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TABLE OF CONTENTS Cheap Chinese Stock 1 Q Statistics of the Week 3 Q Model Portfolio 5

Cheap Chinese Stock By James Altucher

Last week I went full-force into search and China, adding Yahoo! (YHOO:Nasdaq), Marchex (MCHX:Nasdaq), Liberty Media (L:NYSE), NetEase (NTES:Nasdaq) and Tom Online (TOMO:Nasdaq).

Tom Online and NetEase are bets on the growth in China's gaming community, and although I hate to do the "Chinese math" that is so common in the venture capital world ("if 1/10 of 1% of China buys this digitally enabled Swiss army knife then the size of the market is $100 trillion"), the reality is that we are still only at the beginning of China's entry into the gaming world, and NetEase and Tom Online are the leaders in multiplayer gaming and wireless gaming, respectively.

Additionally, as I mentioned last week, both companies have the balance sheets and the profits to guarantee that they will be long-term players, unlike the dot-com flashes of the late 1990s that raised $50 million in IPOs but had $80 million-plus burn rates.

This week, I’m going to look at two new sectors of growth in the China space. As usual, I'm looking for three characteristics before making an investment:

1) Growth of the industry 2) Growth and profits of the company 3) A great balance sheet that guarantees the company will be in business for many years to come, even if profits or the industry slip

Last week I mentioned that Yahoo!'s $1 billion stake in Alibaba.com could be worth many multiples of that as the company executes in its three primary businesses, after the Yahoo! deal: the B-to-B auction site; Yahoo! China, which they received as part of the deal; and Taobao.com, which is the equivalent of eBay in China and has already eclipsed eBay as the largest consumer-to-consumer auction site in China.

Alibaba’s postdeal valuation is estimated to be between $3 billion and $4 billion. (Yahoo! paid $1 billion for a 40% stake but contributed the Yahoo! China sites, which upped the valuation.) In 2004, Alibaba had $46 million in revenue, most of which came from the Taobao site.

By contrast, let’s look at Global Sources (GSOL:Nasdaq), an Internet Review pick as of this morning. Global Sources runs a B-to-B site linking suppliers from mainland China with over 400,000 buyers worldwide. In contrast to Alibaba, Global Sources has been in business for over 35 years, running trade shows for suppliers and buyers and also print catalogs detailing the products offered by their suppliers. Although the online marketplace is quickly becoming an important focus of the company’s business, it is important to realize that an online B-to-B marketplace doesn't stand by itself but benefits considerably from tradeshow marketplaces where there is actual contact with the customers. That contact is an important way in China of building the relationship between supplies and buyers.

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Global Sources’ B-to-B marketplace has more customers than Alibaba's, more revenue, higher profitability, and having been in business for 35 years, the company certainly has established trust with its customers.

Let’s look at the basic metrics:

Cash: $108 million Debt: $0 Ebitda: $20 million Market capitalization: $288 million Enterprise Value (market cap minus net cash): $180 million

As you know by now, I like to look at enterprise value over cash flow, which in Global Sources’ case is approximately 9. In other words, if you bought the entire company and the business never grew or shrunk, you would generate 11% a year on your investment. Not bad when risk- free investments are paying half that.

So is the business growing? The company is estimated to earn 30-33 cents a share in 2005 and analysts are expecting 52 cents a share in 2006. Worst case for growth is more than 50%. Not bad.

The company's stock has been volatile. In March it traded as high as $20.75. Then, after a disappointing earnings report in May, shares traded as low as $6.02.

Why the disappointing earnings report? The company decided to move its tradeshows from Shanghai to bigger venues in Hong Kong. This costs money, and the money used to invest in the transfer, plus the larger venues, produced a direct hit against earnings. The money gained from these conferences won't be seen until future quarters. There's nothing insidious here, but investors saw it that way and wiped out two-thirds of the company's value in a short period.

Meanwhile, the company saw a brief spike in June when eBay announced that it would be teaming up with Global Sources to create a strategic alliance called Global Sources Direct in an effort to create more sourcing opportunities for eBay's “PowerSellers” in China. Prior to this deal, eBay had refused to increase its offer (reportedly $1 billion for the whole company) for Alibaba and instead cast their lot with Global Sources.

Note that I'm not down on the price paid for the 40% stake in Alibaba by Yahoo!. I believe the Taobao site alone is worth it, and getting better management (in the form of Alibaba's Jack Ma) behind Yahoo! China will make the entire venture (particularly Yisou, its search site, and 3721, its keyword search service) more valuable. Just as a comparison, Taobao has 10 million listings on its auction site, compared with 1 million listings on 's Eachnet site (its China site).

However, the market is undervaluing the opportunity in Global Sources, a more established company with better ties to local business in China, with better profits and revenue.

Additionally, Global Sources has several further catalysts:

● The Chinese economy continues to grow and move online.

● The tradeshows in Hong Kong will be bigger than those in Shanghai. Note that although Ebitda was $20 million in the past 12 months, cash flows were $29 million

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because conference attendees often pay in advance, but those cash flows are not booked in revenue yet.

● The effect of the launch of Global Sources Direct has not been fully felt yet. I expect 2006 should see significant results from this, and I wouldn't be surprised if eBay simply buys Global Sources outright.

Global Sources is a Buy.

