LTON Q4, Pure-Play Chinese WVAS Stocks

Linktone did very well in Q4, with sequential revenue growth of 17%. The stock popped 5% this morning. As I write it is trading at $7.37.

This stock, as well as the other Chinese WVAS stocks, trades at a low multiple because of uncertainties about (1) the power dynamic between China Mobile and Linktone, i.e. China Mobile's ability to fine and its ability to adjust the revenue sharing structure, and (2) taxation uncertainties. Also, to a lesser extent there is the concern of commoditization, though factors such as proprietary content and branding mitigate that.

Apart from all of this, it is clear that Linktone and KongZhong are trading at serious discounts to where they would be trading if they operated in the United States. So while it would not be prudent to own large positions in these stocks due to the aforementioned uncertainties, small positions make a lot of sense to me at these levels. As Peter Lynch wrote in Beating the Street, "Here's the key question to ask about a risky yet promising stock: if things go right, how much can I earn? What's the reward side of the equation?" Clearly, if the status quo persists for these stocks, the reward side of the equation is sizeable.

Full disclosure: I am long KONG as of mid January, and will initiate a position in LTON within the next week. I do not yet know know enough about HRAY to make an educated judgement.

As always, the opinions expressed above reflect my personal opinion. I am in no way responsible for any trades made or not made because of something read here.