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Michael Logan

Investors seeking  to cash in on the mainland's growing appetite for mobile-phone ringtones, downloads and multi-media messaging are spoilt for choice, with five companies already vying for attention.

And the competition for capital is about to heat up, with three more planning to list amid concerns that the additional supply could prove too much for the market to swallow.

On Friday, KongZhong submitted papers for a US$100 million Nasdaq Stock Market initial public offering. This followed a $55 million application by Mtone Wireless in April.

At home, Tencent Holdings has begun marketing its HK$1.55 billion Hong Kong IPO.  The company is known for instant-messaging services but Tencent derives the bulk of its sales from wireless value-added services (VAS).

The  entrants will join listed internet portals NetEase.com, Sina.com, Sohu.com and Tom Online, which provide VAS products such as ringtones and downloads, along with Linktone, a pure VAS play.

Market watchers say valuations could come under pressure as the latecomers struggle to attract investor interest.

'I think the pricing will be tough [for KongZhong],' DBS Vickers analyst Wallace Cheung said, noting Tencent was expected to price its shares at just 12  to 14 times forward earnings.

In addition, Tencent's popular QQ instant-messaging service could overshadow rivals KongZhong and Mtone, which were not as well-known.  'Why should I buy a  less well-known product?' Mr Cheung asked.

Philip Securities research director Louis Wong Wai-kit said he was   unsure if the flood of new supply would exhaust investor appetite for mainland technology plays, particularly among United States investors.

'The market will decide. But for the moment, overall investor response toward Tencent seems quite positive,' Mr Wong said. 'I think the overall attitude is still positive, especially in the gaming sector.'

Tencent plans to use part of its IPO proceeds for acquisitions and one possible area is online games.

The new issues could create a mini bubble in the wireless VAS sector but each has a distinguishing feature lacking in the previous technology boom - profits.

KongZhong earned US$2.4 million on sales of $7.8 million last year, its first full year of operation. Earnings in the first quarter alone were $3.1 million on revenue of $7.1 million. Mtone had $1.09 million in profit last year on revenue of $21.6 million, while Tencent earned 322.19 million yuan on 734.95 million yuan in revenue, of which 63.64 per cent was from wireless VAS business.

As many as 880 service providers supply content to China Mobile, the mainland's largest mobile-phone operator.

'It goes to show that the pie is big enough,' Mr Wong said.

While the eight companies compete for wireless VAS business, supporters of the technology plays stress their differences.

Mr Cheung has been a proponent of NetEase because of its diversified business model: online gaming has displaced VAS as the firm's main revenue contributor.

He said Tencent should also not be lumped in with the others, arguing money could be made off its 291.3 million registered users by offering services other than VAS products. 'You can classify Tencent as wireless, but I'd rather not do it ... wireless is just a way to monetise the community.'

KongZhong, meanwhile, is likely to pitch itself as the leader in providing VAS products for 2.5-generation handsets. In the first quarter, about 73 per cent of revenue came from 2.5G products, which have higher margins.

Gartner Dataquest estimated  48 per cent of handsets sold in China this year would have 2.5G capability, rising to 60 per cent next year.

But Mr Cheung doubted this would be enough to stoke investor interest, saying the spotlight this year was on interactive voice response services,  a market  Tom Online  now dominates.

'2.5G is too remote. It's not the focus of China Mobile at the moment,' he said.

UBS Investment Bank is the lead sponsor of the KongZhong issue, while Bank of America and CIBC World Markets are co-sponsors.



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