This column was originally published on RealMoney on Feb. 6 at 1:36 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

China is hot, and the wireless communications industry there has been in rally mode. However, one segment of the Chinese consumer market that is cruising beneath many investors' radar screens is the wireless value-added services (WVAS) industry.

When you consider that China, already the world's largest mobile-phone market, experienced mobile-phone subscriber growth of 18% in 2005, it's easy to see the potential in this massive growth market for mobile commerce services.

To many Chinese consumers, one's mobile phone is an extension of one's personality. Customized ring tones, games and entertainment downloads are must-haves for those who can afford them and a high priority for teens and young adults.

WVAS products include SMS (text messaging), interactive voice response (IVR), downloadable games, ring tones and music and wireless access protocol (WAP) Internet access. It is currently a $20 billion industry in China and is forecast by analysts to grow by 20% each year through 2010. With that kind of growth rate, the industry can afford to trade significantly higher than the current average price-to-earnings ratio of just 18.7.

So how can investors access this market? There are three Chinese WVAS plays worth further investigation: Tom Online ( TOMO), Linktone ( LTON) and KongZong ( KONG).

Check Out Tom Online

With a market cap of $1.25 billion, Tom Online is the largest player in the WVAS industry, and it also has the most balanced revenue mix, with SMS-based, IVR (2G) and WAP (2.5G) services each contributing nearly a third of sales.

In 2005, the company's revenue increased by 39.6% to an estimated $171.4 million, and EPS jumped 13.6% to 85 cents. This year, Tom Online is expected to earn $1.03 per share on revenue of $211.7 million, giving it a forward P/E of 21.8. Shares closed Friday at $22.15 and trade an average of more than 345,000 shares daily.

With a market cap nearly three times that of its next largest competitor, Tom Online has a size advantage that gives it more leverage in negotiating contracts with carriers. Because of this, it trades at a premium to the industry, but it still has room to grow. With industrywide multiple expansion, shares could easily move above $30.

Line Up With Linktone

Linktone boasts more than 8 million subscribers as well as partnerships with Sony Music, EMI, Turner Media, Star Network and other application and content developers. The aggregation of all these deals lets Linktone offer one of the largest wireless media service portfolios in the Chinese market.

In 2004, Linktone grew revenue by 203.1% to $50.3 million, a staggering growth rate that declined in 2005 to 44.7%, ringing in sales of an estimated $73 million. In 2006, analysts forecast earnings of $0.57 per share on revenue of $92 million, giving Linktone a forward P/E of just 12.6, a discount to the industry average of 18.7.

Still, its revenue stream is heavily concentrated in more basic, commoditized, SMS-based services, limiting its prospects with the adoption on 2.5G and 3G handsets. On Wednesday, the company warned that fourth-quarter and full-year 2005 earnings would fall short of previous estimates, citing higher costs and weak sales, highlighting the margin risk from its SMS revenue concentration.

Linktone closed Friday at $7.23 and trades an average of more than 245,000 shares daily with a market cap of $185 million.

The Thing About KongZhong

KongZhong, on the other hand, derives about 71% of its sales from next-generation services available on 2.5G and 3G mobile handsets.

Its 2005 revenue is expected to be reported at $76.5 million, representing growth of 143% for the year. 2005 EPS is expected to have grown by 33% to 80 cents. In 2006, KongZhong is forecast by analysts to earn 90 cents per share on revenue of $95.7 million.

With positive 2.5G adoption trends and the expectation that China will begin awarding 3G licenses some time this year, KongZhong is positioned to accelerate its growth rate ahead of its competitors.

Another advantage KongZhong has is its margins. Although Tom Online, Linktone and KongZhong each run profitable, cash-flow-positive and essentially debt-free operations, KongZhong has the highest operating margins at 31%, compared with 25% at Tom Online and 19% at Linktone.

Because of KongZhong's balanced revenue stream and wide operating margins, shares should trade at a premium to its competitors and could move above $18 in the coming quarters.

KongZhong has a market cap of $438 million and trades an average of more than 280,000 shares daily. Shares closed Friday at $12.70.

While the WVAS providers have experienced explosive revenue growth over the past few years, additional growth catalysts are still on the horizon. Those catalysts include the adoption of 2.5G and 3G mobile handsets and the offering of MP3 downloading services to subscribers.

For instance, China Mobile ( CHL), which accounts for nearly 250 million Chinese subscribers, is gradually extending 2.5G services to its 180 million-plus prepaid users, creating enormous incremental demand, according to analysts at Susquehanna Financial.

These next-generation handsets enable faster download speeds than conventional 2G handsets and allow WVAS providers to offer additional services, such as multimedia messaging services (MMS), wireless application protocol and Java-based services.

Overall, the Chinese WVAS industry hasn't received the love it deserves. Right now, it trades at a discount to its expected growth rate, and that multiple should expand as investors begin to price in the potential of the industry.

With that in mind, KongZhong should outperform the group, as the best performers in the industry will likely be the players that are most concentrated in next-generation services for 2.5G and 3G phone users.
In keeping with TSC's editorial policy, Daniel Adams doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Daniel Adams is a research associate at TheStreet.com, where he works closely with Jim Cramer. Previously, he was an analyst with Kaye Capital Management in Los Angeles.

He appreciates your feedback; click here to send him an email.

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