Newsletter Watch: Cheers for China's Hurray!
Although many newsletter advisors focus on the overall stock market and choose stocks from a variety of sectors, some have chosen to approach the advisory field by developing an individual sector.
By focusing exclusively on a specific niche, these advisors often gain insights into trends within the sector that others may miss. One advisor who has developed an industry-leading position is Nikhil Hutheesing, whose area of expertise is the wireless market.
The editor of Forbes Wireless Stock Watch has recently added Hurray! Holding Co. LTD (Nasdaq: HRAY) – a company with a market cap of just $114 million -- to his buy list, noting that he believes the wireless play will become a “Chinese mobile powerhouse.”
Despite the volatility in China's stock market, the advisor says he remains a long-term believer. “And wireless is still among the fastest growing industries in China,” says Hutheesing.
“Some 4 million new customers sign up each month for wireless service,” says Hutheesing. “It's a big business for the government run wireless carriers such as China Mobile and China Unicom.”
Due to government regulations within China, the company has had to restructure and refocus its operations. Hutheesing explains, “In the middle of last year, the Chinese wireless carriers changed their policies.”
Hutheesing says the government, which requires wireless content to be delivered only through the wireless platforms offered by China Mobile and China Unicom, boosted fees and in turn took a cut of the content provider's profits. He states, “For content aggregators, it became pretty clear that they had little control over their businesses.”
The result, he notes, is that the stocks of many key players in the market plunged. Despite these challenges, he adds, “Hurray! is one company that changed its ways to survive. It has singled itself out and is emerging from the chaos admirably.”
Hurray!'s turnaround started in 2004, Hutheesing notes, when CEO Qindai Wang realized that he had to change his business model to survive the government's hits. His feeling was that in order to get his in-depth library of music, videos, ring tones and wallpaper to the masses, wireless was the best way.
“So Wang started the process of turning his company from an aggregator of content to a producer of content,” Hutheesing says, “The plan: instead of bypassing Hurray!, the carriers would come to Hurray! in search of content.”
To do this, he says, the company went into acquisition mode and acquired three recording studios, as well as 30% of the shares of Beijing-based New Run Entertainment for 18 million yuan and the exclusive right to distribute most of the company's owned entertainment. Now, Huteesing notes, the company owns about 7% of the music distribution market in China. Its goal is to get to 25%.
Says Hutheesing, “The strategy is working. As a content owner, rather than aggregator, its margins are much greater and its risk of being bypassed by the carriers is much less.”
Further, he adds, Hurray! recently acquired Shanghai Magma, a game developer with over 200 titles – making it one of the largest mobile game developers in China. And the company is looking at other ways to distribute its content. The advisor points out that Hurray! is partnering with Chinese websites such as Baidu, Sina and Sohu — all of which are popular Web portals in China.
As to valuation, Hutheesing observes, “The shares are down 39% from their peak in April, 2006. Going forward, I estimate that HRAY will bring in revenue of $77 million in 2007, up 10% from 2006. And earnings per share should come in around 28 cents, up 13% year-over-year.
Trading just above $5.00, he notes that the stock trades at about 1 time the revenue forecast for 2007 plus $3 per share in cash. He adds, however, “If you factor in the music business, which increasingly accounts for a bigger share of the company's revenue, you have to apply a higher price-to-sales multiple.”
In conclusion, he notes, “In essence, I think Wall Street isn't yet hearing the beautiful music of HRAY's new business model and its music company acquisitions. The average price-to-sales ratio of the music companies it has acquired is 3. Very conservatively, if you value HRAY as a music play you get a 12 month target price of $10.25.”
Steven Halpern is the founder of “TheStockAdvisors.com - Steven Halpern's Guide to Financial Newsletters,” the first website to feature a daily overview of the investment newsletter world.
