The Recovery in Wireless Is Visible Aaron M

Industry Note July 30, 2004 Safa Rashtchy, Senior Research Analyst Technology 650 838-1347, [email protected] The Recovery In Wireless Is Visible Aaron M. Kessler, Sr Research Analyst 650 838-1434, [email protected] KEY POINTS: The China Analyst is our weekly report on the Chinese Internet and technology Reason for Report: market. Our commentaries are based on data we collect daily in China using our Industry Overview staff and consultants as well as industry contacts in Mainland China and Hong Related Companies: Kong. Our goal is not to summarize news, but to analyze the most important CTRP 34.70 developments in Internet, online games, wireless services, economy, technology, CHINA 6.73 consumer behavior, corporate activities, and government regulations, and to LTON 11.09 discuss how these trends impact both our existing coverage companies in China as NTES 37.59 well as the broader, long-term development of the Chinese Internet market . SINA 28.48 SOHU 19.97 SNDA 17.35 Summary of Internet TOMO 13.82 Activity in China (MM) Jun-04 Jan-04 Jun-03 Y/Y % Total active users 87 80 68 28% Dial-up subscribers 52 49 47 11% ISDN subscribers 6 6 5 20% ADSL subscribers 31 17 10 210%

Source:China Internet Network Information Center, Piper Jaffray China Research

Summary of Telecom Activity in China (MM) Jun-04 May-04 Jun-03 M/M % Y/Y % Fixed line subscribers 295 290 238 1.7% 24% Penetration rate 24% 21% 19% - - Mobile users 305 301 234 1.3% 30% Penetration rate 24% 21% 18% - -

Source: Ministry of Information Industry of China, Piper Jaffray China Research

Industry Commentary – The recovery in wireless is visible. China Stocks This Week - A look at the sector and company-specific performance for the week.

Company Updates - Our latest thoughts on Sina, Sohu, NetEase, Ctrip, Shanda, Tom Online, and LinkTone.

Piper Jaffray China Internet Index (PJCII)

Index Last Week YTD LTM PJ China Internet Index -5.9% -29.5% -41.0% NASDAQ -0.9% -7.2% 7.3%

Risks - Include the volatility of wireless revenues, investor sentiment toward a young and new sector, the potential of government intervention, and the potential of decline or volatility of economic growth. The unique corporate structure of the Chinese Internet companies also poses additional risk factors for investors.

Piper Jaffray & Co. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisions.This report should be read in conjunction with important disclosure information, including an attestation under Regulation Analyst Certification, found on pages 5 - 7 of this report or at the following site: http://www.piperjaffray.com/researchdisclosures.

Industry Commentary The Recovery In Wireless Is Visible. With three of the largest Chinese wireless players having reported, our worst fears have been eased and while the level of SMS decline is significant, the overall wireless market is still viable and growing. With the wireless revenue pattern coming into focus more, we encourage investors to build positions in the Chinese names, given their heavy sell off over the past two months which has made their valuations very attractive, in our opinion.

The volatility in the Chinese stocks have not just in large part been due to the decline of SMS, but the confusing market condition. The confounding factor is that the there is no uniformity in the dynamics of SMS decline: the entire market is certainly not declining but still growing, and there are a number of players who, at worst, will see flat SMS revenues while on the other extreme, companies like NetEase may see a 40% sequential decline in Q2 (as company preannounced) with additional reduction coming in Q3 and Q4. This is not a typical market behavior where a given dynamic typically impacts most players more or less at the same level, with minor variations. What makes the SMS market more complicated is that it is built on layers: layers of providers (SPs) coming at various stages, with the earliest ones being the portals in terms of their customer acquisition methods, others with offline marketing focus, and finally now those with handset deals; layers of new players with better and more engaging products that have had much lower churn, and layers of companies with varying degree of aggressive marketing policies, which see different levels of inactive users or billing issues.

Our take on the SMS market is that there is no one answer for a given company to fix its problems and maintain its share of the SMS market. The best strategy revolves around two key issues: content and customer acquisition strategies. We are convinced that there is a viable and strong demand for the right SMS services from consumers and, more importantly, SMS will survive and will be a crucial component of getting consumers into new services: SMS is effectively the e-mail of the wireless world and many services can be introduced or signed up through an SMS message. But SMS has to have engaging and interesting content to keep subscribers on, and we believe some of the more entertainment-oriented and interactive type of content produced by companies such as Linktone, Tom Online and others is the key for success. Second and more importantly, the subscriber acquisition strategy for the SPs has to evolve into a multi-faceted approach rather than a single focus – there is no one approach that is the ultimate solution. Offline co-marketing with mobile operators, offline direct advertising, online marketing, and event and celebrity driven promotions are all needed to succeed in a sustainable subscriber acquisition strategy. This is crucial now since the mobile operators are highly focused on taking control of the subscription process on the new services, especially on WAP where all the SP services go through the mobile operators. As such, it is of strategic value for the SPs to maintain a solid brand name and subscriber relationship through engaging SMS and other services.

