It looks as if the harsh regulatory environment we began to witness last year is going to stay. The bad news is that wireless revenues will likely be down sharply across the board this coming quarter. To date these are the major new regulatory changes the portals we have to deal with:
1. Migration of MMS onto the MISC billing platform (this will be similar to the SMS migration from last fall). Under the new system, costs will increase since the portals will have to deal with each of the individual provinces.
2. New revenue recognition policy at China Mobile will mean no payment to the portals for undeliverable messages
3. New SARFT regulations on TV and radio advertising will make it hard for the portals to drive future new usage based business based of the current banned format.
4. Although unsubstantiated to this point there has been talk for some time of the existing revenue share agreements being renegotiated by China Mobile, China Unicom, etc.
The negatives above are clear and should continue the downward pressure on share prices in the near term. However there are many long term positives and the recent sell off may be a buying opportunity for long term investors with a high risk tolerance.
- Relatively small wireless exposure. The online gaming market is continuing to grow fast and NTES is a major player. I hope to see them step up their casual gaming and mobile gaming efforts going forward. The quality of new 3D games will need to improve post WOW so it is possible there could be some delays in the release dates on new games. However NTES does have strong internal game development capabilities, can tailor games to local Chinese culture, high margins and a reasonable valuation. I look forward to seeing their earnings report
- Their casual gaming platform I-Game is growing quickly, as is 1Pai.com the YAHOO/SINA auction partnership (although significant auction profits should be a long way off). Wireless continues to be under pressure, but SINA may benefit if other smaller players are pushed out of the business in the new environment. Advertising should continue to grow strongly in the long term as more and more Chinese people gain internet access. The 2008 Olympics should raise the profile on the entire section. I think SINA is a good long term bet, but it is hard to predict short term performance
- They have continually disappointed me on their execution in the gaming and wireless area. They are no longer relying on wireless (as a percentage of their business) to the extent they used to be. However SOHU is still the second most popular portal in China (they also hold Chinaren.com, focus.cn and 17173.com which are valuable as well) and trade at a very reasonable valuation. Short term positives may include increased advertising from EBAY as EBAY tries to battle with 1Pai.com and Taboa. In the long term even totally discounting every other revenue source, advertising should be enough to support the stock.
- The portal is not as popular as the above, but I have been impressed with management thus far. The Skype/TOMO IM partnership seems to be gaining ground quickly and the India Games acquisition seemed very smart. TOMO may have the best international expansion possibilities of the portals above. The valuation is also attractive.