Notes on China Unicom Merger

China Unicom (CHU) announced it was merging with China Netcom (CN) and selling its CDMA business to China Telecom (CHA). The new China Unicom will become a full telecom service operator after the deal and won't operate two wireless networks at the same time. However, China Unicom will have difficulty integrating China Netcom's fixed-line telecom business. Overall, the stock appears fairly valued, considering its 3G opportunities in China. Thus, we maintain our Hold recommendation on the shares.

China Unicom can focus only on GSM business after it sells its CDMA business. The company will also have enough cash to spend on its capital expenditure. Moreover, with a 23% market share in one of the world's fastest growing wireless markets, the new China Unicom should be capable of generating consistent annual earnings growth in the future. China Unicom is also well-positioned to leverage the considerable opportunity in the Internet field.

Currently, China Unicom is trading at a forward multiple of 23.0x our 2008 EPS estimate, which is higher than industry mean and the industry median. China Unicom is trading at a forward multiple of 21.8x our 2009 EPS estimate, which is similar to the industry mean and higher than the industry median. Thus, we set a target price of $20.75 per ADS based on a modest increase in the company's price/earnings ratio which we believe is a more appropriate valuation measure.

Robust Pipeline at Inspire Pharma

We maintain our Buy rating on Inspire Pharmaceuticals, Inc. (ISPH). Currently, the company has three products on the market and a robust pipeline. We see strong top-line growth from 2008 and beyond. Inspire just reported positive phase III data of Denufosol for cystic fibrosis. The company has a strong collaborative alliance with Allergan Pharmaceuticals (AGN) for key products that treat dry eyes and allergic conjunctivitis.

The company's Japanese partner Santen Pharmaceutical recently completed phase III trial of diquafosol tetrasodium for dry-eye disease. Marketing application will be filed in Japan by the end of 2008. Inspire received milestone payment and will receive royalty payment when the product is commercialized in Japan and other Asian countries. Also, we believe the positive data for Denufosol bodes well for the company, since the drug candidate can act as a long term value driver for Inspire.

We believe Inspire is heading in the right direction. Elestat (for allergic conjunctivitis) and Restasis (for dry-eye disease) continue growth momentum. Although initial uptake of AzaSite (for bacterial conjunctivitis) has been slow, we believe sales may pick up momentum after a few quarters and that AzaSite sales will drive top-line and bottom-line growth going forward. Upcoming catalysts include the announcement of partners for the cystic fibrosis program.

Based on the progress the company has made so far, we maintain our price target of $8.50 on the shares. We arrive at this price target by using specialty eye-care pharmaceutical industry average P/E ratio of 18 x, multiplied by our estimated 2011 EPS of $1.06, discounted by 30 percent for three year. We believe the company can trade in-line with biotechnology stocks, as Denufosol progresses in the clinic.

Lithia Motors Feels Weak Market

Lithia Motors, Inc. (LAD) is a growing retailer in the U.S. automotive industry. The company is focused on improving productivity, which should propel earnings growth.

Our major concerns are the general health of the overall industry, exposure to Ford (F), General Motors (GM) and SUVs as well as the volatile interest rates. Moreover, high gasoline and diesel prices are affecting the company's operations. This resulted in declining sales volumes.

But the company is well-positioned to continue its aggressive acquisition campaign, as it has a solid balance sheet, with good liquidity and high interest coverage. The company focuses on its acquisition strategy and has greater access to financial resources than most private competitors.

Parts and service revenues and profits continue to grow. The company's lifetime oil change contracts have a 39% penetration rate among car sales. On June 4, Lithia Motors announced that the Board of Directors has approved a dividend of $0.14 per share for the second quarter. Lithia Motors will pay the dividend to shareholders of record on July 15.

The company is accelerating cost cuts.