KONG Must Kowtow to Regulators

Kongzhong (KONG) is one of the leading providers of wireless value-added services in China. The company?s revenue for the second quarter exceeded the market consensus, while its EPS was in line with market expectations. Revenue has increased sequentially for the past four quarters.

Kongzhong has a good chance to benefit from the potential growth of the wireless Internet services in China because of its leading position and balanced WVAS portfolio. The company?s bull story, however, is clouded by the unexpected policy changes from Chinese telecom operators and regulation changes from Chinese government. The policy changes from China Mobile (CHL) have resulted in significant decrease of Kongzhong's profitability for two years and will continue to have adverse impact on Kongzhong?s profitability in the future.

Although we are not very optimistic about its prospects due to the tough WVAS operating environment, the company still has enough cash to look for another source of revenue growth in the future. The low P/B ratio of the stock can provide some support for its stock price. Therefore, we are maintaining our Hold recommendation for the stock.

Lehman Woes Drive Worry

As the Dow, Nasdaq and S&P 500 all sell off roughly a percentage point as of mid-day Monday, an AP report cites a Wall Street Journal article from this morning about Lehman Brothers' (LEH) difficulties continuing.? Lehman may need to pre-announce losses for its 3rd quarter (ending August) report, and another $1.8 billion in writedowns may be forthcoming.?

You'll recall that this comes after the company's first reported loss in its Q2 report of $2.8 billion, amid extensive mortgage loan writedowns.? With the latest dire forecast including the possibility that Lehman may need to raise $6 billion overall, shares are down 4.5% thus far today, or 82% lower than?their 52-week high.

Analysts have remained busy lowering earnings estimates for the 4th largest U.S. investment bank; in just the past week, 3 analysts have downwardly revised August quarter estimates, and 4 have taken down expectations for fiscal year 2008 (ending November '08).? The Zacks consensus estimate for the coming quarter is -51 cents per share, whereas a quarter ago LEH was expected to fetch $1.28 in the term.

HSBC Estimates Adjusted Down

We are continuing our Hold on HSBC Holdings Plc (HBC), as well as our $85 target price. In its first-half report, HSBC posted net earnings of $7.7 billion, down 22% year-over-year. This was below our estimate due to lower-than-expected net revenue growth. Weaker U.S. profits due to higher impairments in consumer finance loans and additional write-downs in Global Banking and Markets offset solid results in HSBC's emerging markets and European businesses.

We are cutting our EPADS estimates to $6.75 from $7 for 2008 and to $7.50 from $8 for 2009. Going forward, earnings should reflect strong loan and deposit growth, especially in emerging markets and improved productivity, partially offset by increased impairment charges due to problems in the US subprime and other credit markets. HSBC increased its interim dividend 6%.

Recent trends suggest improvement in loan and deposit volumes, which should enhance future revenue growth. The company is also taking advantage of higher-growth, lower-cost regions such as China and India, to set up major back-office operations, which are likely to boost bottomline growth. Furthermore, HSBC completed several acquisitions in the fast-growing Chinese market.

While HSBC is globally diversified, about three-fourths of earnings are typically derived from three areas: the U.K., the U.S. and Hong Kong. Economic disturbances in any one of these regions could have a negative impact on earnings. Currently, the economic outlook for the U.K. and the U.S. are most problematic. Moreover, credit costs jumped 59% in 2008's first half. Finally, the turmoil in the U.S. subprime market should continue to take its toll on revenues and earnings at Global Banking and Markets.

Ace Limited's Outlook Limited

Ace Limited's (ACE) operating earnings of $2.18 per share, substantially ahead of expectations, reflects the Combined Insurance acquisition and a favorable prior period reserve development. Underwriting results benefited from relatively better current accident year results and a lower level of catastrophe losses.

The company experienced growth in international operations, which benefited from a weaker U.S. dollar as well as growth in A&H and specialty lines. However, the global reinsurance business again reported a significant decline in this quarter and remains our matter of concern. We expect potential pressure on ACE?s shares over the next couple of quarters, which should outweigh our growth expectations for this company at this time. Hence, we reiterate our Hold recommendation.

Based on 2Q08 results, we are increasing FY08 earnings expectation to $8.18 per share from $7.90 per share, but maintaining our FY09 earnings expectation at $7.90 per share. At the current price, the shares of ACE trade at 1.06x the 2Q08 book value of $48.99 per share, a 12.8% premium to the Bermuda reinsurance group but not out of line from the historic level of other primary carriers its size. The company has benefited from the sale of its three run-off units, which represented 17% of its legacy asbestos reserves.

This has somewhat reduced the uncertainty associated with legacy asbestos claims and improved visibility to ACE?s future earnings. Despite some of the general softening of casualty lines, we expect ACE to show trends in its premiums and earnings. Our six-month price target of $57.50 per share incorporates a 1.10x price-to-book multiple to our estimate for the company?s book value of $52.25 per share at December 31, 2008.

Walgreen's Opening More Stores

Maintaining a pristine balance sheet, the management of the largest national retail pharmacy chain, in terms of revenue and profitability, Walgreen Co. (WAG) continues with its new store expansion strategy. However, the management is also implementing a more aggressive strategy that includes acquisitions.