This Kong Is China's Real Wireless King

11/24/2009 12:00 pm EST

Focus: STOCKS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, tells of a wireless service provider in China that’s on top of all the important trends in the mobile economy.

One of the most powerful secular trends in technology today is the explosive growth of the mobile economy—basically, application software and e-commerce driven by mobile phones.

Of course, the greatest opportunity of the mobile economy is in China, by far the world's largest wireless Internet market, with more than 600 million cell phone users and 300 million Internet users. KongZhong (Nasdaq: KONG) is the leader of this trend, and truly is the 800-pound gorilla of China's mobile economy.

In 2002, KongZhong was founded as one of China's first mobile wireless services providers. The company is based in Beijing, and some of the popular traditional paid services that it provides include short messaging, ring tones, multimedia messaging, and daily horoscopes. And as China's wireless usage exploded, the company became profitable in its first year of operation, and KONG went public in 2004.

KONG's second-quarter revenue grew 37% year-on-year and 9% sequentially to $32.3 million, which exceeded company guidance. Total gross margin improved to 51% from 49% in the first quarter.

And income growth was even better, coming at $3.55 million for the second quarter—a 41% increase from the first quarter. As for its balance sheet, the company is very strong, with $132 million in cash and equivalent assets, and only $26 million in debt.

The company's strategy is to focus on this fast-growing mobile application division, which grew 385% in just one year, from 5% to nearly 25% of the company's total revenue.

Traditional wireless value-added services mobile software applications is the company's cash cow, but is growing much slower than the mobile applications business. Instant messaging, ring tones, and multimedia messaging make up the bulk of the company's traditional value-added services.

Currently, the company's wireless applications business focuses on handset games and mobile online community development. KongZhong charges a download fee per game,as well as selling virtual items for games played on virtual communities similar to Facebook. Some online community games can reach several million players within just six months of their launch date.

China's mobile gaming market is poised for explosive growth. Kong's management [expects] mobile gaming to continue to grow by more than 600% to 100 million users within the next five years.

Considering that Kong's mobile gamers grew by 385% just in the past year, and that the industry is projected to grow by 400% in two to three years, this goal is certainly achievable.

As both the operator of China's largest mobile online community and the leading developer of mobile applications, KongZhong is perfectly positioned to profit from the ongoing explosive growth in the mobile economy. And I expect the company to continue its exponential growth in the foreseeable future.

Buy KONG under $15.50 as a way to profit from the upcoming year-end rally. Given the company's fast growth and improving profitability, I believe that the stock will likely hit $20 within the next six to 12 months. (It closed at around $14.50 Monday—Editor.)

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