US-listed Chinese stocks are on fire. Profits of more than 50% or even 100% on a daily basis are the new rule. Nothing wrong with it, if it is justified.
Rallies in US-listed Chinese stocks for fundamentals that do not make sense to any prudent investor is just insane. A company like VisionChina Media (VISN) has no valuation to trade into the $18.00 price range for a company that lacks profits, has an increasing huge debt and makes no profits.
One company that lags behind but could easily be on investors' radar again is a company called GigaMedia (GIGM). I have written about this company in the past, and I think now the time is right to review the company once again. The company is a turnaround situation play and trades at a considerable discount to its fundamentals.
GigaMedia Limited, through its subsidiaries, engages in the operation of online games for online game players and cloud computing software and services business in Asia.
Online games business
GigaMedia is investing in and repositioning its online games business to align itself with strong growth in browser/mobile games in the social casino sector. The company is leveraging its expertise in online casino games to develop new browser/mobile casino games in-house, which it expects to launch beginning in late 2013. Supporting this, management is also making critical operational improvements, including upgrading the game server system and integrating the game testing/development environment to enhance efficiencies and strengthen operations. Management targets a comprehensive, multi-platform offering of self-developed browser, mobile and PC-based games by early 2014, delivering improved financial performance and lower business risk.
Cloud services business
Launched in April 2013, GigaMedia is investing in and positioning its cloud services business to capitalize on strong opportunities for software as a service in the SME sector in Greater China and demand for various cloud services in the region's government sector. GigaMedia plans to expand the scope, reach and quality of its cloud offerings in 2013 by developing new strategic channel and technology partnerships; the strategic cooperation agreement with global technology firm Atos announced in April 2013 and the cooperation with the Taipei City government announced in May 2013 represent initial success. Following the current trial operational period, management plans to increase marketing in late 2013 to grow its subscriber base
GigaMedia's 2013 Turnaround Strategy
The turnaround took longer than I initially expected, more than two years already.
For this year the following issues were addressed:
- Restructuring, cost controls and team incentive programs implemented over the past two quarters by new management are helping to address the challenges of a general market decline in GigaMedia's legacy PC-based games business and create a leaner business, better positioned to deliver sustainable growth and profitability.
- General and administrative expenses have decreased approximately 31 percent since the fourth quarter of 2012.
- Corporate operating expenses have decreased approximately 49 percent since the end of last year.
- Loss from operations has decreased approximately 47 percent from the fourth quarter of 2012, when excluding the goodwill impairment in the fourth quarter of 2012.
- Management plans to begin launches of new social casino games late in the fourth quarter of 2013. The games will be in browser and mobile format, positioning GigaMedia to benefit from strong growth trends in these markets. (See GigaMedia's June 25 announcement for details.)
- Many people do not trust Chinese companies for their lack of regulated accounting standards. In 2Q 2013, shareholders have approved the engagement of global leader KPMG (one of the big four accounting firms). The firm has offices in Taiwan, which will facilitate rapid, efficient collaboration with GigaMedia. The change of auditors to KPMG is part of new management's initiatives to enhance shareholder value.
The company is trading around $1.10 and has a market capitalization of only $55 million as of October 16, 2013. Cash per share is $1.44 and the book value is $2.28. The company has no debt on its balance sheet.
This stock has limited downside risk (low $0.87) but could easily increase, especially if the turnaround is completed successfully.
The fact that the CEO has backed up his own company is also a bullish sign.
As value investors we want to own stocks that are cheap not only in relation to other equities but also in absolute terms. Our fund RJT Capital would rather buy a well-managed, good business at a depressed price, but such situations are few and far between.
GigaMedia can be purchased well below its replacement-cost value as a business, and is currently underowned, unloved, and undervalued.
We think GigaMedia makes progress in lowering its cost structure, but now it's time for the company to drive revenue growth. We are looking forward to the coming quarters and are confident the company can achieve profitability the next fiscal year.