China's Wireless Dragons

By Aaron Levitt | June 12, 2009 AAA

With an estimated population of 1.3 billion people, one of the biggest appeals to investing in China is the growth of its vast consumer base. The basic idea is that as the nation prospers, Chinese citizens will crave and want all the necessities and "toys" we have here in the West - everything from Burger King (NYSE:BKC) Whoppers to fancy lattes.

One of the more interesting consumer stories in China is in the growth of its cellular and wireless market. More than 160 million mobile phones were purchased by Chinese citizens in 2008, with analysts estimating another 5-8% increase in 2009. Add this to the several hundred million more who do not currently have a cellular phone, but have access, and you have an opportunity for robust future growth.

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The Wireless Leader
With about 75% of market share for mobile phone service in China, China Mobile Limited (NYSE:CHL) is the leader in wireless. Boasting a subscriber base of more than 470 million - significantly larger than entire population of the United States - the company has been minting growth. China Mobile produced nearly $10 billion in free cash flow in 2008 and increased operating revenue by more than 15%. In addition, the company recently inked a deal with Taiwanese telecom giant Far EasTone Telecommunications for $528 million, giving China Mobile a 12% stake and access to EasTone's vast market. The stock also pays a 3.5% dividend. (For related reading, check out The Power Of Dividend Growth.)

Money in Value-Added Services
With the creation of Apple's (Nasdaq:AAPL) iPhone and its Apps store, we in North America are getting a taste of what's been going on in Japan and parts of Asia for years; the cell phone is becoming a lifestyle device. For example, in Japan, the mobile phone functions as a credit card, television, internet browser and music player, among other uses. In China, the market for these value-added services is increasing exponentially. Analysts forecast that these services will generate more than $11.5 billion revenues in China by 2010, a 48% surge over 2006 levels. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

KongZhong Corp. (Nasdaq:KONG) represents an interesting way to play the growth of these value-added services. The company operates many channels of mobile content in China, including designing games for mobile play, wireless application protocol (WAP), multimedia messaging service (MMS), operating mobile websites, and color ring-back tone, which is the fastest growing category in Asia. The company reported first-quarter earnings in May of 7 cents per American depositary share (ADS). Revenue for the wireless firm increased to $29.6 million, up from $21.4 million a year ago.

Institutional investors have been taking notice at the growth in the value-added marketplace. Recently, Nokia Corp. (NYSE:NOK), through its Nokia Growth Partners venture capital fund, invested $6.8 million in five-year convertible senior notes with KongZhong, highlighting the potential growth in this area. The company finished the first quarter with nearly $141.67 million in cash and equivalents.

Bottom Line
The sheer size of China's population provides many investment opportunities. One of the more interesting opportunities is in mobile communications. As the nation's wealth increases, more people will demand these products. The preceeding two companies provide investors with the opportunity to profit from China's growing consumerism.

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