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China IPO Backdoor Strategy: Buy this mobile content company now for less than the cost of a movie ticket!

Posted November 26, 2007

by Stephanie Grimmett, TFN Baltimore — (TFN): China Mobile (CHL: NYSE) is as ubiquitous in its homeland as Verizon is in the United States. And the company has popped up everywhere in the last few weeks. As you may recall, Taipan recommended China Mobile, the largest Chinese cellphone company, in the June issue. If you were lucky enough to get into the stock back then, congratulations on earning 70% gains so far. As one of our Chinese Secret IPO Backdoor recommendations, we bought China Mobile mainly because the company plans to IPO on the Shanghai Stock Exchange. The company announced this month that it will IPO in the first half of 2008. This is a push back from the original date that China Mobile had planned for the share sale. When we recommended CHL, the company was planning its IPO for as early as July. But here we are in December, and China Mobile has yet to enter the Shanghai bourse because of the convoluted and sometimes shady dealings of the Chinese government. New rules for the New Economy China Mobile is patiently waiting for the Chinese Securities Regulatory Commission to change a rule before it can enter the mainland bourse. CHL is a Hong Kong company, and, as such, it can’t join the Shanghai exchange until a regulation prohibiting foreign companies, even if they’re based in not-so-foreign Hong Kong, from joining its stock markets. That change will open all of Hong Kong’s thriving Chinese-owned businesses to the mainland exchanges. It’s a change that’s sorely needed on mainland bourses with too few companies and too many investors. The newly wealthy in China — and there are a lot of those these days — are crazy about investing. Despite recent pullbacks, the two exchanges on the mainland, in Shanghai and Shenzhen, are bubbling higher and higher without enough investment opportunities to satisfy the ever-increasing number of investors. Companies which trade on the Hong Kong exchange are running at a considerable premium compared to their Shanghai listings. Our first China Backdoor IPO pick, Guangshen Railways (GSH: NYSE), which IPOed on the Shanghai Stock Exchange a year ago, is currently trading 67% higher on the mainland than it trades for on the Hong Kong exchange. Granted, to U.S. investors the difference isn’t all that remarkable, since Guangshen’s prices in Hong Kong dollars and Chinese yuan are equal to about 70 cents in its Hong Kong listing and a whole $1.20 in Shanghai. But that’s not the prettiest picture when your average Chinese worker earns a mere $60 per month. A Hong Kong solution The Chinese government isn’t too happy about this situation. And the CSRC has been taking measures to cool off its markets for a while now, fearing both inflation and a crash when the easy profits surrounding Shanghai and Shenzhen disappear. The CSRC is desperate to moderate its exchanges. And to do it, the Chinese government will open the mainland to companies based in newly “re-Chinafied” Hong Kong. These companies are often older, stronger and more stable that their mainland counterparts, which will help to bring depth and balance to the Chinese exchanges. Besides, on a fiscal level, it makes sense to allow Hong Kong companies onto the mainland exchanges. These companies are making their profits from the Chinese masses. Many of them, like China Mobile, do the bulk of their business within the country’s borders. And China wants its money back. Push me, pull you Chinese investors, however, want the chance to pull gains from their own booming economy. And the country’s government has never been good at sharing its wealth. China would like to keep those Chinese profits inside its own borders. And the best way to get back at least some of that money made on its citizens (after all, if anyone is making money from China’s citizens, the government would prefer it to be, well, China… and nobody else) is to allow the companies that make their money in the Chinese economy to join its stock exchanges. The regulation change will come, China Mobile will join the Shanghai Stock Exchange. And when it does, you will see a feeding frenzy like none ever witnessed. China Mobile is the future of Chinese communication. It has as many customers as the entire populations of the United States and the United Kingdom combined. And that number grows by about 5.5 million people every month. But if you didn’t grab the stock back before it blew past the $50 per share mark (or the $80 mark), or even if you did and you want another way to play the Chinese cellphone company without paying that hefty pricetag for more CHL stock, we have a recommendation designed to do just that. China’s got online game China has an enormous online gaming market. In the last two years, we’ve played that market for phenomenal gains of 167% and 73% with Shanda Interactive (SNDA: NASDAQ) and Guangshen Railways (GSH: NYSE), respectively. By 2008 the online gaming industry in China will be worth $1.1 billion. Online gaming is incredibly popular for the Chinese, and it’s growing in popularity all the time because, with the country’s growing middle class, more Chinese can afford to join in on the trend everyday. China’s money class China will have more than 100 million families in its middle class by 2010. Each of those 100 million families will be worth at least 620,000 yuan ($74,700) and will have the means and the opportunity to buy all kinds of electronic toys. This new middle class, with their fear of upsetting the good fortune they’ve found in life but also the desire to