Chinese Technology Companies to Watch in 2007

January 4, 2007

technology.gifIn Part I of this two-part blog entry, I said that I would discuss some specific Asian companies that would benefit from the global technology adoption of Internet Protocol Version 6 (IPv6). Two Chinese companies, KongZhong (NASDAQ:KONG) and ZTE Corporation (ZTCOF.PK) may fit the bill. Normally I don’t like discussing specific stocks because factors within the global economy, within company management, with the political risk of certain countries constantly change that can dramatically change the risk-reward set up of stocks. These factors can’t be adequately addressed within the several paragraphs to which I limit my blog posts.

For example, inside our maalamalama campus, even though we teach you how to identify the best risk reward setups for stocks we believe will return 25% or more annually, we also provide you with more than enough of our favorite opportunities for the next one to five years to get you started. Sometimes we have devoted 50 pages alone to analyzing just one asset class when the asset class is promising enough to merit such attention, even if it is ignored by the great majority of investors. As another example, a while back I mentioned that I liked the risk-reward setup of Chesapeake Energy (CHK) but didn’t expect the stock to see any real movement until the wintertime. However,some of the warmest winters on record all over the world have greatly changed the course of this stock, and the price of natural gas futures has taken a dive. CHK has underperformed due to record warm winter months and this is something that nobody really could have predicted heading into the winter season. As yet another example of how unforeseen events can affect returns, I invested in specific stocks within another asset class that is overwhelming ignored by the majority of investors (but that we discuss in detail inside our maalamalama members campus). I expected these stocks to produce 60% to 80% returns in a year. Well, when the leading company in this asset class suffered from poor business operations, all of a sudden, the stocks I expected to return 60% to 80% in a year have yielded these types of returns in a matter of six months. So that said, just consider this entry a starter and know that you must perform your own due diligence when it comes to any specific stock selections discussed through the forum of this blog.

According to their website, KongZhong states, “We are a leading provider of advanced second generation (2.5G) wireless interactive entertainment, media, and community services, in terms of revenue, to customers of China Mobile Communications Corporation (China Mobile), which has the largest mobile subscriber base in the world.”As an example of some of KongZhong’s pursuits, they have invested USD$500,000 in eFriendsNet Entertainment Corp. (“EFN”), one of the top social networking portals in China.

Furthermore, here are a list of awards KongZhong has won: KongZhong operates which was recently named “Media with the Highest Potential” at the 2006 China Advertising Summit. KongZhong’s in-house developed mobile networking game e 3-Kingdom was named “Most Popular Mobile Networking Game” at the 2006 China Joy Best Games Contest, and KongZhong Mammoth, KongZhong’s wireless game subsidiary, won the Best Mobile Game Developer, Best Mobile Game Publisher, and Best Mobile Networking Game Operator. For the most part, wireless internet portal applications in China are still considered in the developmental stages, with KongZhong being one of the industry leaders.

On the other hand ZTE Corporation, headquartered in Shenzen, China is a manufacturer of telecom equipment. According to their website, ZTE “develops and manufactures telecommunications equipment for fixed, mobile, data and optical networks, intelligent networks and next generation networks as well as mobile phones.” With $400 million raised in a 2004 Hong Kong IPO, ZTE is aggressively pushing their overseas sales. Although Huawei is the much better known name in Asia (I must admit that before I conducted my research in this area, I was well aware of Huawei but had never heard of ZTE), ZTE so far has managed to avoid the dreaded Chinese piracy claims that plagued Huawei in 2003, when U.S. company Cisco served them with a copyright infringement lawsuit.

KongZhong and ZTE Corporation merit attention for the same reason I said Baidu merited attention at less than $60 a share in one of our very first newsletters. As a region, Asia’s internet growth rate is 200% a year, and China is the largest market by far in the region (and by the way, Baidu hit a high of $126 a share about six months later after I alerted our newsletter subscribers of this opportunity).

A huge boost to KongZhong and ZTE’s future growth prospects is the fact that both companies receive substantial competitive advantages from state protection and advancement of the technology industry in general. ZTE’s connections with the government run even deeper. For example, ZTE was founded in 1985 by a handful of state-owned companies affiliated with the Ministry of Aerospace Industry. Though ZTE no longer has anything to do with Aerospace, their close ties to the Chinese government can only be helpful in business relations.

China furthermore has openly stated a strong desire to unveil its global technology leadership to the rest of the world during the 2008 Beijing Olympics. Both KongZhong and ZTE should benefit nicely as a result of this state-sponsored push. Furthermore, both KongZhong and ZTE should be able to leverage their knowledge of building customer bases in a developing country to other high profile developing markets like India and Brazil, for example.

However, one last word of caution. Certainly, competition in China is fierce and both KongZhong and ZTE have risks of erosion in growth and profits as competition intensifies. In addition, as the U.S. technology index, NASDAQ, appears to be on the verge of a correction, the strategy to take with these two companies would be to slowly buy in on dips in price and to add larger positions on very strong dips or when a prolonged downtrend finally shows resistance. (For a brief technical analysis of the NASDAQ trend, refer to the password protected blog entry from last week’s newsletter). Although I realize that these companies are Chinese, KongZhong does trade on the NASDAQ index, and the performance of the U.S. NASDAQ index still significantly affects tech markets abroad. Even stocks with great potential must be purchased with patience and at the right entry price.


J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top