Wednesday, August 26, 2009

Robert Hsu and STV

After STV moved from $4.25 in December 2008 to $8.36 in April 30th 2009, Mr. Robert Hsu decided it was time to jump in.

April 30th 2009

New Buy: China Digital TV
Founded in 2004, China Digital TV is a Beijing-based leading technology company in China's rapidly growing digital television market. With a 50% market share, STV is involved in the market in many different ways. The company is the number-one provider of conditional access (CA) systems, which enable TV network operators to manage the delivery of content and services to their subscribers. In addition, the company provides cable, satellite and mobile TV network operators with full-service support systems, value-added services and set-top box solutions.
Plus, China Digital TV's major stream of revenue (90%) comes from the production and sale of smart cards. Smart cards are an important part of the set-top boxes that TV network operators use to provide and control access to their cable networks. And as analog TV users switch to digital TV, they will need one of these smart cards to integrate into the set-top box to access digital cable TV.
Thanks to its dominant position in the industry and the major switch to digital TV, China Digital TV will continue to grow its market share in the coming years. The transition to digital TV will greatly increase the need for STV's services, and this growth is already showing itself. In 2008, the company signed 36 of the total 66 new CA systems contracts. And by the end of last year, STV had 200 carrier customers in 27 Chinese provinces.
Strong Financials
STV's strong market presence and growth has surely shown itself in its financials. The company's net revenues soared from $3.7 million in 2004 to $30.6 million in 2006 and $70.7 million in 2008. That represents an annual growth of 109%! Net income also jumped from $4.5 million in 2005 to $43.1 million in 2008. And STV's gross margin was 80.5% in 2008.

In late September 2008, China Digital TV launched a share repurchase program for up to $40 million of its shares. By December, it had bought back 2.3 million shares at a total cost of approximately $16.1 million. Meanwhile, it declared a special cash dividend of $1 per share. Still, the company has a strong cash position of about $203 million without any liabilities -- that's $3.52 per share!
I look for these strong financials to continue in the months and years to come, considering STV's growing business. And I think we should take advantage of it by buying STV under $9. I'm targeting $14 by the year-end, which would give us a nice 50%+ gain.


Price was around $8.36.

May 7th 2009: China Digital TV (NYSE: STV) shares rallied 30% last Friday on a combination of strong buying and short covering. This action handed us a nice 19% gain already, but it also moves the company's shares significantly above our buy limit price of $9.
After this strong move higher, the stock has gone up too much, too fast. And I know that many of you are wondering if it's still a good buy now, even though it's trading above my $9 buy limit. Well, I don't recommend chasing China Digital stock at this level. I think there is a good chance that the stock will pullback below $10 again before resuming its uptrend, giving us another opportunity to buy China Digital at a reasonable entry point. So I want you to buy STV on pullbacks below our new buy limit of $10.


May 14th 2009: China Digital TV (NYSE: STV), as we discussed in last night's Flash Alert, reported somewhat disappointing first-quarter earnings yesterday, which sent the shares tumbling 20% in trading. And shares continued to fall today, losing another 5%. As I said in the Flash Alert, I remain confident that the Chinese government'-backed TV digitalization project will continue to benefit the company in the months and years ahead. Still, I want to gain more of a firsthand perspective of what's happening behind the scenes at the company, so I'm traveling to New York next week to meet with China Digital's management. I'll be sure to share my findings with you in next week's China Strategy weekly update. Until then, I recommend that you don't sell or buy any more shares. Continue to hold STV.

May 21st 2009: China Digital TV Update
The whole world is moving towards digital, and this is creating incredible investment opportunities in the technology sector. That's why I added China Digital TV (NYSE:
STV) to the China Strategy portfolio a few weeks ago. As you know, the company is China's leading supplier of conditional access systems (CAS), better known as smartcards, for cable boxes. It sells smartcards to over 200 regional cable operators throughout China. To date, China Digital has sold over 25 million smartcards, or to 50% of all cable TV households in China.
Currently, there are 50 million households with cable TV in China, an incredible leap from the 15 million in the country just three years ago. There's no denying that demand for digital cable is growing rapidly in the country. This is creating a tremendous opportunity for China Digital, especially when you consider that there are 380 million households with television sets in China, and the Chinese government has set a timeline to convert all TV broadcast to digital format by 2015, starting with the larger cities.
So in five years, most of the 380 million TV households in China will have digital cable. That means the number of digital cable TVs and smart cards sold in China is estimated to reach 110 million by the end of 2011, which is more than 100% growth. And China Digital will grab the lion's share of this expanding market -- it already grew by about 30% in both revenue and earnings in 2008, and it has no debt.
Despite all this, though, China Digital reported first-quarter earnings last week, and the stock dropped 20% on news that its revenue decreased 15% from the fourth quarter in 2008. Net income slipped even more, 38%, indicating a drop in profit margin as well. I know these results raised red flags for a number of you. And although I believe that this is a temporary drop due to tight credit with cable operators last year and the Chinese economy bottoming out in the first quarter, I was concerned as well.
So I traveled to New York on Monday to meet with China Digital's Investor Relations Director, Eric Yuan, to discuss these issues and gain a better understanding on what he thought was happening at the company. During our conversation, I learned three positive pieces of news about the company that indicate the slowdown is temporary and business will pick up in the second half of the year:
1) Improving Financing: Due to the global financial crisis, Chinese regional cable operators, all of them municipal state-owned enterprises, had a tough time obtaining bank credit last year, which slowed their purchase of smart cards. This trend continued until the end of the first quarter in 2009 when China's stimulus policy encouraged banks to lend to cable operators. As they receive funding in the months ahead, cable operators will resume purchases of smart cards in the second half of the year. So revenue is expected to pick up in the second half.
2) Economic Recovery: The Chinese economy likely bottomed in the first quarter, and we're already seeing improvement in general economic conditions there. This will drive continued digital cable growth, as consumers feel more comfortable spending on digital cable. Also, Chinese cable operators tend to purchase smart cards near year-end, making this a seasonal business.
3) Favorable Government Policy: Last week, in an effort to push cable digitization forward, nine Chinese provinces announced a three-year tax waiver for cable operators. This will add 5% to the cable operators' bottom-line and will boost smart card sales. More provinces may follow suit, which would accelerate China's cable digitization process.
So much of the decrease in China Digital's earnings in the first quarter was a direct result of seasonality and the global financial crisis pinching banks lending practices. Eric also explained that some of the decline in margin was attributable to increasing R&D spending, as the company is working on movie-on-demand, interactive TV games and other new businesses.
After my conversation with Eric, I was feeling much more optimistic about China Digital. The causes for the decrease in earnings during the first quarter are short-term issues. And given China's enormous television audience, the three factors mentioned above are all potential long-term bullish catalysts for the company. So, I recommend that you to start buying STV again below our original limit price of $9.