The background described above should explain to some degree why we see the various levels of declines in the SMS revenues. But the important development is that we believe Q3 will mark the lowest point of SMS declines and the clean up process and with the Q4 decline expected to be less than Q3, we should see stable SMS revenues for most players in 2005. Importantly, we have also been able to lower estimates on SMS to the level that we believe hold little risk. There is double advantage in these lower expectations: they are, of course, easier to meet but also for the portals, the impact of another possible miss will be far smaller: SMS should be less than 20% of Sohu's revenue, for example, down from 49% in Q1 of this year. With the SMS decline pattern better understood, we are also gaining more confidence on the growth path of 2.5g and IVR services, which has shown very promising growth levels. While still new and small, we believe these new services can carry the growth of the wireless segment in 2005.

Industry News

Shanda Buys Stake In Largest PC Game Platform In China. On July 29, Shanda Interactive announced that it has signed an agreement to purchase a minority stake in Haofang, a privately-owned company that develops and operates the largest network PC game platform in China. Additionally, Shanda will acquire a majority interest in Haofang in 2006. Haofang had more than 320,000 peak concurrent users and 200,000 average concurrent users in July 2004. We believe this a good strategic move for Shanda as it enables it to add an additional gaming segment to its current roster of MMORPG's and casual games as well as enables Shanda to further penetrate the home-based market, which is underpenetrated today but is showing strong growth.

Yahoo! China Outsources IT Content From ChinaByte. ChinaByte is one of the leading IT portals in China. In the partnership, Yahoo! China will outsource IT news and commentaries from ChinaByte and ChinaByte will be entitled to share advertising revenues generated on Yahoo! IT channel. Prior to this partnership, Sina, Sohu, NetEase, and Tom Online are all clients of ChinaByte for its exclusive news and commentaries. The revenue sharing model might evolve into fee-based customer relationship in the future. Yahoo! China has been improving its local presence by launching China-specific contents and applications, i.e., Yahoo! Messenger 6.0 (Simplified Chinese) capable of wireless chatting (looking up to Tencent), Yisou Search (looking up to Baidu) and 1pai Auction (I

Customers of Piper Jaffray in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research by visiting piperjaffray.com or can call 800 747-5128 to request a copy of this research. Page 2 of 7 Industry Note July 30, 2004 Want Auction, looking up to EachNet and Taobao). Yahoo! has been trying every possible path to re-invent its leadership in China by adding local features (wireless, local search, auction) after its buyout of 3721. We have seen positive changes of Yahoo! in China. In the future, we expect Yahoo! to further consolidate its resources and brand recognition with local market momentum and become a real competitive local player in China's Internet market.

China Stocks This Week. China stocks were mostly positive this week, with particular strength from the portals, which increased approximately 10% wk/wk as investors become more comfortable with the wireless estimates. However, our China index decreased 6% last week (due to weakness from UTStarcom) versus the NASDAQ's 1% decline. Year to date, the China Index is down 30%. We continue to expect some consolidation of prices before further appreciation, especially given that the wireless sector remains in transition. We expect the Chinese stocks to appreciate from current levels as investors become more comfortable with the wireless revenue pattern as well as the heavy sell off over the past two months which has made valuations very attractive, in our opinion.

Year-to-Date Daily Graph Of Piper Jaffray China Internet Index vs. NASDAQ

China NASDAQ 125 120 115 110 105 100 95 90 85 80 75 70 65 12/31/03 1/23/04 2/13/04 3/08/04 3/29/04 4/20/04 5/11/04 6/02/04 6/24/04 7/16/04

Source: Factset Company Performance Company Wk/Wk YTD Sina.com 11.9% -22% Sohu.com 9.2% -41% Netease 10.4% -4% Shanda Interactive 9.2% 44% Linktone 1.6% -39% Tom Online 2.4% -11% Ctrip.com 3.4% 2%

Company Updates

SINA (SINA, Outperform). Sina reported an inline quarter with slightly better results than we expected. While the company will continue to see further declines in SMS revenues, the new services are picking up and the decline in SMS is sufficiently accounted for in our model, as well as reflected in the stock price, in our opinion. The next catalyst for Sina may well be the introduction of its online games, which we expect in the next quarter. The growth of advertising, especially given the Olympics in Q3, should be very strong and provide another catalyst for the stock.

