CDC Corporation (NASDAQ:CHINA) is enjoying a three-part recovery after difficult performance in recent years. All three businesses (Software, Mobile Value Added Services [MWAS] and On-line Gaming) are showing solid growth.
Recent comments by management about ‘unlocking shareholder value’ have us thinking about the value of a break-up of the company or spin-off of one or more businesses. In this note, we examine the possible value of each of the parts of the business and note that the sum-of-the-parts valuation could be as much as double the current share price.
1. Software – CDC provides Enterprise Resource Planning [ERP] and Customer Relationship Management [CRM] software to the middle and lower end of the corporate market. Competitors such as SAP and Oracle do not compete as aggressively in this space and CDC uses acquisitions and a powerful Franchise Partner Program to address this market. We believe CDC software segment revenue will grow by 16% in 2006 and 2007. Industry research predicts that ERP will grow strongly in the next five years and CRM enjoyed a significant growth in last year.
2. Mobile Value Added Services [MVAS] will shrink in coming years as a result of new policies from China Mobile – But CDC is not as exposed as some other players.
3. Gaming – As a result of acquisitions and strong organic growth, gaming revenue is growing strongly. We expect revenue growth of 70% in 2007 and 22% in 2008 and that margins will widen in this division.
Overall, we believe CDC’s EBIT will double EBIT in 2007. With conservative variables in our cash flow model, we conclude a target price of $7.90, 20% higher than the current price.
A sum-of-the-parts valuation using Price/Sales, P/E and FV/EBITDA for the separate divisions indicates that the shares are worth $13 - $16. BUY.