2Bull Forex Blog

While the American economy may be entering a period of uncertainty, where leading economic indicators are predicting a slowdown in the domestic market, in more emerging markets, as has often been reported, such as China, the economy is booming at incredible rates with the consumer becoming the beneficiary of the results. Consequently, as the consumer becomes more affluent, relative to previous years, more discretionary income will be found to be used for entertainment purposes. As a result, by deduction, companies such as Kongzhong (KONG) will immediately be impacted in a positive manner which will help its top and bottom lines, promoting optimism for shareholders.

As reported on the Yahoo! Finance profile page, Kongzhong, part of the business service industry, promotes a variety of products and services relative to entertainment, media and community purposes. With promotions and products forming from ideas such mobile phone entertainment enhancers, message boards, and contents about domestic and international news, while this company only has a stronghold in the nation of China, because the country is the largest nation in the world relative to population, and because this country has seen incredible growth relative to GDP indicators, I believe the environment Kongzhong presents itself in is a favorable one to the Chinese community. As this corporation is located in Beijing, there will be little problems such as currency rate fluctuations or geopolitical interruption as the company can focus only on its relative market. While some investors may be wary of investing in China because a country cannot grow and sustain such growth forever coupled with the possibility of a strong economic recession, I believe it is inevitable that a nation like China and India, with so much potential and already promoted growth, will continue such advancements to the economy, benefiting the consumer which will ultimately benefit Kongzhong. In addition, as more consumers become wealthier, since Kongzhong promotes a more luxury service, there will only be great benefits in terms of fundamentals in the coming years for this business.

While there may be some concern of putting to much faith for future fundamentals this company may produce, it is not to say that this company does not already have solid figures. While revenue has stabilized over the last fiscal year from growing almost 514% to now about 62%, such growth, especially for a company which formed only a few years ago, is remarkable. In addition, because the company is categorized as a small cap stock, there seems to be some sentiment around Wall Street that more money is pouring into these smaller growth companies in 2007 because the large cap value stocks had maxed out in 2006. Such may be a blessing in disguise for Kongzhong, especially since the company has a PEG ratio of about 0.64 for the next five years which not only indicates it is a strong buy value wise but has the growth to acquiesce with the given proposed sentiment. Nevertheless, many investors may also contest that the forward P/E ratio is higher than the trailing P/E ratio which would signal an overbought share price or indicate decreasing earnings.

While there is some justification with a release, there is always going to be a change in predictable earnings, and with the given economic situation, I believe earnings will surprise both shareholders and analysts. In addition, it’s forward earnings multiple of about 17 is still far below the industry average of 40. Not only that, but compared to industry competitors such as large capitalizations companies such as Thomson, Chicago Merc, or MasterCard, while the business service is a bit different with each company, Kongzhong’s earnings multiple is still well below all of these corporations. Furthermore, while earnings relative to share price will not be that favorable to investors in the future as predicted, there is still some optimism surrounding other comparable multiples in the form of revenue and sales. Kongzhong’s p/s, at about 2.81 over the last twelve months, while relatively normal, can be transcended to include other ratios which would lead to the argument that this company is undervalued. With an enterprise value to revenue level near 1.69 and an enterprise value to EBITDA ratio of about 6.7, both numbers illustrate that this company is undervalued relative to share price in terms of both revenue and cash. Furthermore, Kongzhong has a ROE above 20% which is much higher than the 13% ROE industry average and has contributed to a current ratio at an astonishing 13.4. While its true that this company is still relatively new and will assume more debt in future years with expansion, having that much asset coverage relative to liabilities is an excellent trait to have and will contribute to more optimism with investors and future growth.

The low amount of debt has also led to a smaller enterprise value relative to market value which, with low multiples in relation to the enterprise value, again contributes to the undersold labeling of this company. Nevertheless, the one area that concerns me is the high beta and relation, over the past 52 weeks, to the S&P 500. While the S&P has grown over 10% during this duration, Kongzhong has decreased in share price over 36% during this same time. However, 2006 was a year more inclined for the large cap value stocks, and with more money still flowing into the market, it is time for small cap growth stocks to begin to rise in terms of share price which means Kongzhong should be the beneficiary of the situation, especially since the S&P is supposed to have a great year percentage wise.

Thus with the good fundamentals and excellent economic setting, Kongzhong should benefit in 2007. In addition, looking at the charts, it seems, when examining the simple moving average of 100 days that Kongzhong has hit a support level of about 6.75 and is rising in a rally type movement. In addition, with high upward volume movements in December, there seems to be more optimism pouring in from investors who are eager for this stock’s share price to rise. Therefore, as the charts indicate with strong support from fundamentals and economic conditions, Kongzhong is on an upward trend, and as an investor, you should take the opportunity to examine this company, regardless its capitalization, and think about purchasing shares.