Ninetowns has a market cap of $140 million, cash of $116 million and no significant long term debt. The trailing P/E is about 24 and the one analyst that follows Ninetowns predicts a loss of $0.02 per share in fiscal year 2007.
In August of 2005 the business outlook for Ninetowns changed dramatically when the State Administration for Quality Supervision and Inspection of the People’s Republic of China (PRC Inspections Administration) decided to create a free e-filing software package to facilitate the import/export process in China. Although the PRC Inspection Administration hired Ninetowns to provide the new software, the PRC Inspection Administration paid Ninetowns a paltry 400K for their services and Ninetowns was forced to offer a scaled down version of their core software product for free.
Since the introduction of the free e-filing software, Ninetowns has struggled financially. Revenues and profits have dropped consistently including in a recently reported loss in the fourth quarter of 2006. Although Ninetowns has been able to increase the number of service contracts and premium services sold, this increase has not offset the revenue lost due to the free software option now available.
With the B2G business at Ninetowns struggling, the company has been looking for other business opportunities. Considering Ninetowns current customer base of over 130,000 businesses involved in import/export transactions in China, a B2B business that leveraged this customer base was the obvious choice. In September of 2006, Ninetowns acquired a 16.25% interest in Global Market Group Limited, a Chinese B2B trade facilitator. Although this was a positive sign, this investment did not show investors that Ninetowns was fully committed to a strategy change to the B2B market place.
In late 2006, Ninetowns launched tootoo.com, its first full featured entry into the B2B marketplace. Although financial results have yet to be reported for tootoo.com, a look at the Alexa ranking shows that tootoo.com is experiencing significant traffic. Tootoo.com has a current Alexa rank of 2,045 compared to a rank of 2,098 for competitor Global Sources, 374 for MadeinChina.com, and 97 for Alibaba.com.
Although a high Alexa rank doesn’t necessarily translate into revenues and profits, the quick jump in traffic at tootoo.com does show that Ninetowns has the ability to leverage their current customer base.
A few weeks ago Ninetowns announced the next step in its B2B strategy. By acquiring Baichuan, a leading Chinese vertical search engine, Ninetowns plans to offer industry specific web search for suppliers and buyers engaged in Chinese international trade. In order to enhance the quality and relevancy of search results, Ninetowns plans to use the supplier verification technology from its existing iDeclare and iProcess service platforms.
The Baichuan acquisition allows Ninetowns to merge tootoo.com with Baichuan’s yaphon.com. Baichuan has entered into alliances with more than 30 Chinese B2B portals with access to 400,000 suppliers and 1.5 million products. Baichuan also introduced the Total Quality Sourcing [TQS] ranking algorithm to improve search result relevancy and quality. By combining TQS and Ninetowns supplier verification system, Ninetowns hopes to gain a competitive advantage over the competition by focusing its search results on companies that have passed multiple quality standards.
Although Ninetowns core software has been hurt significantly by the introduction of the free alternative, the fourth quarter results have finally stopped the downward spiral of revenues. On a year over year basis, the fourth quarter of 2006 had a significant decline compared to fourth quarter 2005 results, but revenues actually increased from the third quarter of 2006. This increase was due in large part to increased sequential sales of iDeclare packages (+300) and iDeclare service contracts (+5,500). The net loss reported for the fourth quarter was largely due to increased spending on R&D for the new B2B platforms (+$779K).
Although there is no guarantee that the new B2B strategy at Ninetowns will be successful, Ninetowns has some unique advantages in this field. By leveraging its current customer base and utilizing the only Chinese developed vertical B2B search platform, Ninetowns can rapidly grow internet traffic while having a better understanding of local business customs than the foreign competition.
On March 22, 2006, SEC from SC 13G was filed for Ninetowns showing that Netease, founder and CEO Lei Ding purchased 3,070,028 shares in Ninetowns representing about 9% of total shares outstanding. This shows that at least one prominent investor, knowledgeable in Chinese on-line businesses, has confidence in Ninetowns.
The core B2G import/export software business at Ninetowns appears to have stabilized and with increased premium services, this business should make a small profit or at least break even going forward, but the real potential in Ninetowns is in B2B. Although revenue projections are impossible at this stage, competitor Global Sources (GSOL) has had rapid growth in profits and revenues recently. Although Global Sources relies heavily on sourcing fairs to facilitate transactions, Ninetowns has the potential to succeed without sourcing fairs if its search results can accurately provide quality import/export leads.
At Wall Street Mayhem we think Ninetowns has a compelling valuation at current prices. After backing out the cash, Ninetowns has an enterprise value of only $24 million. Considering the strategic B2B advantages Ninetowns enjoys due to its extensive customer base and its ability to integrate quality measures into B2B search results, Ninetowns has the potential to make a significant impact on the B2B market place in China.
Suggested Trades: BUY NINE near $4, set stop loss at 15% ($3.40)
Full disclosure: Wall Street Mayhem is long NINE
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