Ctrip (CTRP, Outperform). The recent investment by InterActiveCorp (IACI) into Ctrip's biggest competitor, privately held eLong, may be taken by investors as a potential negative for CTRP. There is, of course, the possibility of further investment by IACI in eLong. While we consider this event as a mild negative for CTRP, we believe IACI is at very early stages of trying to understand the dynamics of online travel growth in China. Also, CTRP remains significantly larger than any of its competitors and has strong financial resources. We expect CTRP to report a solid quarter with upside to earnings. We believe Ctrip's dominant position in the Chinese travel market will continue to give the company a major competitive advantage. Ctrip reports on Thursday, August 5.

Shanda (SNDA, Outperform). We expect Shanda to produce upside to our recently published estimates for Q2, and the launch of the new in-house developed games should continue to improve margins. Given the growth opportunity in the online gaming market and Shanda's leadership position, we believe investors should maintain a good position in this category leader.

Sohu.com (SOHU, Outperform). Sohu's Q2 results were slightly better than expectations, much like Sina, and we believe the risk from the continuing decline in SMS is getting smaller (see our full note on Sohu published 7/29). We believe Sohu is also doing very well in advertising, and the catalysts from the expected launch of its new search product and online game could further move the stock.

NetEase (NTES, Outperform). We expect NetEase to report within the preannounced range, with it releasing its earnings next week on Monday, August 2. We believe NetEase's online game sector will be strong and estimates for Q3 may go up, helping push the stock up higher now that investors are more comfortable with the wireless segment.

Tom Online (TOMO, Outperform). Tom Online reported a very strong upside and solid guidance earlier this week (see our full note published July 28). We believe TOMO is one of the strongest wireless players in China and has a key double advantage of having significant 2.5g and new service revenues and a strong relationship with both China Mobile and China Unicom.

LinkTone (LTON, Outperform). We expect LinkTone also to report strong wireless revenues and we should be able to at least maintain our estimates and possibly increase them. The key focus for LinkTone will be its growth path in the 2.5g and IVR services. Linktone reports on Wednesday, August 4.

Distribution of Ratings/IB Services Firmwide and by Sector Piper Jaffray Internet Media & Marketing Sector IB Serv./Past 12 Mos. IB Serv./Past 12 Mos.

Rating Count Percent Count Percent Rating Count Percent Count Percent

BUY [OP] 279 58.37 82 29.39 BUY [OP] 16 69.57 6 37.50 HOLD [MP] 182 38.08 24 13.19 HOLD [MP] 5 21.74 0 0.00 SELL [UP] 17 3.56 2 11.76 SELL [UP] 2 8.70 0 0.00

Notes: The boxes on the Rating and Price Target History chart above indicate the date of the Research Note, the rating, and the price target. Each box represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first Note written during the past three years. Distribution of Ratings/IB Services Firmwide and by Sector shows the number of companies in each rating category from which Piper Jaffray received compensation for investment banking services within the past 12 months.

Legend: I: Initiation of Coverage D: Discontinuation of Coverage SB: Strong Buy (effective 01/12/04, Equity Research eliminated the SB rating) OP: Outperform (prior to 12/12/01, OP stocks were rated "Buy") MP: Market Perform (prior to 12/12/01, MP stocks were rated "Neutral") UP: Underperform (prior to 12/12/01, UP stocks were rated "Sell") NA: Not Available UR: Under Review SUS: Suspended GP On: Listed on one of the Guided Portfolios maintained by Piper Jaffray GP Off: Removed from the Guided Portfolios maintained by Piper Jaffray

Page 5 of 7 Industry Note July 30, 2004 Important Research Disclosures Analyst Certification — Safa Rashtchy, Senior Research Analyst Analyst Certification — Aaron M. Kessler, Sr Research Analyst The views expressed in this report, including the Key Points and Risk sections in particular, accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.

