Tuesday, November 29, 2005

SNDA Post A305 Update

Shanda Q3 report has been very bad for investors. I made a mistake so far in calling to buy Shanda shares when it was around 30$. After reading into Q305 report and recent Shanda's update that it is switching to free-to-play business model for two of its major MMORPGS, I have changed my view from 'Buy' to 'Hold', with a 12-month target 20$, derived from 20 times of lowered 2006 EPS.

In my opinion, the free-to-play model may not be a bad move in the long run, given that free games are gain popularity, it may continue to take market share from paying games. Indeed, all people like free stuff. However, there is no free lunch for sure, gamers will have to pay for the entertainment in one way or the other. This model has been proved to work by the popular game Yalgang in Korea and China. But in terms of Q405 and Q106, this model may put downward pressure on Shanda's revenue and margins.

On the expense side, the picture is not pretty. Investments in business is not bad, but no investors likes to see steep increases in costs to eat profits. I guess Shanda management will need to think twice before spending big money in development, marketing and salaries.

What about the 'EZ' boxes? So far, it is said they are being sold in some cities for experiments. The price was said to be around 1000$, which in my opinion is too expensive to distribute to mass population. If let me choose to buy a EZ Station for 1000$ and a Xbox360 for 400$, I will choose the latter with no hesitation. We have to wait before start predicting sales for these EZ boxes.

Here is my updated model:


SNDA Q305 Report Posted by Picasa

ValueClick(NASDAQ:VCLK) Post Q305 Update

After ValueClick's Q305 Report, I maintain my previous 'Buy' rating, and I am raising 12-Month target from 18$ to 21$, based on 15 times of 2006 projected EBITDA plus cash.

Although this stock has gone up more than 60% since I recommended it back in June 2005, I believe there is still upside going forward given that:

* Continued strength in online marketing
Wall Street Journal reported a few weeks ago that online advertising penetration rate is only a few percents of overall marketing dollars. Given the continued trend of more and more shoppers are going online (either research before purchase or do shopping directly), we should see continued migration from traditional media to online. Valueclick will continue to benefit from this favorable trend.

* Good execution, conservative guidance
The management team so far has done a good job in integrating acquired businesses to drive revenue and earning growth.

In the past, the management has been following a philosophy to keep public expectations low via conservative guidance. I believe that the 06 guidance is pretty conservative, there could be upside in revenue and EPS numbers.

Here is my updated model:



VCLK Q305 Updat Posted by Picasa

Tuesday, November 22, 2005

CNTF, maintain BUY

CNTF is a perfect example of market inefficiency. I have been watching it since its IPO, when it was trading in the high teens, I did not give much attention to it since its business model was pretty new, thus there was too much uncertainty about revenue and earning power. And its near one billion price tag was not close to be a clear bargain.

But in the past summer, the stock has been going down to incredible low levels without much plausible reasons, the only excuse I can think of this selloff is lack of interest, some shareholders were panic to sell at whatever price because not many buyers showed interest, following the so-called support, resistance, trend lines,etc.

Before Q305 report, the Company actually preannounced that 2005 full year EPS is around 1 dollar, but the report made little smoke in the market, boosting price from around 8$ to 10$, but tanked back to around 8$ again in the next couple weeks. I was lucky to be able to pick up some shares before and after the pre-announcement around 9$.

After the Company reconfirmed its full year 2005 EPS guidance to be around 1 buck, the stock started to fly on Nov 16th, when I did not hesitate to add positions heavily. In less than three weeks, the stock has went up from 8.7$ to 18.4$. I took some profit at 15$ and 15.5$, currently still hold about 40% of my original position to let profit run.

With about 4 dollars in cash and 1 dollar 2005 EPS, I think the market is still in the process to reevaluate this stock to better reflect the risk and return profile. I called for 15+$ year-end price target when it was around 11$, now I expect it to reach 20+$ in the next 12 months.

