About The Company
Trunkbow International Holdings (TBOW) is a leading developer of Mobile Value Added Solution (“MVAS”) and Mobile Payment Solutions (“MPS”), used in Chinese smartphones. These platforms are deployed by the three major Chinese carriers to offer their subscribers enhanced smartphone features that increase average revenue per user and reduce churn. Trunkbow provides both hardware and software solutions that are integrated into clients’ existing IT infrastructure. It also offers technical support and system maintenance for clients.
Trunkbow stands in a highly coveted position because it is an approved vendor to each of the “Big Three” Chinese mobile vendors: China Mobile (CHL), China Telecom (CHA) and China Unicom (CHU). Together, these three firms operate a colossal oligopoly in the world’s largest telecommunications market. Between them, they have over 800 million customers. Being government agencies, the Big Three vendors have a strong preference for continuity and compatibility in their various systems, which fortifies Trunkbow’s competitive standing. Trunkbow’s platform solutions are highly integrated with the Big Threes’ existing IT and networking infrastructure, making it very difficult for them to switch. Trunkbow has a first mover advantage and is the undisputed leader in the Chinese Mobile Payment industry. It was the first firm to commercialize Mobile Payment Solutions for in-store POS and Mobile E-commerce in China.
Trunkbow is also uniquely positioned to benefit from growth in one of the largest and most rapidly growing industries in the world: mobile applications for Chinese smartphones. Booming growth in this sector is supported by increased smartphone usage among China’s aspirational middle class, the largest and fastest growing middle class demographic in the world. Rapidly expanding per capita GDP and an increasing trend towards consumerism is further propelling this growth. China’s telecom sector is already the largest in the world, as measured by population.
Within the growing telecom market, China has undergone a mobile revolution in recent years, driven by a shift in e-commence under which end users are seeking instant gratification through a broader range of purchasing options such as mobile purchasing. The e-commence opportunity in China is massive. There are an estimated 485 million internet users. This is more than double the number of users in the US. And penetration is only 36%, compared to 78% in the US, creating tremendous opportunity for further growth. Trunkbow mobile applications are specifically positioned to benefit from this growth.
Within the mobile e-commerce market, these growth trends are highly encouraging for Trunkbow:
- Online transactions doubled year-over- year to RMB170 billion in the first quarter of 2011
- There were around 300 million mobile Internet users in China at the end of 2010; this number is projected to grow to 750 million by 2014.
The value of Trunkbow’s platforms to its Big Three customers increases with the average revenue per user of its subscribers and decreases with subscriber churn. In order to support its competitiveness, Trunkbow invests continuously in R&D to develop innovative technology solutions. It works extensively with customers and technology partners to develop cutting edge technology solutions that are relevant to consumer trends and market demand. 100 R&D professionals at the firm have filed 164 filed patents applications over the years, of which 50 have been approved by the National Intellectual Property Administration in China. The firm has also have begun the filing for international and U.S. patents in order to protect its intellectual property globally. The fact that Trunkbow’s platforms and services have been relied upon by the Big Three continuously over the past ten years is a testament to its standing as a well managed, trusted provider of technology solutions.
The R&D division is led by three highly experienced industry veterans, Dr. Hou Wan Chun, Dr. An Chun Ming and Mr. Wang Xin. Dr. An Chun Ming pioneered Next Generation Network (“NGN”). Prior to joining Trunkbow he led multiple development efforts at Bell Labs Fellow during his 30 year tenure. Dr. Hou Wan Chun previously worked as an engineer for leading U.S. telecom companies, including Lucent, where he was involved in developing new intelligent network applications.
Tremendous Value Opportunity
Trunkbow is currently trading at 3.4x trailing twelve month earnings, a phenomenal discount to intrinsic value by any measure. When one factors in earnings growth, this multiple becomes even more attractive. The company has recorded tremendous compounded annual growth of 47% over the past 4 years (based on annualized YTD Q3 2011 earnings since Q4 results have not yet been released). As shown below, if earnings can be sustained –as I have described previously, they can be – then this discount gets even deeper over time.
Click to enlarge images
Taking a look at net margins, the numbers are eye-popping. These margins are a function of the value Trunkbow adds to its telecom vendor customer base as well as their willingness to pay for Trunkbow’s lucrative proprietary technology. Trunkbow’s strong IP portfolio and proprietary technology are central to customer captivity and the high margins.
In summary, value opportunities like these are almost exclusively found in the realm of small market cap stocks like Trunkbow. Given that there is no dearth of small cap names, it does take some digging to identify opportunities like this. When they are found, these opportunities represent a tremendous opportunity for capital appreciation. As a final note, management is heavily vested - management ownership at 9/30/2011 was 46.9%, a very reassuring sign.
Disclosure: I am long TBOW.