KongZhong launches Nasdaq IPO

China''s leading 2.5G service provider nears end of pre-marketing.

Lead manager UBS is preparing to launch a $100 million Nasdaq IPO for wireless VAS (Value Added Service) provider KongZhong either at the end of this week or early next week. Fund managers say roadshows are likely to run for two-and-a-half weeks ahead of scheduled pricing at the end of the week beginning July 5.

The company is aiming to raise a fixed amount and will likely issue between 20% and 30% of share capital subject to the valuation it can achieve. The majority of the offering will be primary shares, with an as yet unspecified secondary share offering.

Co-leads are Bank of America and CIBC.

The deal is being pitched on a PE range of about 18 to 22 times 2004 earnings. At the bottom end of this range, the company will price at a premium to its lowest comparable stock - Tom Online, currently trading at 16 times 2004 earnings. At the top end, it will also price at a premium to Linktone, currently trading at 20 times.

However, lead mangers have been telling investors that KongZhong deserves a premium because it offers the next step up the technology chain. Where the original wireless VAS operators derive their revenues from 2G services, KongZhong is predominantly 2.5G oriented.

And because it is being listed at an earlier point of its growth cycle, specialists argue margins and EPS figures will expand much quicker, making the valuation more attractive for investors on a 2005 basis, where it will price flat to all the 2G comps.

However, the company needs to convince investors it has staying power since it was only founded in 2002 following the launch of 2.5G services by mobile operators China Mobile and China Unicom. KongZhong is billed as a "portal on your phone," with subscribers activating its services via a special button on their telephones.

Since launch, its growth profile has been impressive. In 2002, the company recorded revenues of $200,000. At the end of 2003, revenues were up to $7.8 million and net income $2.4 million. Then in the first quarter of 2004, KongZhong beat its full 2003 figures, recording revenues of $7.1 million and net profit of 3.1 million.

For the full 2004 financial year, analysts are projecting revenues of $48 million and net profit of 22 million, a seven-fold increase over 2003. In 2005, net profit is forecast to double again.

Margins are also high, with the company recording a net profit margin of 30.7% in 2003 and forecast margin of 44% in 2004.

This is because 2.5G enables the company to transmit higher quality graphics and content to its 7.7 million subscribers. It does this in three ways. WAP (Wireless Access Protocol) allows users to browse the internet on their phones. MMS (multimedia messaging) them to enhance messages with sound and images. A Java technology platform allows them to play interactive games.

2G service providers, on the other hand, are limited to more basic text messages and IVR, which enables additional functionality such as sending songs via phone, downloading customised ringtones and accessing voice chat rooms.

At the end of the first quarter, 2.5G accounted for 73% of KongZhong's revenue compared to 7% at Sina and 5% at Linktone. The company believes its first mover advantage and brand name will enable it to retain its position as China Mobile's top 2.5G service provider.

It has also recently signed an agreement with China Unicom, allowing it to run 2.5G services over the latter's network in competition with Hurray, which has mandated Citigroup for a similarly sized Nasdaq IPO.

According to independent research house Analysys, KongZhong is China's top WAP service provider followed by Beijing Mobile Navi, Tom Online, Shen Xuntian Technology and Tencent. It is also the country's leading MMS provider followed by Tom Online, Sina, NetEase and Sohu.

Specialists say the company has three main product lines: interactive entertainment; media and communications. The first covers mobile gaming, which accounts for 30% of overall revenue and karaoke on the phone. The second encompasses browsing news across the web and the third mobile chat rooms and messaging.

According to Analysys, revenue from WVAS in China is set to grow from $450 million in 2003 to $800 million in 2004. In 2002, the figure stood at $200 million.

WAP and MMS services are set to see revenue growth from $53 million in 2003 to $180 million in 2004. It also estimates that 48% of new mobile phone purchases will have 2.5G capabilities in 2004, rising to 60% in 2005.

KongZhong was founded by Zhou Yunfan and Nick Yang, who had previously established portal ChinaRen before selling it to Sohu.com in 2000. Together they now own 45% of KongZhong. Major venture capital investors include Draper Fisher Jurvetson (9%), Global Lead Technologies (13%), Calver Investments and eGarden (6%).

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