So far this business has been doing well, leveraging China's lost labor cost advantage to cell phone design. While the financial numbers are rosy, I suggest not to be over optimistic either. The domestic cell phone market of China has been a mess in the past year, majority of cell phone manufacturers experienced huge loss in revenue and market share(to foreign brands), among them are such Chinese local brands as Bodao, Haixin,Changhong, Haier,etc. China Tech Faith has been generating majority of its revenue from domestic manufacturers, thus if these customers keep going down in their business, it won't be cheerful for phone designers. The Company is facing the challenge to diversify its revenue base by getting more international markets, so far I believe the management is seriously working on this. Within the past month or so, they released a 3G phone in Italy market, also to better penetrate and serve U.S. market, they just opened a local office in California, offices in Japan, Korea and Europe are going to be opened later this year or early 2006 as well.

To conclude, the bottom line is this company has a lot of cash, super earning growth, and low valuation compared to other tech sectors. I believe the price of high teens starts to better reflect the risk and return balance, I am looking CNTF to go beyond 20$ within the next 12 months.

Also, for those who can trade HongKong or Singapore market, there are two names you may want to take a look: 2000 HK and LHL SP. These two and CNTF are the biggest three players (based on what I read in news) in the cell phone design market of China. CNTF has made a great run so far, on a relative value basis, the other two look quite cheap to me, I am looking at 50+% gain in both names with next 12 months. 2000 HK closed at 1.73 HKD today, my preliminary 12-month price target is between 2.5 HKD to 3 HKD. LHL SP closed at 0.3 SGD today, my preliminary 12-month target is 0.6 SGD.

A few Chinese movers:CNTF,CESV,CAAS

There were a few overly undervalued tiny Chinese stocks, based on what the market told us recently:

CNTF:
This Chinese cell phone designer is going to earn about 1 dollar per ADS for 2005, having about 4 bucks in cash, while its shares were traded below 10 for more than a month. In the past 5 trading days, the stock has jumped more than 70%, currently trading at 15.22$. I think a price between 16 to 20 is quite reasonable. I have been holding this stock.

CESV:
This is another little Chinese stock that has been neglected by the market for a long time. In the last four quarters as of June 2005, EPS is about 80 cents. The company sells energy saving products in China, recently it reveals plans to acquire some gas or coal company to expand into selling energy. More over, the company is going to work on a windmill project, which it has patent, in northwest China. It also teamed with another company in Beijing to develop cutting edge Thermo-photovoltaic Cell Technology, which will convert solar energy into electricity at higher rates than most current methods.

As of last Wednesday, Nov 16th, the stock was traded as low as 4.12$. Now it is above 7$.

I am long this stock @ $6.8. In the short term, I expect price will be volatile, in the long run, I am looking at a price target of low teens.


CAAS:
This is a little company that manufactures car components in China.

In the past few years, there have been a clear trend of more and more Chinese were buying cars. I think two major factors have contributed and will still do to this uptrend in buying vehicles. First, as China keeps growing its economy at double digits, the Chinese people has more and more disposable income. Secondly, the price tag of cars have been coming down, making them much more affordable than before.

As of last Wednesday, Nov 16th, the stock was traded around 5. Now it is trading at 9.42$. I have no position in this, and will remain cautious before further looking into more details.

Wednesday, November 16, 2005

NTES Q32005 Update

What happened?
In my opinion, Q3 was not a bad quarter for NTES at all. Revenue was 0.7 million higher than I thought, and EPS came the same as I called.

Before we start criticizing the market being insane, let's think about what has changed on fundamental level:

-Slow down of two flagship games:
All MMORPG games have its life cycles, there is no game can last for ever. It is quite reasonable to expect games to show signs of slowing down, especially those that are already popular. XY2 is an old game, it is not reasonable to expect it to bring in 20+ million USD per quarter for ever. XYQ seems to continue to grow.

I agree with the management that XYQ may peak in Q4 or Q1 next year, XY2 may have peaked. There is risk of a sudden drop in popularity, like what happened to Mir II from Shanda in Q3.

- Delay of new games:
NetEase's new game, DaTang, is said to be one of best 3D games that will be available in China market. But most likely it won't be launched until Q2 next year. The game has entered into beta test for a couple months. TianXia, another flagship 3D game, won't be released before Q3 or Q4 next year.

Why?

There could be technical questions, such as the development team simply will not able to release these games earlier.

But, I think there is another possibility.

It is not hard to figure out that if Netease releases the new 3D games, which has more fancy pictures, better control, more fun, etc., a considerable amount of gamers that play current titles of NetEase will likely to give up the old games for the new ones. Given that the two 2D games are still making tons of money every day, I think it is quite reasonable for the management to maximize life time of existing titles.

Thus, I don't think delaying new games by a quarter has material effects on long term success of this enterprise.

- Too much optimism
There were too much optimism among analysts after Q2 earning surprise, people constantly increased revenue and EPS estimates, making the business very hard to satisfy the greedy public.

The market:
The market told a different story after Q3 report. The stock crashed below 60. Looks like the bullish story is over.

What is worse, Shanda disappointed shareholders with sharp decline in revenue and earnings(what is worst is the steep increase of operating costs). The9 was not able to boost its share price, even with a hit title as classical as WoW. Thus, valuation levels for the gaming sector is coming down.

What I think:
I still think positive about this business itself, but will be careful with valuation level. I am revising 05 EPS from 3.16$ to 3.11$, and 2006 full year EPS from 4.47 to 3.99$. The downward revision reflects the risks of material slowing down of current two games and delay of the two new 3D games.

I am revising 12-month price target from 95$ to 72$. The downward revision is because of slightly lower EBITDA estimates and lower multiples. The new target is based on 14 times of 06 expected EBITDA plus net cash. I tend to believe there could be upside beyond this target, given that NTES has been trading with forward PE between 20 to 25 in the past a few years.

To conclude, I think this is a BUY with a 12-month price target 72$.

(The price target in the following picture is not right, please disregard that and use the above one)


NTESQ305 Update Posted by Picasa

Wednesday, November 09, 2005

SOHU Q305 Update

SOHU reported a good quarter, a few key points:

* Online ads is growing with healthy rates, and 30% YOY growth is quite achievable in 2006, in my own opinion.
* We may continue to see the wireless sector to recover, given its small revenue contribution at the moment, there are potentials that SOHU can further moneytize its brand name through wireless contents.
* So far, Sogou is not generating much revenue yet. But given the strong uptrend in search advertising and Sohu's continued focus on technology and distribution, I believe Sogou will be a revenue growth driver in 2006.
* Sohu has a team working on developing online games, which generated little revenue for SOHU so far. I believe it is a matter of time before SOHU can make some money through these investments. The extraordinary success of NetEase is an example.
* SOHU's management is dedicated to serve shareholders, better than most other Chinese companies. CEO Charles Zhang has been consistently buying back shares through open market, and the company has also been busy buying back shares with its limited cash reserve. SOHU CFO also purchased SOHU stock. All these transactions shows the management's faith in the Company and its dedication to shareholders.
* The 2008 Olympics sponsorship will be likely give the Company an edge in making more money in advertising and expanding market share.


In short, I think SOHU is the near the time when it will see returns from its previous investments in search, advertising ,wireless, maps, etc. I think SOHU is likely to grow fast in these key areas, it is well positioned to capitalize the uptrend in online spending in China, it seems to have more good cards to play than some other peers.

I maintain my previous 'Strong Buy' rating and 27$ 12-month target, based on 24 times of projected 2006 EPS.


SOHUQ305 Posted by Picasa

Friday, November 04, 2005

SINA(Neutral, 12-month Target 27$)

SINA's Q3 revenue comes lower than expected, it net income in particular is heavily hit by large marketing costs for wireless services.

Online advertising keeps growth momentum, Q305 YoY and QoQ growth rates are 24% and 13% respectively. The management believes this sector will have about 30% YOY growth rates in 2006, as the tend of migration from traditional media advertising to online advertising continues. I believe that is an achievable target.

The wireless sector, however, is a little bit soft. Although overall wireless revenue grew 7% from previous quarter, that increase in revenue came with a much larger increase in marketing costs. I believe it will be challenging for significant revenue growth in this sector, it is more likely we are going to witness even lower gross margins and higher marketing costs(but I think the marketing costs from go down to normal levels from the high in Q3). The next catalyst for this sector will be 3G rollouts, but so far it is not in sight yet. Overall, I am modelling about 13% YoY growth in this sector in 2006.

That said, I maintain my previous 'Market Perform' rating, and lower 12-month price target from 30$ to 27$, based on 27 times of my projected 2006 adjusted EPS(adjusting GAAP EPS by adding back amortization cost)


SINAQ32005 Posted by Picasa