Policy Change Could Impact the Little Guy

I have written about China on numerous occasions, pointing to the vast investing opportunities in what has become the largest consumer market in the world. At the same time, I have discussed the real risk of regulatory and political concerns that exist in a communist controlled country.

 The reality is that policies regulating corporate practices in the booming Chinese economy can change quickly. Case in point: China Mobile Limited (NYSE/CHL), the largest provider of mobile services in China, announced significant changes to the country’s subscriber and billing practices in the mobile telecommunications area that has driven the smaller Chinese mobile plays down.

 The new policies are aimed at protecting consumers considering buying wireless mobile services. The major change is expected to see potential consumers get longer trial periods to test services and products as well as receive two reminders for those with new monthly subscriptions. In addition, those that have existing plans will also receive billing reminders.

 The objective of the proposed new changes may be required, but for the smaller Chinese providers of wireless value-added services (WVAS), it could have a dramatic impact. WVAS includes products such as interactive voice response (IVR), SMS (text messaging), downloadable games, digital music, and wireless access protocol (WAP) Internet access. We have already seen a major correction in WVAS small-cap stocks since the announcement by China Mobile, which now clouds the situation going forward.

 Some leading Chinese small-cap companies that could be impacted include Linktone, Ltd. (NASDAQ/LTON), TOM Online Inc. (NASDAQ/TOMO), Kongzhong Corp. (NASDAQ/KONG) and China Techfaith Wireless Communication Technology Ltd. (NASDAQ/CNTF).

 For the investor, the risk is real. These small-cap plays have seen their market-cap fall by over 30% since the announcement. The stocks appear to have added value at this time, but the reality is until we see the extent of the changes, these small-cap wireless plays are vulnerable to further losses. The best strategy at this time may be to wait on the sidelines and see the impact on revenues and earnings down the road when the proposed policies come into play.

 I would advise waiting over the next few quarters to see the extent of the policy changes. In the meantime, I have downgraded the small-cap WVAS group.