Tom Online

Tom Online. (TOMO:NASDAQ) 2006-05-30.

TOM Online is one of China's leading Internet portals and wireless service providers. Much like Baidu.com, Sohu.com and Sina (which we already have in our International aggressive portfolio).

TOM Online makes its money from a mixture of advertising revenue and proprietary content and services. While it is not yet in the same league as the others in terms of Web traffic , it is the leader in wireless value-added services (WVAS). TOM Online makes most of its money providing proprietary or exclusive multimedia content to users of mobile  phones and other wireless devices.

TOM Online is one of the reasons why companies like Baidu, Sohu, and Sina are watching their backs.
Much of the downturn in this sector, in recent quarters is due to the old guard ceding ground to newcomers like TOM Online, both in traditional ad-driven Internet revenue and in WVAS.

The wireless Internet is still in the early stages of its evolution, with different companies carving out their
own niches. TOM Online has focused on entertainment, with an emphasis on music and trendy content.
In the fourth quarter 2005, about half of its wireless revenue came from music-related products, and total wireless revenue accounted for 94% of the $172 million the company took in during 2005.
Any ad-based revenue is just icing on the cake. "Music-related products" primarily refers to ringtones and ring-back tones . Sports is another area of focus,  and the company has exclusive relationships with CCTV5, the largest sports TV channel in China, and Sports Weekly, China's largest sports magazine.
It also has content deals providing access to games, as well as other sources of revenue outside its core entertainment focus.

Another Chinese portal, NetEase.com has been able to achieve huge revenue growth from a diverse range of wireless services and online content, eventually specializing in gaming as other revenue streams fell behind.  We would wager that the same thing will happen to TOM Online.

WVAS does not face the same competitive pressures as ad-based Internet portals, and TOM Online enjoys a dominant position already. It is the only Chinese company in the top three in every WVAS category.
Analysts are predicting that WVAS revenue in China will grow at a compound annual rate of 28% for the next few years. That would bring the sector from revenues of $770 million in 2004 to $1.6 billion by 2007, and TOM Online should take a decent proportion of that.

In addition, the mobile carriers don't want to manage relationships with dozens of content providers if they can form closer partnerships with fewer companies. China Mobile (NYSE: CHL), which alone has about 250 million  subscribers ( more mobile phone users than there are in the whole USA), is just one such company that has chosen  to partner with TOM Online.

Tom online is a potential takeover target for Sina, which is strong in its portal business but relatively weak in its WVAS component.

Tom Online has a lot of organic growth ahead of it in its own right, but a merger premium could also be on the cards.

Millions of people in China and elsewhere, are willing to pay for online games, ringtones and other WVAS content. The demand for these is growing exponentially and will really increase as China’s affluence grows.
So far the mobile phone penetration in China is only 30%, so there is plenty of expansion ahead.

Buy Tom Online (TOMO:Nasdaq) up to US$28