live like the heroes they love, but are too afraid to be in reality, are pushing the online gaming industry to new highs. And while most European nations have a median age of about 40 years, the median age in China is 33. Remember what you were spending your money on at 33? Well, China’s young adults are spending their disposable income on gadgets: computers, televisions, online games, mp3 players and cellphones. China’s phenomenal economic growth is allowing more and more of its population to afford new luxuries like handheld computers and shiny deluxe cellphones. In fact, as we see happening in emerging markets everywhere, many Chinese moving up the economic ladder are skipping the status symbol of having a landline phone connected to their homes. These nouveau riche, or just nouveau well-off, Chinese are ignoring landlines and instead are snapping up cellphones for themselves and their children. Online gaming goes mobile Right now, China has a thriving online gaming industry that’s working its way into mobile games. Mobile games, the way the Chinese play them, are as complex, highly evolved and as massive multi-player as World of Warcraft or any other traditional online game is today. These games, played on cellphones and mobile computers, connect players to entire simulated worlds and provide entertainment for hours, much longer than your old cellphone Tetris game could keep you interested. The Chinese do love their games, and they love to take these games with them wherever they go. They want to escape and rescue a princess or pillage an entire kingdom while they’re riding to work on an overcrowded bus. They want to fly above crowds, shoot lightening from their eyes to destroy evil wizards or control beautiful maidens while they wait for their turn in the lunch line. So far, what I’m describing sounds like a Gameboy. But it’s much better than that. Mobile games allow players to connect to one another in an environment free from China’s pervasive big brother government, and they provide the annonimity that grants Chinese who would never fight the system in public to become heroes in their own minds. The Chinese embrace the chance to communicate with each other and the opportunity to display their strength and freedom in the online games they play obsessively. And as they gain the technology and the money to snap up fancy new cellphones, they’re beginning to demand these same sort of games in their mobile versions, as well. This is where our backdoor play on China Mobile comes in. Kong-Sized opportunity KongZhong (KONG: NASDAQ) provides mobile gaming to China Mobile. And its relationship with CHL means that KONG is the king when it comes to the mobile gaming industry in China. The company has contracts to develop mobile games from new release movies in its homeland, and it just launched the Chinese NBA mobile Web site on its network. KONG is China Mobile’s largest value-added service (or VAS, as the industry calls itself) provider by revenue. VAS offers services besides the basic “call pix and text” plans covered by the cellphone carriers. And KongZhong specializes in 2.5G mobile content. Its services are widely available with China’s current cellphone network. Besides it’s mobile gaming unit, which has some terrific games and brings in million revenue, KongZhong is a one-stop shop for mobile content, and just like your cellphone VAS provider, it offers picture services, karaoke, electronic books, ringtones, wallpapers, clocks, calendars, chat, message boards, dating and networking services and news, sports and entertainment alerts. Earnings growth KongZhong just announced its third quarter earnings. The company is currently digging itself out of a hole. The Chinese government issued new regulations for the cellphone industry in 2006 that effectively outlawed several of the forms of revenue the company relied on. And KongZhong has turned itself around since the changes. The company announced increased revenue in the third quarter of 2007, and its mobile advertising has been growing at a healthy clip. KongZhong raised its earnings from only $40,000 in the second quarter this year to more than half a million in the third. Disposable income is growing every day, and its populace is disposing that income on technology. China Mobile just signed an exclusive contract with Apple to sell the iPhone on the mainland. The iPhone will give the Chinese another new toy to play with, but the games they’re playing on that phone or on a majority of the other new cellphones in the country will be KongZhong’s. KongZhong’s deal with China Mobile means KONG is a winner. And the company’s recent slump makes right now a great time to grab the stock before everyone else realizes it’s moving back on top. China Mobile’s Shanghai IPO will benefit more than just CHL. The influx of cash will give the company more room to expand. And every new China Mobile customer will be sold KongZhong’s games and services. Buy KongZhong (KONG: NASDAQ) under $7 for its future in the Chinese mobile gaming market and its unique relationship as China Mobile’s largest content provider. ***Don’t forget to watch this weekend’s Smart Trading Action Alert: Smart Trading Action Alert: Given the beating some blue chips have taken in recent weeks, select small-cap stocks now provide opportunities for safe profits. Ian Cooper explains. ****Make sure you sign up for our FREE TFN News Feed for breaking news, special reports and new financial videos. Click here to pick your favorite reader. 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Posted by Stephanie Grimmett · Filed Under International Investing 

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