Research Disclosures Piper Jaffray was making a market in the securities of Ctrip.com International, Ltd. at the time this research report was published. Piper Jaffray will buy and sell Ctrip.com International, Ltd. securities on a principal basis. Piper Jaffray has received compensation for investment banking services from Ctrip.com International, Ltd. within the past 12 months. Within the past 12 months, Piper Jaffray was a managing underwriter of an offering of, or dealer manager of a tender offer for, the securities of Ctrip.com International, Ltd. or the securities of an affiliate. Piper Jaffray was making a market in the securities of Linktone Ltd. at the time this research report was published. Piper Jaffray will buy and sell Linktone Ltd. securities on a principal basis. Piper Jaffray has received compensation for investment banking services from Linktone Ltd. within the past 12 months. Within the past 12 months, Piper Jaffray was a managing underwriter of an offering of, or dealer manager of a tender offer for, the securities of Linktone Ltd. or the securities of an affiliate. Piper Jaffray was making a market in the securities of NetEase.com, Inc. at the time this research report was published. Piper Jaffray will buy and sell NetEase.com, Inc. securities on a principal basis. Piper Jaffray was making a market in the securities of SINA Corporation at the time this research report was published. Piper Jaffray will buy and sell SINA Corporation securities on a principal basis. Piper Jaffray was making a market in the securities of Sohu.com Inc. at the time this research report was published. Piper Jaffray will buy and sell Sohu.com Inc. securities on a principal basis. Piper Jaffray was making a market in the securities of Shanda Interactive Entertainment Limited at the time this research report was published. Piper Jaffray will buy and sell Shanda Interactive Entertainment Limited securities on a principal basis. Piper Jaffray has received compensation for investment banking services from Shanda Interactive Entertainment Limited within the past 12 months. Within the past 12 months, Piper Jaffray was a managing underwriter of an offering of, or dealer manager of a tender offer for, the securities of Shanda Interactive Entertainment Limited or the securities of an affiliate. Piper Jaffray was making a market in the securities of TOM Online Inc. at the time this research report was published. Piper Jaffray will buy and sell TOM Online Inc. securities on a principal basis. Piper Jaffray has received compensation for investment banking services from TOM Online Inc. within the past 12 months. Within the past 12 months, Piper Jaffray was a managing underwriter of an offering of, or dealer manager of a tender offer for, the securities of TOM Online Inc. or the securities of an affiliate. Piper Jaffray was making a market in the securities of Yahoo! Inc. at the time this research report was published. Piper Jaffray will buy and sell Yahoo! Inc. securities on a principal basis. Piper Jaffray was making a market in the securities of InterActiveCorp at the time this research report was published. Piper Jaffray will buy and sell InterActiveCorp securities on a principal basis. Piper Jaffray was making a market in the securities of UTStarcom, Inc. at the time this research report was published. Piper Jaffray will buy and sell UTStarcom, Inc. securities on a principal basis.

Piper Jaffray research analysts receive compensation that is based, in part, on the firm's overall revenues, which include investment banking revenues. Piper Jaffray research analysts who follow this Company report to the Head of Investment Research who, in turn, reports directly to the Chief Executive Officer of Piper Jaffray.

Rating Definitions Investment Opinion: Investment opinions are based on each stock's return potential relative to broader market indices*, not on an absolute return. • Outperform (OP): Expected to outperform the relevant broader market index over the next 12 months. • Market Perform (MP): Expected to perform in line with the relevant broader market index over the next 12 months. • Underperform (UP): Expected to underperform the relevant broader market index over the next 12 months. • Suspended (SUS): No active analyst coverage, however coverage expected to resume. * Russell 2000 and S&P 500 • Volatility Rating: Our focus on growth companies implies that the stocks we recommend are typically more volatile than the overall stock market. We are not recommending the "suitability" of a particular stock for an individual investor. Rather, it identifies the volatility of a particular stock. • Low: The stock price has moved up or down by more than 10% in a month in fewer than 8 of the past 24 months. • Medium: The stock price has moved up or down by more than 20% in a month in fewer than 8 of the past 24 months. • High: The stock price has moved up or down by more than 20% in a month in at least 8 of the past 24 months. All IPO stocks automatically get this volatility rating for the first 12 months of trading.

Page 6 of 7 Industry Note July 30, 2004

Disclaimers

This material is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This information is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. It is not a representation by us or an offer or the solicitation of an offer to sell or buy any security. Further, a security described in this release may not be eligible for solicitation in the states in which the client resides. Officers or employees of affiliates of Piper Jaffray & Co., or members of their families, may have a beneficial interest in the Company's securities and may purchase or sell such positions in the open market or otherwise.

Notice to customers in the United Kingdom: Circulation of this report in the United Kingdom is restricted to investment professionals and high net worth individuals falling within Articles 19 and 49 of the Financial Services and Markets Act (Financial Promotion) Order 2001 as amended. No one else in the United Kingdom should read, rely on or act upon the information in the report. The investments and services to which the report relates will not be made available to others in the United Kingdom.

Securities products and services offered through Piper Jaffray & Co., member SIPC and NYSE, Inc., a subsidiary of Piper Jaffray Companies. Additional information is available upon request.

No part of this report may be reproduced, copied, redistributed or posted without the prior consent of Piper Jaffray & Co. Copyright 2004 Piper Jaffray & Co., 800 Nicollet Mall, Suite 800, Minneapolis, Minnesota 55402-7020

Page 7 of 7