KONG Buying Opportunity

In my opinion, now is a good time to initiate a small position in KongZhong (KONG). The stock closed at $8.66 Friday, giving it an enterprise value of ~$200 M. I feel the stock may go down a bit further from here in order to fill the gap up that happened after Q4 earnings, but I would be suprised if it went below $8.00, barring any news.

With a TTM FCF of $13.6M, KONG is currently sporting a EV/TTM FCF multiple of ~14.75, and a TTM P/S multiple ~4. Not too bad.

And then there's KONG's growth. Q4 saw sequential revenue growth of 33% and YoY revenue growth of 329%, with sequential and YoY net income growth of 24% and 323%, respectively. Gross margin improved slightly to 65.8%, as compared to 65% for Q3. For more information, the KONG Q4 presentation can be found here, and the SEC filing here. The SEC filing includes management's 1Q05 business outlook.

By all accounts KONG is currently the number one mobile services provider in China. It stands to benefit (1) as the overall WVAS market size grows, (2) as the market consolidates, and (3) as customers migrate from 2G to 2.5G, from which ~93.5% of KONG's Q4 revenues came.

Of course, keep in mind the risks associated with KONG and the other WVAS companies.

Full disclosure: I am long KONG

The opinions expressed in this blog are my personal opinions. I am in no way responsible for trades made or not made because of something read here. One should always do his or her own due diligence before buying a stock.