Mediaring @ 22.5 cts ( Internet / Singapore ) 4 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Limited profit track record; growth could be hobbled by disproportionate growth in direct service fees and marketing expenses

2.Difficult to see what differentiates it from peer service providers

3.Tendency for hype in the sector

What a difference black ink and some attention makes. Mediaring, of course, has been a hot stock these few days; after languishing at 14-15 cents with no buying interest for several months, it rose to as high as 24 cents these few days, a >50% price rise, on the back of its interim profit (after several years of losses) and probably more importantly, a placement of new shares to a reputed investor group (Newsmith) albeit at the rather low price of 16 cents.

Mediaring sees itself as one of the largest pure play VoIP, or internet telephony, outside of the US, and I am not about to dispute this claim. Likely this is on the basis of revenue, which is made through selling the VoIP services online and also the associated peripherals (PC phone). Indeed, its revenue has been growing at a 50-100% clip these last 3-4 years; this is not a new phenomenon. Yet the company has only just turned profitable this half-year; surely that says something about the viability of the business? Indeed, an examination of the P&L for 1H05 sees revenue growth of ~90% accompanied by a more than proportionate increase in sales/marketing expenses of ~160% and direct services fees of ~70%; these two components constitute its main costs, and suck up most of the revenue such that pre-tax profit margin is only 1-2%. Direct service fee expenses are likely to grow proportionately with revenue; they are payments to the Internet infrastructure providers. As for sales and marketing expenses, it has been increasing more than proportionately in relation to revenue growth these few years; a look-through of the annual statements from 2003 onwards showed that sales/marketing expenses had doubled every year!!

VoIP is probably a more usable service today compared to say, during the 2000 dot-com boom period, given improved Internet penetration rates and the advent of broadband. However, my doubts about this Internet sector remain; firstly I cannot see what distinguishes Mediaring's VoIP service from other VoIP providers, some of which are free (eg. Skype), and that is despite the high sales/marketing expenses. Secondly, there is no shortage of cheap substitutes for VoIP; I have been using pre-paid Phoenix phone cards to call fixed lines in Shanghai and for a S$10 calling card I get 250 minutes of calltime; that's about 4 Singapore cents a minute. How much does Mediaring charge for the similar destination? 5 US cents a minute. Where's the cost competitiveness of VoIP? And mind you, the voice quality of these pre-paid international calling cards' phone service is excellent too.

I shall not talk about PE at this point because it is ridiculously high and probably meaningless. It would be fair to say that revenue growth in 2H05 would still probably be strong but profit should be the one investors should concentrate on. Hey, we have already had the lesson of one dot-com crash, surely we don't need another one? Mediaring is certainly a dot-com company in spirit; just look at its management review of operations: "The Group's call traffic rose 55% to 474 million minutes in 1H 2005 from 205 million minutes in 1H 2004. The Group generated more than 80 million minutes of call traffic a month since March 2005." Gee, this sounds like a pitch by a typical dot-com during 1999-2000: the focus on revenue, the emphasis on large orders of magnitude (millions of units); you can just swap the term "minutes" for "eyeballs".