12-month target,derived by 20 times of my projected 2006 EBITDA plus cash, or 40 times of 2006 EPS plus cash per share. These multiples used are high to reflect the possibility of takeover by Google. I doubt Google will be willing to bid more than 500 million USD for Baidu in the next 12 months. The largest acquisition of Chinese IT companies made by foreign firms is Ebay's purchase of EachNet, the No.1 online auction site of China, with a price of 150 million USD.

Here is the past and projected financials:

Baidu Fact Sheet Posted by Picasa

JOBS(13.25$,Sell) Update after Q205

51Job.com(NASDAQ:JOBS) reported a quarter that is inline with my estimates. I keep a 'Sell' rating for JOBS and hold a 12 month target 10$, which can hardly justified by earning power of the business, rather, I have built in some expectations of brandname and takeover opportunities.

Please refer to my previous discussion on JOBS before Q2 earning release at:

Here is the updated financials:

JOBSQ205 Posted by Picasa

Wednesday, August 03, 2005

SINA Q205 Report

Sina reported an inline quarter, a few takeaways:
* Online advertising keeps doing well and may continue to maintain high growth rates going forward.
* WVAS may have bottomed, we may see a slow recovery going forward. However,increased competition and SINA's late arrival to 2.5G services may put a up limit to the growth rate.
* So far, SINA's venture to online and casual games is not rewarding yet. Until they find a good way to moneytize their user traffic, the game segment may keep being sluggish.

I hold my view that Sina shares will not go anywhere in the next 12 months except some strategic improvements are made. I am holding a 30$ 12-month target for it, based on 25 of projected 2006 adjusted earnings(GAAP EPS plus amortization of acquisition related intangibles). For my previous discussion on SINA before Q2 earning, please refer to:

By the way, I do not like the way how SINA presents their Non-GAPP earnings, as claimed in their report:

"To supplement the consolidated financial statements presented in accordance with United States Generally Accepted Accounting Principles (GAAP), the Company uses non-GAAP measures of income from operations, net income and net income per share, which are adjusted from results based on GAAP to exclude certain expenses, gains and losses. These non-GAAP financial measures are provided to enhance the user's overall understanding of the Company's current financial performance and prospects for the future.

The Company's management believes excluding the non-cash amortization expense of intangible assets resulting from business acquisition from its non- GAAP financial measures of income from operations and net income is useful for itself and investors, because they enable a more meaningful comparison of the Company's cash earnings and performance between reporting periods. In addition, such charges will not result in cash settlement in the future.

The Company's management believes excluding non-cash amortization expense of issuance cost relating to convertible bonds from its non-GAAP financial measure of net income is useful for itself and investors as such expense does not have any impact on cash earnings.

The Company's management believes excluding gains and losses from equity investment from its non-GAAP financial measure of net income is useful for itself and investors, because such gains and losses will not result in cash settlement in the future nor impact the Company's future cash earnings or cash flows. The Company does not typically invest in common stock of other companies. Thus, these charges are otherwise unrelated to the Company's ongoing business operations.


I agree that adding back of amortization of acquisition related intangibles provides a better picture of the earnings power. But I disagree that amortization of bonds and losses from investments and equity interests should be excluded, because these are real costs of this enterprise. Thus, I am only adding back amortization of intangibles to get a better understanding of the business.

At last,here is the historical and my projected financials:

SINAQ205 Posted by Picasa

What about Shanda(34.75$, Strong Buy)?

NetEase reported a super strong quarter that beats estimates handsomely. Its share is up more than 20% after the earnings. Now, what about Shanda(NASDAQ:SNDA)?

As the first China online gaming company that comes to NASDAQ, Shanda showed investors a whole new business model that is both very profitable and sustainable. After Shanda's sweeping success in its business in China, as well as its shares on NASDAQ, competitors quickly picked up, the strongest rivals so far are NetEase (NTES) and The9(NCTY).

NetEase is rising as a giant in game development and operation. Given its accumulated expertise derived from the several games it has released, it is reasonable to expect that NetEase can extend its success its upcoming titles as well. Beyond technology, NetEase has focused on developing games that incorporates Chinese culture and legend, which has unmatched competition advantage against foreign titles such as WoW and most games from Korea. That said, I believe NetEase is a long term buy, with a 12-month target of 78$, which I think is still conservative, I won't be surprised to see it trade around 90$.

What about Shanda? Is it outpaced by rivals such as NetEase? From the stock performance, it looks like the market has a few concerns:
* Pipeline of games.
People may think the MMORPG pipeline is not strong, given that D&D is delayed to early next year. It is true that year its MMORPG revenue will come mainly from Woool and Mir2, but I expect MMORPG revenue will hold up and show some growth this year because of a few reasons:
- The market is still growing, more people are playing games.
- Shanda signed Ragnarok Online((RO), which is not a new game, but it still generates about 4 million USD in revenue per quarter. After Shanda taking over the game, revenue from RO most likely will go up provided with Shanda's better marketing strength and distribution network. For 2H2005, I expect RO to contribute about 10 million USD in revenue to Shanda. That can partly offset the decline of two other MMORPG games, if there is any.
However, on the casual game front, Shanda is growing fast. Revenue from casual games 14.1 mil USD, a 23% sequential growth from that of Q404. In the remaining quarters of 2005, I expect this sector to keep a QoQ growth rate between 15% and 20%.

