4 China IPOs for the First Week of February

by: IPOdesktop

China IPOs on tap include: China Century Dragon Media (NYSEMKT:CDM), Trunkbow International (NASDAQ:TBOW), Zheng Hui Industry (ZHIC) and Zuoan Fashion Limited (ZA). Eight others totaling $1 billion are scheduled -- see IPO calendar & valuation summaries

China Century Dragon Media's (CDM) will offer a $9 million IPO with a market capitalization of $57 million at the price range mid-point of $6.50. The IPO is scheduled for Tuesday, February 1, 2011

SUMMARY & CONCLUSION -- For the nine months ended September 2010 compared to September 2009 sales were up 84%, earnings were up 83%. The company had a low Price/Earnings ratio of 6. IPO proceeds could help increase competitive advantage by enabling CDM to buy bigger blocks of CCTV ad time to repackage with added services. this is a small IPO at only $9 million.

CDM Valuation Metrics

Business: CDM Repackages blocks of advertising time on certain channels on China Central Television (“CCTV”). The company assists customers in identifying the most appropriate advertising time slots for their television commercials. CDM does this based on the customer’s advertising goals and in developing a cost-effective advertising program to maximize returns on their advertising investment. CDM provides production services to help clients integrate market resources and find partners to assist with producing the commercials. CCTV is the largest television network in China. It currently has 21 public channels and 19 pay television channels and reaches approximately 90% of the households in the PRC.

Growth: CDM intends to increase purchases of advertising time aired on CCTV to help clients reach a diverse audience. It plans to use IPO proceeds to acquire larger blocks of time.

Competition: CCTV’s advertising time, particularly prime-time advertising time, is limited and is highly coveted by advertisers and advertising agencies. As a result, there is intense competition for such advertising time. In particular, CDM faces intense competition for CCTV-related advertising business from a number of domestic competitors: Such as Walk-On Advertising Co., Ltd. (San Ren Xing), Vision CN Communications Group (Tong Lu), Charm Communications, Inc. and China Mass Media Corp., which may have competitive advantages. This includes advantages such as significantly greater financial, marketing or other resources or stronger market reputation.

Use of proceeds: $7.2 million, from the sale of 1.4mm shares. The company will use 20% to obtain more advertising time, 40% to obtain advertising time and cooperation rights on regional television stations. The remaining 40% will go for general corporate purposes.

Trunkbow Inter’l Hldg's (TBOW) is a $30 million IPO with a market capitalization of $195 million at the price range mid-point of $6. It is scheduled for the week of January 31, 2011

CONCLUSION: The company has experienced flat income since 2009, while profit margins of 48% seem unsustainable. TBOW's 28 times annualized earnings seems too high for no significant historical growth, in a market that itself is growing.

TBOW Valuation Metrics

Business: TBOW offers telecom operators in China application platforms on which to offer Mobile Value Added Solutions (“MVAS”) to subscribers. This enables telecom operators to offer their subscribers access to unique mobile applications, innovative tools, value-added services and an overall superior mobile experience. TBOW believes it adds value to clients by helping them increase average revenue per user and decrease subscriber churn.

Customers: Primarily telecom service providers in the PRC, including local branches of China’s three major cellular carriers, China Telecom (NYSE:CHA), China Unicom (NYSE:CHU) and China Mobile (NYSE:CHL).

Growth plan: Each of the 30 provinces, municipalities and autonomous regions contains its own self sufficient cellular operating unit with separate P&L responsibility. In other words, with 30 regions, there are 30 separate operating companies per cellular carrier. This model is replicated in each of the three major carriers, resulting in a total of ninety potential clients within China.

The PRC government has mandated that these mobile payment services and MVAS functions must be available to all provinces over the next five years. With such services currently available in 13 provinces, the 17 remaining provinces will be seeking them from the market- with Trunkbow being a major incumbent, fully vetted at a corporate level and with patented technology. TBOW was initially focused exclusively on the PRC market. It is now actively positioning its product sets with carriers in the U.S. and Europe and is entering the global market.

Intellectual property: TBOW has 164 filed patent applications, of which 50 have been granted by the National Intellectual Property Administration of the People’s Republic of China. The company has recently begun the process of filing for international and U.S. patents in order to protect intellectual properties globally.

Use of proceeds: TBOW plans to use $27.4mm from the sale of 5mm shares. Some $15 million will go to building out mobile payment service platforms in Zhejiang Province, Xinjiang Province, Shandong Province, Shanxi Province and Henan Province in the PRC. These will be pursuant to terms presently under negotiation between certain of TBOW’s resellers and China Unicom. The balance will go for working capital and general corporate purposes.

Zheng Hui Indstry (ZHIC): This $15 million IPO comes with a market capitalization of $32 million at the price range mid-point of $8.50. It is scheduled for Wednesday, February 2, 2011

SUMMARY: ZHIC has a low Price/Earnings ratio of 8. 1.1 times book value, for the nine months ended September 2010 vs. September 2010. In this period, income declined to $2.9 million from $3.1 million on a 20% increase in sales. Gross margins declined to 17% from 20%. Revenues in 2009 were up only 10% compared with 2008. This is a small, $15 million IPO.

ZHIC Valuation Metrics

Business: ZHIC has become one of the leading vertically-integrated duck producers in Shandong Province, with the value chain of parental breeder duck raising, hatching, feed processing, commercial duck raising, processing and sale of duck products. ZHIC has the capacity of hatching 10 million ducklings and processing 8.5 million meat ducks annually.

Use of proceeds: From the sale of 1.76mm shares, the company plans to raise $13mm. Of that, $11 million to $12 million will go for the acquisition or construction of a new factory, including processing and cold storage facilities, and related equipment; The remaining $3 million will be used to expand the company's current facilities

Holdover from last week Zuoan Fashion Limited (ZA).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.