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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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KongZhong (KONG) |
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Selected Analyst Coverage (Target): Piper Jaffray — Market Perform ($7.00) W.R. Hambrecht — Sell ($7.00) Credit Suisse — Neutral ($6.40) |
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KONG Closed at $7.04 on 4-13-07 |
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Released 4-15-07 |
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KongZhong (ticker: KONG) is a leading provider of wireless value-added services (WVAS) to mobile phone users in the People’s Republic of China. · KongZhong is a distributor of WVAS such as games, pictures, and ringtones, as well as chat and dating services and sports, entertainment, and current news. · The company currently distributes content using 2G and 2.5G technology, which essentially reaches and includes all mobile phones in use. · Recently, KongZhong has been investing heavily in developing a Wireless Internet Portal (WIP) for use with 3G technology. The company’s goal is to turn “Kong.net” into one of the top two WIPs in China; with the intention of recouping the investment through advertising revenues. Although this will be a monetary loser for the company in the near future, the investment should pay off handsomely if Kong.net gains a significant first-mover advantage in the WIP space. · In 2006, the Chinese government imposed new rules concerning billing of customers; this will likely cause a contraction in revenues by about 20-25% in the near-term; although long-term it should lead to an industry shakeout of smaller players, leaving leaders like KongZhong better positioned overall. · Despite tremendous growth in cell phone usage in China, overall penetration still stands at less than 1/3 of the population, with an even smaller fraction currently using 3G technology to access a WIP such as Kong.net; the potential for market growth is outstanding, especially given the results of the company’s marketing campaign, which increased daily WIP visitors by 50% from 20 million to 30 million - still a low single digit portion of China’s total population. · Given recent margin contraction due to telecom carriers demanding a higher share of revenues, it is worth noting that the company has diversified its carrying base away from China Mobile, and the push to an ad-supported WIP platform should help diversify the company’s source of profits. FY2007 should see the first significant addition to revenues from WIP as the company has signed on several prominent partners; although the project will likely not be accretive to earnings for several years past that date. · Although the near-term operating environment appears difficult, KongZhong has a strong net cash position of $131M (Market Cap. $246M) or $3.75/share, which should limit further downside in the shares. We also note that the sell-side analyst community is fairly negative on the stock, and it appears most investor pessimism is priced in. Further, the largest shareholder in KONG is Renaissance Technologies, the hedge fund managed by Jim Simons. Given Simon’s track record (35% annualized returns net of 5-and-44 fees), we view his participation in the stock as a positive sign. · Given KongZhongs’s anticipated earnings growth, its balance sheet position, cash flows, and business risk, our fair value target for KONG is $10.80, putting KONG shares as being undervalued by approximately 53.0% based of Friday’s closing price of $7.04.
Disclosure: The analyst has no position in KONG or its derivatives, and we encourage you to read our note more thoroughly detailing our thoughts and feelings about KONG. |
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