Report on TCOM
Microcap Monday: Triple Digit Gains on TCOM ($0.55)
Monday, August 8, 2005
By Danny Deadlock
Note: Conflicts and Disclosure Policy- StockHouse Editorial writers may own, buy, or sell shares in public companies mentioned in their articles. Please be advised that a conflict may exist and that any investment decisions you make are your own responsibility. You should not make any kind of investment decision in relation to these articles without first obtaining independent investment advice from an authorized investment advisor. Complete Conflicts and Disclosure Policy.
Visit the Danny Deadlock Bullboard here.
Important Notice: We speculate on microcap stocks, we do not invest. Speculating on microcaps (penny stocks) is nothing more than educated gambling and you must always be aware that it is extremely high risk. The returns can be tremendous, but never speculate with more than you can afford to lose as they are often subject to extreme volatility. We are not investment advisors but are here to provide insight into various aspects of the market and research into microcap stocks we feel offer strong growth potential over a 12 to 18 month period.
The Importance of TCOM SME's to Baidu
Remember the good old days? January 2000, when foreign taxi drivers had stock tips and your stock broker actually made you money? Well it was deja vu all over again on Friday when the shares of Baidu (NASDAQ: BIDU) gained 400% on the opening day of a new NASDAQ IPO.
If you haven't watched the news since Friday or picked up a newspaper, you likely don't know that Baidu is billed as the Google of China. The company commands about 80% of the search engine market in China but unlike Google, its revenue is dramatically lower (forecasted to be in the range of $30 million U.S. for 2005). However, it’s the future earnings potential that has everyone licking their lips.
In the United States (297 million people), approximately 68% of the population use the internet. In China (1 Billion people), approximately 10% of the population are on the internet. This also doesn't factor in the 300 million mobile phone users in China who are very tech savvy. Many analysts (including myself) believe China is at the point of internet usage we saw in North America during the mid 1990's. And we all know the type of explosive growth companies saw within a few years of that (in particular the early market leaders).
Many parts of China will unfortunately never see the technology needed for internet access but even with 50% market penetration in three years, the numbers are staggering. As China's population and economy continue to grow, the number of internet users could grow to several hundred million. First consider the following statistics:
Population estimate for North America in 2005 - 328,387,059
Internet users as of June, 2005 (68.0% penetration rate) - 223,392,807
Right now Google commands a market cap in the range of $80 billion. Baidu is currently worth $4 billion (based upon a share price of $125). The big difference right now is in revenue. For the last quarter, Google reported huge revenue of $1.3 Billion and Q2 net profit of $343 million. Baidu on the other hand will see revenue in the range of $30 million for all of 2005.
So how is it a company with such small revenue by comparison can command a market cap in the range of $4 billion? It’s because of the statistics above and the future growth potential. Institutional investors, hedge funds, and even retail investors, are all gambling that China is in the early stages of the same cycle we saw in North America several years ahead of the 2000 tech boom.
Importance of SME's (Small and Medium Enterprises)
For several years no one could understand how to make money on the internet - particularly through search engines. Even in 2000, companies like Yahoo, MSN, and Google were receiving enormous traffic to the search engines, but no one had a profitable business model. It was a lot like having a computerized index system for the world’s largest library and shopping center. Millions were walking through the door every day using your system for free, but who was going to pay the bills? It sure wasn't going to be the visitor or consumer - even though they wouldn't know where to start without your service.
Then along came a company called goto.com who thought of charging the businesses interested in selling something. The business or vendor (SME) knew by that stage it was impossible to get listed at the top of the search engine results and if you weren't on that first page, it was like finding a needle in a haystack. So Goto came up with a "pay per click" business model that didn't serve up the banner ads everyone was ignoring, but instead moved search results for specific keywords to the top - but only those results people or companies paid for. The vendor got exposure and only had to pay each time the user clicked on that search summary ($0.05 to $XX based upon a competitive bidding process for keywords).
It was a lucrative model and the first time major search engines saw a method of making money from search results - and making lots of it. It didn't take long for Yahoo to buy out Overture for $1.6 billion and now companies like Google are raking in enormous amounts of cash from search results using that same Overture concept.
So what is the importance of the SME?
Search engines depend upon millions of people like you and I to search for stuff on the internet every day. But do we pay for it? No. Large corporations are search engine advertisers but primarily it’s the small to medium sized business - anything from Jane Smith selling knitted sweaters in Alaska to a midsized insurance company in Toronto that employs 300 people.
If you took a detailed look at who is generating the revenue for companies like Google, Yahoo, and MSN, it's not the world's largest corporations or the individual consumer. It's the thousands of small and medium sized businesses (SME's) across North America who have something to sell.
China is no different, and while investors are awestruck over the growth potential of the internet in China, everyone is overlooking the importance of the SME in that country. Even with Baidu, when the smoke settles, it will be the SME's across China and abroad (those that want to sell something to the billion people in that country) that will pay the bills and drive top line revenue growth for the search engines.
That Brings us to Telecom Communications, Inc. (TCOM/OTCBB $0.57)
One of the reasons we started following this company in the first place, was their advanced technology for the internet and mobile phones, world class customer service, and their experience and understanding of this huge but unique market. Of particular importance, and the area that most are overlooking even with Baidu, is their focus on one million SME's in China.
A major component of TCOM's (OTCBB: TCOM) business model is providing products, services, and technology tailored specifically for the needs of the SME. Technology that not only assists them with marketing and promotion over the internet, but over mobile phones and wireless devices. When you consider that this country already has 300 million mobile users, the potential of this aspect is incredible when you combine it with growth of the internet.
TCOM may lack the public profile of Baidu but it's access to SME's and decision to quietly focus its resources on building that niche market is very important. It’s the SME that keeps the lights on at the end of the day. The company has already signed up thousands of SME's for their latest technology services and they have a very strong working relationship with a private company called ICChina. ICChina is likely the largest B2B network in China linking hundreds of thousands of SME's with government agencies, suppliers, etc.
Conclusion
Our last StockHouse update on TCOM was July 4th in the low/mid $0.20's. On Friday TCOM hit $0.75 and pushed our one month gains as high as 200% before moving back into the mid $0.50's. We're still looking at a nice double for the month but TCOM is intended as a long term play for us. The internet has a long way to go in China and these early leaders will likely see the bulk of their gains in the years to come. Besides Baidu, there are half a dozen other major players in China that trade on NASDAQ but they are all priced in the double digits.
TCOM's current market cap is in the range of $40 million - a far cry from everyone else who boasts valuations in the billion dollar range. TCOM still has a lot of work ahead of it to catch up on the revenue side (forecast is $15 million for 2005) but their % growth to date has been tremendous and I believe we are only seeing the tip of the iceberg right now. Their business model is very solid, the potential in China enormous, and their decision to focus on the SME is very wise as no matter how you slice it, the SME is the cash cow.
--------------------------------------------------------------------------------
Danny Deadlock owns 25,000 shares of TCOM