June 4th 2009: China Digital TV (NYSE: STV) has won two new contracts to provide conditional access systems to Jiangxi TV Network Co., Ltd and Zhongguang Movie and TV Satellite Co. Ltd,. Jiangxi TV Network is the provincial level TV operator in the area and covers nearly 5 million cable TV users across 11 municipalities. The new contract will allow the network to transmit up to 200 digital channels to its users.
Meanwhile, STV's contract with Zhongguang Satellite will allow the company to provide its new Miracle 3.0 SMS solution to the satellite company. The Miracle 3.0 SMS solution will allow Zhongguang to optimize its customer account management and fee collection process. Zhongguang Satellite is a China Central Television (CCTV) subsidiary that distributes content from four CCTV channels to more than 300 million users via more than 7,000 head-end receivers in China. These deals will add nicely to the company's bottom line. Continue to buy STV under $9.


July 16th 2009: China Digital TV (NYSE: STV) shipped approximately 2.13 million smart cards in the second quarter, slightly lower than its forecast of 2.35 million to 2.55 million. Management noted that the miss was due to some cable operators delaying digitization projects. However, the company won 12 new contracts to install CA systems in China in the past three months. As China moves to government-mandated full broadcast digitization by 2015, China Digital TV is well positioned to play a leading role in China's ongoing digital mass migration and beyond. Continue to buy STV under $9.

July 30th 2009: China Digital TV (NYSE: STV) will report second-quarter financial results on Thursday, August 6, after the market closes. I expect a slow second quarter but better forward guidance for the second half. Continue to buy STV under $9.

August 6th 2009: China Digital TV (NYSE: STV) will report financial results for the second quarter today, after the market closes. I expect the earnings to be stable, but look for stronger guidance in the second half. Buy STV under $9.

August 13th 2009: China Digital shares also fell dramatically -- 17% -- following the company's second-quarter earnings report last Thursday. The company announced that revenues dropped 25% to $14.6 million year-over-year, and 2% from the first quarter. The drop in revenues was mainly due to a decrease in smart card sales as only 2.13 million smart cards were shipped during the second quarter compared with 2.69 million in the same quarter of 2008.
While I was expecting flat results, the forward guidance was weaker than anticipated and that's what whacked the stock last week. China Digital management looks for smart card shipments of 1.85 million to 2.25 million in the third quarter and revenues of 411.8 million to $14 million.
The company is currently struggling because a number of cable operators decided to postpone their digitalization projects, cutting demand for China Digital's smart cards. Because of the recent miss in earnings, disappointing outlook for the third quarter and decreasing demand for China Digital's smart cards, I will talk to company management tonight to gain a better idea on what's currently happening in the company's business and industry. Until I have more details, I recommend that you to hold STV.


August 20th 2009: China Digital TV is China's leading provider of smart cards that are used to upgrade from analog to digital TV. I recommended the stock to take advantage of the Chinese government's policy to have all Chinese households upgrade to digital service by 2015. But despite this demand for its products, the company announced a disappointing second-quarter results last week, leading me to speak with Eric Yuan, the company's director of investor relations.
Eric told me that despite China's economic recovery and improving finances for cable operators (STV's primary customers), they have been slow to purchase more smart cards for digital upgrade. The main reason for this is a lack of quality content for TV audiences, who have limited incentives to upgrade to digital right now. Although there are more than 60 TV stations only available to digital customers, most of these stations offer low-quality programming that is unappealing to consumers. This hampering is caused by Chinese government control and restriction of television programming, something that did not exist in the U.S., Hong Kong or Taiwan.
Although I am long-term bullish on the digital entertainment market in China, I am disappointed by China Digital's near-term prospects and I see no quick turnaround in sight. I want you to sell STV and cut our losses.


Price: $7.43


Did anybody buy at $10 for a quick 25% loss?

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