RYAN JACOB
PORTFOLIO MANAGER
JACOB INTERNET FUND

COMPANY: CDC Corporation
TICKER: CHINA (Nasdaq)
PRICE: $4.28 (as of 4 p.m. Friday)
52-WEEK RANGE: $2.37-$4.95
MARKET CAPITALIZATION: $475.71 million

Ryan Jacob is the portfolio manager at the Jacob Internet Fund (JAMFX), with around $100 million in assets under management. CDC Corporation is a software and Internet services company. Mr. Jacob spoke to David Dalley of The New York Sun about why CDC is one of his favorite holdings.

What does CDC do?

There’s a lot going on here right now and it’s one of our favorite names. They originally wanted to be a Chinese Web portal, kind of like Yahoo, called china.com. It became public in July 1999, and it went through the boom/bust in terms of the bubble. When the market turned south, the founder, who has a background in software, decided to buy software companies with some of the cash they’d raised in the IPO. They still held onto the portal business but because the market was so uncertain they shifted their focus towards software.

When the Internet market came back a bit, they started to get involved in the Chinese market once again, and in the electronic gaming market, too, which is big business in Asia. They really have two distinct businesses now – software, and Internet services. They also have over $200 million in cash and no debt.

Why do you like CDC in particular?

We own about half a dozen Chinese Internet companies, but this is our favorite on a valuation basis. It’s benefiting in particular from the growth in the Chinese economy and the expanding middle class.

We originally bought it last fall. The company has been doing some interesting things and they’ve had some management turnover. The stock was trading at a very depressed valuation. To give you an idea, it has a total market cap of about $500 million now. It was about $350 million when we started buying.

What are they doing in online gaming?

One thing that really intrigued us about this company was an online game they launched in China last year called “Yulgang.” It’s a role-playing game, like “World of Warcraft” but not quite as big. They did something new – they decided that rather than charging users per hour as the others do, they’d allow them to play for free but charge to buy items in the game. It was pretty unique model for this type of game, and it resulted in their usage numbers exploding, and that caught our attention.

This stock is in a deep value situation. It’s trading very cheap, but it has been orphaned by Wall Street. It’s a software business with significant value, an Internet services business that is doing better each year, and a hit online game. The company also has a lot of cash and new management, who have stated their intention to split the company up, which I think is a great idea.

What do you think the company is worth?

The market cap today is about $480 million, $218 million of which is cash.China.com, which trades in Hong Kong separately, has a market cap of $300 million. CDC owns a little over 80% ofchina.com, so that’s worth about $250 million. When you combine that with the $218 million in cash, the result is that the software business, by implication, is not being valued at anything. It doesn’t add up, and they understand that.

Management is clearly aware that the best course of action is to split the businesses apart. They’re not complementary. Once that happens, the market will accord them the valuation they deserve. To be conservative, we think that the company is about 40% undervalued.