Motley Fool published a rather bullish article (below) on Chinese mobile services provider Kongzhong (Nasdaq: KONG) this past Friday.

 

 

The article spoke to a typical strength of hot Chinese issues: fantastic growth opportunity backed by a ginormous Chinese population and rapid GDP per capita growth.  It also noted some salient fundamental factors such as industry-leading margins and 3G adoption.

 

However, it failed to highlight a notable risk with Kong: it derives over 90% of its revenue from China Mobile, China's dominant mobile access provider.  That's a lot of concentrated risk.  And that risk has already manifested itself in both 2004 and 2005, when China Mobile changed certain policies around wireless value add services (WVAS) on its platform and negatively impacted Kong's operational results.

 

Interestingly, Kong did not highlight this risk in its latest Q4 press release and it is doesn't ever have to because the SEC does not require 10-Qs or 10-Ks from foreign issues.  This might be acceptable if Kong were as open to shareholders as some players like PetroChina (NYSE: PTR).  Instead, Kongzhong omits important details about revenue concentration risk and a 3.5M class action settlement in its reports.

 

All of this is before we even consider the regulatory environment in China.  The wireless services industry there has experienced significant past government policy changes that have materially impacted the performance of WVAS businesses such as Sina (Nasdaq: SINA) and Sohu (Nasdaq: SOHU).  Given the relative youth of the Chinese mobile industry, continued regulatory churn shouldn't be surprising.

 

In the end, Kongzhong may fly high despite all of these risks.  Nonetheless, extra due diligence on such foreign issues can only help would-be investors.  The worst thing that can happen is to submit blindly to market hype and translate great overall potential in a foreign economy into assumed potential in a specific foreign stock.