Kongzhong Corp (KONG), a leading provider of mobile Internet value-added services in China, has decided to acquire Simlife International Inc, a Chinese mobile game developer with a portfolio of more than 200 3D mobile games.

We consider this is a strategic move as Kongzhong has become the largest mobile game developer in China ahead of its competitors Hurray! Holdings (HRAY), Linktone (LTON) and Shanda Interactive Entertainment (SNDA). The company has taken a strategic decision to focus on two key areas. These are (1) Develop its mobile games business as the main growth driver and attain the largest share in this segment (2) Transform its Kong.net portal into a wireless based social gaming and community platform.

According to various industry estimates, the Chinese wireless value-added services market may generate up to $11.5 billion of revenue by 2010. The mobile game business is likely to account for a significant part of this market opportunity. At the end of April 2009, China had 671 million wireless subscribers and penetration is approximately 45% in the country. It is estimated that the number of mobile users in this region may surpass 750 million by 2010. The on-line mobile game developers in China are therefore, looking at significant growth potential.

In the first quarter of 2009, mobile game contributed 17% of total revenue compared to 10% in the previous quarter and only 6% in the year-ago quarter. This segment is expected to generate 25% of KongZhong's total revenue in fiscal 2009. The company continues to enhance its in-house mobile gaming development capabilities. As of now, over 150 mobile game titles of Kongzhong are commercially available across all major mobile game channels. This includes China's first flash-lite mobile game community and first mobile social game called "Nong Chang Da Heng".

We remain bullish on KongZhong, Hurray! Holdings and Linktone.

Telecom companies are starting to report minimal financial improvements in terms of revenue and earnings levels. In addition, economic stimulus plans throughout the world, including the U.S. broadband infrastructure development program -- and similar structural subsidies in China and India -- may be a boon for selected service providers and equipment manufacturers.

Telecom carriers and equipment providers that offer the most attractive opportunities are focused on third-generation (3G) wireless, broadband (DSL) and fiber-to-the-home/node networking. There are also a few market leaders that have proven able to survive the sometimes turbulent opportunity swings in the industry.

It is our belief that in this uncertain stage of macroeconomic events, companies with strong balance sheets and firm net cash positions, along with sustainable dividends, provide respectable risk/reward profiles. On the other hand, highly-leveraged companies should be avoided, at least at this possible economic inflection point.

OPPORTUNITIES

• Necessity for Telecommunications - The need for telecom in both rural and urban areas, and its role in the infrastructure of both developed and developing markets, continues to grow. Wireless infrastructures and/or low-cost integrated IP voice and data wireline networks are necessities. In fact, most global subscribers will not give up their wireless phones and services that easily, although upgrades to advanced (high-end) handsets/offerings may be sensitive to overall consumer/business budgets. This is accompanied by telecom carriers' continued quest for operational flexibility and streamlining
• International Diversification - While country diversification offers only limited protection in the current highly-correlated world equity markets, it offers hedging capabilities from local economic weakness and associated currency exchange differentials. Therefore, a significant allocation of foreign telecom companies would be appropriate as part of a technology-focused portfolio
• Balance Sheet Positions - In our view, companies showing significant net-cash positions become attractive in volatile markets. It is important to consider balance sheet conditions that may limit the vulnerability of telecom companies in weak economies. This is perhaps at least as important as metrics that track earnings growth, but often do not consider overall market declines. With the S&P 500 P/E between 10 and 12 times earnings, valuation targets that were provided by analysts based on earnings growth parameters have not been effective in guiding investment recommendations during market tailspins

RISKS AND WEAKNESSES

• Potential Business Slowdown - Lower overall top-line sales among carriers that would justify a proportional reduction in capital expenditures
• Exacerbated Borrowing with Credit & Loans - Over the near-term, telecom companies may be exposed to high debt levels and limited liquidity
• Economic Impact Straining Consumer & Business Spending - Telecom companies that would have free cash flow impacted by slowdown in demand. (Sustainable cash flow is required to service debt obligations and may be severely impacted by pessimistic business projections)

Telecom companies are starting to report minimal financial improvements in terms of revenue and earnings levels. In addition, economic stimulus plans throughout the world, including the U.S. broadband infrastructure development program -- and similar structural subsidies in China and India -- may be a boon for selected service providers and equipment manufacturers.

Telecom carriers and equipment providers that offer the most attractive opportunities are focused on third-generation (3G) wireless, broadband (DSL) and fiber-to-the-home/node networking. There are also a few market leaders that have proven able to survive the sometimes turbulent opportunity swings in the industry.

It is our belief that in this uncertain stage of macroeconomic events, companies with strong balance sheets and firm net cash positions, along with sustainable dividends, provide respectable risk/reward profiles. On the other hand, highly-leveraged companies should be avoided, at least at this possible economic inflection point.

OPPORTUNITIES

• Necessity for Telecommunications - The need for telecom in both rural and urban areas, and its role in the infrastructure of both developed and developing markets, continues to grow. Wireless infrastructures and/or low-cost integrated IP voice and data wireline networks are necessities. In fact, most global subscribers will not give up their wireless phones and services that easily, although upgrades to advanced (high-end) handsets/offerings may be sensitive to overall consumer/business budgets. This is accompanied by telecom carriers' continued quest for operational flexibility and streamlining
• International Diversification - While country diversification offers only limited protection in the current highly-correlated world equity markets, it offers hedging capabilities from local economic weakness and associated currency exchange differentials. Therefore, a significant allocation of foreign telecom companies would be appropriate as part of a technology-focused portfolio
• Balance Sheet Positions - In our view, companies showing significant net-cash positions become attractive in volatile markets. It is important to consider balance sheet conditions that may limit the vulnerability of telecom companies in weak economies. This is perhaps at least as important as metrics that track earnings growth, but often do not consider overall market declines. With the S&P 500 P/E between 10 and 12 times earnings, valuation targets that were provided by analysts based on earnings growth parameters have not been effective in guiding investment recommendations during market tailspins

RISKS AND WEAKNESSES

• Potential Business Slowdown - Lower overall top-line sales among carriers that would justify a proportional reduction in capital expenditures
• Exacerbated Borrowing with Credit & Loans - Over the near-term, telecom companies may be exposed to high debt levels and limited liquidity
• Economic Impact Straining Consumer & Business Spending - Telecom companies that would have free cash flow impacted by slowdown in demand. (Sustainable cash flow is required to service debt obligations and may be severely impacted by pessimistic business projections)

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