New China Mobile WVAS Revenue Sharing Model
As reported last week, China Mobile (CHL) has made some major changes to its WVAS revenue sharing model. Historically the service providers took 85% and China Mobile took 15%. With the new changes the service providers will take 85% going forward only if they do all of the marketing and customer service related to the WVAS product. China Mobile will take 30% or 50% instead of 15% depending on the amount of marketing and customer service responsibility they take on with regard to the service provides WVAS product.
I tend to agree with Paul Waide from Marketwatch on most of the outcomes of this new policy:
I really think that this new policy will speed up the pace of consolidation within the Chinese WVAS marketplace. Smaller companies will likely be willing to be taken over at a lower earnings multiple than in the past as they may not have the capabilities of taking over all the marketing and customer service required to keep the 85/15 split. The larger players like SINA, KONG, TOMO, SOHU, LTON, HRAY, NTES will likely to be able to increase the size of their customer list (and cross market additional services to them) by buying up some of the smaller players. Of course as we learned last year, the larger players should do their due diligence before any acquisitions so as to avoid any regulatory problems related to China Mobile policy violations (pornography, gambling, fortune telling, billing problems, etc) at the companies they are acquiring.
In my opinion this news is positive for most of the publicly traded WVAS players as it removes some of the uncertainty in this space going forward. I see KONG, LTON and HRAY as possible acquisition targets (although they also may be doing some acquiring of their own). TOMO, SOHU, SINA, SNDA, Tencent, NTES and other firms public and private may be looking for smaller WVAS companies to acquire.
Each of the portals has different advantages and disadvantages and varying reliance on WVAS, so it is hard for me to pick clear favorite. Among the pure WVAS players KONG, LTON, HRAY (based on revenue percentage from WVAS we could probably include TOMO here also, but based on their portal and more diversified business I will not) I like KONG the best (although I like HRAY and LTON also). While HRAY trades at a lower PE ratio I like KONG's higher cash position, leadership in 2.5G and mobile games on the China Mobile network, and prospects for 3G going forward. LTON has a much higher percentage of revenue coming from 2G than HRAY and KONG which I do not like as much.
Disclosure: I am long NTES, SINA, SOHU, SNDA, KONG, TOMO