* Fatigue System.
I don't think this will affect the gaming industry in the long run, as confirmed by what was said in Netease's conference call. Also, it does not solve the problem of over playing, since players can always change to play another game or use some tricks to get around(Since hacking the game is not preventable, how can you be sure that those brilliant players will not create tools to get around the fatigue system, if there is any). I see this policy is more symbolic than practical, and not necessary:

* SINA merger deal.
I still believe this deal will go nowhere unless Shanda gives up and sells shares of SINA. As I discussed in SNDA section of

There are far more criticizers than supporters, the market simply does not buy into this concept. But, I hold my view that regarding this ambitious plan, shareholders of Shanda has nothing to lose but everything to gain. If Shanda does not pull it through, its game business will keep doing fine; but if it does open a whole new field of business, with hundreds of millions of possible customers, Shanda stock will be on fire.

Personally, I like the idea that TV can access stuff via Internet. It sounds weird now since video data are transferred via traditional media network, not the Internet. But I noticed there is recent boom in VOIP technology and services, where voice signals are not transferred via traditional phone lines anymore, rather, the Internet. Since VOIP works and people are getting used to it, why people won't accept a tool to access online movies, music, games, pictures through Internet also? Since the invention of television at the beginning of 20th century, it has been a stagnant box without much progress. 50 years ago, people passively watch TV, listening to those programs on each channel, 50 years later, we are doing exactly the same thing. You may get more channels from more service providers, but viewers have no choice but to accept what is programmed to show next. In order to watch a movie, I got to sit through those painful commercials again and again. What is worse, I may have missed part of the movie and thus not be able to see the whole thing.

Recent Video-On-Demand(VOD) service is one minor progress, we can see it as a milestone because for the first time it gives viewers the freedom to choose what to watch, when to watch and watch without interruption. I have a VOD service from CableVision, I like it but think there is still a lot more to do with it. Currently, they offer a library of movies, majority of which I already saw before or have no interest. Many times, I sit into my sofa, browsing through the VOD program list, scratching my head to decide which to watch, usually I gave up because I can not find a good one that I am willingly spend the time and money at. Mr. Chen TianQiao, chairman of Shanda, will feel comfort when he knows my situation described above. His idea is not genius, but bold. With his box, which is a modified PC, viewers like me will have the freedom to watch thousands of movies and MTVs, listen to millions of songs, order Karaoke songs, and of course, play casual or RPG online games. How big is the market, God knows. It is irony to me that people are valuing Sirius Satellite Radio(SIRI) venture for 9 billion USD, while hesitating to give a dime to Shanda's plan.

I hold my view that Shanda has little to lose in this plan but a lot to gain if it happens:http://coolheadinvestor.blogspot.com/2005/07/updates-on-chinese-stocks-before-q2.html

Besides the few concerns stated above, I think another factor is being ignored by the market currently:Mobile Gaming.

Digital Red, Shanda's mobile gaming subsidiary, is the pioneer and leader in mobile games. So far, it has a portfolio of about 260 games for various models of mobile phones. Mobile games are still in infancy stage, but as the market is picking up rapidly, Shanda is well positioned to reap profits.

I learned that Shanda has a more ambitious plan other than mobile games. I checked into their website recently(http://www.worldup.com) and learned more about the Game-V platform they have promoted. That platform not only enables users to purchase and play a portfolio of mobile games, but also other digital entertainment, including music,picture,message,books,etc. That implies that Shanda will not only stride into the mobile game area, but also the territory of wireless value added services(WVAS), dominated by players such as Tom Online(NASDAQ:TOMO),Kong Zhong(NASDAQ:KONG),Hurray(NASDAQ:HRAY), SINA(NASDAQ:SINA), SOHU(NASDAQ:SOHU).

To conclude, I think the market is valuing Shanda purely from an online game perspective with too much emphasis on short term focus such as near term pipeline and game regulations.

Back to the financials, I think the market has a fair expectation for Shanda in 2005. For Q205, I am expecting net revenue to be around 61.3 mil USD, of which 40 mil comes from MMORPGs (a -5% QoQ decline to reflect heated competition), 18.7 mil USD comes from casual games (a 15% QoQ growth), and 9.4 mil USD comes from other categories(a 15% QoQ increase). I am expecting 36 cents per share earning for Q2, assuming a 44% net margin.

For full year 2005, I am expecting net revenue to be 270 mil USD, a 72% growth from that of 2004. I expect EPS to be 1.61 USD, same as the consensus.

That said, I am holding a 55$ 12-month target for Shanda.

For my previous discussions about Shanda:

Tuesday, August 02, 2005

NTES (Buy, target 78$)

No need to say much, Netease reported a very strong quarter. I am raising 12-month target from 65$ to 78$. For 2005, I am expecting revenue to be around 198 mil USD, EPS to be around 3.13$. If the new MMORPGS goes well, there will be upside in these estimates.

Please refer to my previous discussion about NTES before Q2 earnings:

Overall market

Although I do not make predictions of the market and do not act on those judgment, if there is any, I hold my view that we may be at the beginning of a sustainable bull run: