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Kongzhong (KONG) - Speculative buy?

July 21st, 2007 · No Comments

There’s nothing like looking for a beaten down stock (my favorite group), which has a chance to recoup some of the value it has lost. Granted, these stocks, in my experience usually go two ways. They go under (or close enough), or they soar multiple fold. Some companies which have performed spectacularly after being shunned by investors earlier this decade include Humana (NYSE: HUM), AmerisourceBergen (NYSE: ABC) and Bon-Ton (Nasdaq: BONT) and any number of the dot com survivors.

One company on my current radar screen is Kongzhong (Nasdaq: KONG). This is definitely a riskier buy, because its business is currently in decline from a number of factors outside the control of the company. Kongzhong is a wireless value-added provider in China. What this means is that provides a number of services such as mobile games, ringtones, and news at a cost to users. Both 2G and 2.5G platforms are used.

First Quarter 2007 Financial Highlights:

– Total revenues were $20.13 million, in line with the Company’s first
quarter revenue guidance of $20 million to $21 million.
– Total mobile advertising revenues increased 12% sequentially to
$116,000.
– US GAAP net income was $1.56 million. Diluted earnings per ADS were
$0.04.
– Non-GAAP net income was $2.13 million. Non-GAAP diluted earnings per
ADS were $0.06.

The risks? There are a number. The companies revenues are falling, which means that the company may post a loss the next quarter and for the next few quarters until they can stabilize revenues, and show growth.

It is highly dependent on the incumbent mobile phone providers China, including China Unicom and China Mobile to allow their subscribers access to the content. China Unicom, China Telecom and China Netcom make up 24% of total revenues. Lately, these companies, as well as the government, have made it more difficult for customers to access content from Kongzhong. China Unicom recently went to short term contractual agreements with all value added companies, thus making future service fees more unpredictable.

China Unicom informed all its wireless value-added service providers in April 2007 that the existing 2006 cooperation agreements will be extended for one quarter to June 30 2007. As such, the service fees it charges to service providers, including KongZhong, will remain unchanged at 20% of gross revenues derived from China Unicom users in the second quarter of 2006. The Company expects to renew its cooperation agreement with China Unicom in June 2007.

The Company noted that beginning in May, China Mobile started to display a reminder of GPRS fees to WAP users when they try to browse a WAP page. In addition, China Mobile started to promote only its own WVAS products on the embedded menus of handsets customized for China Mobile pursuant to strategic alliances between China Mobile and selected handset manufacturers. In the past, such embedded menus promoted all best-selling WVAS products on Monternet, including many of KongZhong’s products. The Company expects the above two actions by China Mobile to have a significantly adverse impact upon WAP revenues.

The company expects revenues for this current quarter to be down to between $16 and 18 million.

So why buy the company?

The stock is severely beaten down at this point. At ~$4.80 per share, it trades with a market cap of $170 million. The company has $138 million in current assets, of which $117 million is cash. It only has $15 million in current liabilities. Thus, unless the company begins to hemorrhage money (it was still profitable in its recent quarter), you are protected on the downside. It has roughly $3.30 a share in cash.

The 52 week range is $4.71 - 10.28. Shares have been as high as $15 in 2006. I feel that Kongzhong may be an interesting China play, although one that will entail higher risk than I normally would take. I am looking at a 1-2 year outlook, and not for immediate gains in this company. The company is in the process of developing kong.net, a WAP site. Revenues last quarter were insignificant at $116,000. However, this has potential for growth, the question being how long it will take. Definitely keep an eye on this company to see how things turn around for the company. I would call shares a speculative buy at this time, especially as it is trading fairly closely to its cash on hand value.

							

Tags: Stocks