Thursday, March 15, 2007

Bull Case for HRAY

In the course of doing work on HRAY, another WVAS provider, I came across a great article on Forbes. In the last half, does a good job summing up many of the compelling parts of HRAY. I particularly like their music strategy, whereby they are experimenting bypassing the carriers by selling ringtones to people in music stores. This gets around the issues they currently face with the carriers. I listened to a few conference calls, read the latest 10K, and generally liked the managent quite a bit.

Company looks very attractive at an EV of $30M. They paid about $20M alone for interest in a few music companies. Subtract those out, and your looking at a value of $10M for the WVAS business (vs. roughly $0 for LTON's business, and over $100M for Kong's). Earnings last year were $6M. That's a 5 P/E on a cash basis, and about .5x revenue (on the $30M number). At these prices, I'm thinking that there is very little downside in both LTON and HRAY. LTON appears to be securing content by snatching of valuable television brands, while HRAY is becoming a force in China's rapidly growing online and offline music industry. I will likely initiate a small starter position in both names in the next couple days, and look to add more as I dig deeper into the names, the market, and initiate discussions with management.

I will look at doing a more detailed write-up in the coming weeks.


Ohad said...

HRAY which once was the least attractive WVAS stock , has become the most attractive stock in the field in my opinion. They foresaw the need to diversify and bypass the large operators and that's what probably saved them from sinking to an operating loss like LTON.
the big question is, now that that their music business is getting more substantial and bares higher margins, perhaps they are not a pure technology company anymore but a content company just like a conventional record company

Research Intensive Investing said...

That is my impression as well--that they are most clearly the company that has decided to go the content route (which, at least in relation to WVAS, I think will be the most attractive strategy). HRAY is also currently my favorite in this space, at least from the standpoint of defending and growing their WVAS business against the operators. Management also strikes me as innovative and ahead of the curve, which is an extremely valuable asset in a space as quick and opportunity laden as China's internet market.