Dialing for Dollars Both my daughters became Kelly Clarkson fans when she was on American Idol. I could see the attraction, and I was even pulling for Kelly to win and even tempted to vote my opinion by calling the number. How would you like to have a nickel for every time someone called in to American Idol or my favorite, Dancing with the Stars? How about having that nickel for each -- except not for American Idol but for the equivalent shows in China? Stay tuned for an alert recommending one such company this coming week.

Statistics of the Week

Major acquisitions of China companies by U.S. Internet companies:

● eBay bought EachNet in July 2003, when it was the No. 1 player in online auctions. Now surpassed by Alibaba's Taobao. ● Yahoo! bought 3721.com in November 2003. ● Yahoo! bought 40% stake in Alibaba.com in August 2005. ● .com bought Joyo in August 2004. ● IAC/Interactive bought a 30% stake in travel site eLong in July 2004. ● Monster.com bought a 40% stake in China HR in February 2005. ● bought a 3% stake in in June 2004. (Source: Morgan Stanley Research)

Top Chinese Sites 1. Baidu.com (Google has 3% stake) 2. Sina.com 3. .com 4. 163.com 5. QQ.com 6. 3721.com (Yahoo/Alibaba owned) 7. Yisou.com (Yahoo/Alibaba owned) 8. Taobao.com (Alibaba) 9. Tom.com 10. Chinaren.com (Source: Alexa.com)

Most Visited Web Sites in the World: 1. Yahoo.com

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2. MSN.com 3. Google.com 4. Yahoo.co.jp 5. Baidu.com 6. Sina.com.cn 7. Ebay.com 8. Passport.net 9. Sohu.com 10. 163.com 11. Amazon.com 12. .com 13. QQ.com 14. Myspace.com 15. Naver.com 16. Google.co.jp 17. 3721.com 18. Google.co.uk 19. Aol.com 20. Go.com 21. Cnn.com 22. Nate.com 23. Bbc.co.uk 24. Yisou.com 25. Taobao.com (Source: Alexa.com)

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INTERNET REVIEW MODEL PORTFOLIO

OPEN POSITIONS Date Initiation Current Simple NASDAQ at NASDAQ Company Name/Ticker Initiated Rating Code Price Price Return Initiation Date Return Callwave 11/07/2005 SP 4.20 $ 4.07 -3.10% $ 2,174.84 2.40% CALL E*Trade Financial 10/14/2005 SB 16.28 $ 19.18 17.81% $ 2,055.78 8.33% ET Inphonic 10/10/2005 SP 13.44 $ 10.66 -20.68% $ 2,092.03 6.45% INPC Ipass 10/17/2005 B 5.48 $ 6.41 16.97% $ 2,064.90 7.85% IPAS Keynote 10/10/2005 SB 13.05 $ 12.82 -1.76% $ 2,092.03 6.45% KEYN Liberty Media 11/14/2005 B 7.91 $ 7.73 -2.28% $ 2,203.10 1.09% L Marchex 11/14/2005 SP 20.00 $ 19.78 -1.10% $ 2,203.10 1.09% MCHX Microsoft 10/13/2005 B 24.31 $ 28.07 15.47% $ 2,033.28 9.53% MSFT NetEase 11/14/2005 B 62.51 $ 60.10 -3.86% $ 2,203.10 1.09% NTES Provide Commerce 10/13/2005 B 22.10 $ 27.66 25.16% $ 2,033.28 9.53% PRVD RealNetworks 10/18/2005 B 7.52 $ 8.72 15.96% $ 2,068.61 7.66% RNWK E.W. Scripps 10/20/2005 B 46.34 $ 46.70 0.78% $ 2,087.80 6.67% SSP Technology Investment 10/19/2005 B 14.73 $ 15.50 5.23% $ 2,048.46 8.72% TICC Tom Online 11/14/2005 B 20.74 $ 21.31 2.75% $ 2,203.10 1.09% TOMO Time Warner 10/10/2005 SB 18.01 $ 18.03 0.11% $ 2,092.03 6.45% TWX 10/11/2005 SP 20.62 $ 23.10 12.03% $ 2,084.90 6.82% VRSN Yahoo! 11/14/2005 SP 38.04 $ 41.54 9.20% $ 2,203.10 1.09% YHOO Coding System: SB, for strong buy; B, for buy; SP, for speculative buy; N, for neutral and S, for sell.

INTERNET REVIEW PERFORMANCE Total Return 4.87% Performance results listed here reflect values of stocks as of the close of the most recently completed trading day. They do YTD 2005 Return 4.87% not factor in dividends paid, interest earned and actual commissions paid. Results are updated overnight and posted prior to the market open the following business day. The 2005 YTD Return figures reflect changes since the beginning of 2005. The Total Average Return figures reflect changes since inception on 10/10/2005. NASDAQ COMPOSITE Portfolio Current % Gain/Loss Since 2005 YTD Open Price Inception Price Portfolio Inception Return Nasdaq Composite 10/10/2005 $2,092.03 $ 2,227.07 6.45% 2.21% (COMP)

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James Altucher, writer of TheStreet.com Internet Review, is a managing partner at Formula Capital, an alternative asset management firm, and a contributor to TheStreet.com’s RealMoney. TheStreet.com is a publisher and is registered as an investment advisor with the U.S. Securities and Exchange Commission. Mr. Altucher is restricted from transacting for his own benefit in securities discussed in TheStreet.com Internet Review. Formula Capital and its affiliates may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in TheStreet.com Internet Review and may take positions inconsistent with the views expressed.

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