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November 16, 2005
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They just bought Shanghai Framedia Advertising, making the largest outdoor advertising enterprise in China, this type of advertising is red hot and getting hotter, they do compete with Li Ka-shing, but there can be more than one winner in this business, and they lack diversification which should allow them to outperform Clear Media, Tom Group. Great blog!
It's the only chinese stock I know. personally I would recommend any kind of company which can enable the masses.. stuff like wireless broadband which is very cheap to roll out, and can still be censored by the government.
I bet TechFaith has been undervalued. The core business of TechFaith is actually not hi-tech R&D, but mass production. It applies mass production to mobile application level design, thus achieves higher margin from economy of scale.
Up to now, I didn't see the hope of real core technology developer in China, BOE tried to do that but up to now their temptation is not successful. In order to pursue global competence, Chinese companies have to utilize the clear local advantage -- low labor cost, under current context. Some analyst doom TechFaith's future with the presumption that TechFaith is trying to compete head to head with global cutting edged technology developer. But the reality is, the niche market for TechFaith is mid or low level mobile design, which is exactly what Chinese companies are good at.
Below is a little piece of strategy analysis based on my research toward TechFaith.
INDUSTRICAL ANALYSIS
- Handset producers worldwide are more price sensitive.
End product margin shrinks faster. So that producers need to deliver new models faster than before, with each model pursue less profit. The producer's marginal gain will shink under this trend, and thus become much more sensitive to the supply cost.
We expect TechFaith to secure more international clients, since it has excellent price competitive advantage. The handset producers are more sensitive over price today than before.
- Product life cycle is shortening (which is good for CNTF)
TechFaith has faster average design deliver turnaround than competitors. We expect this advantage will help TechFaith to bring in more contracts and thus generate more revenue.
- Designer from Japan and Korea
IDC analyst Kimura Michito said Japanese players have typically stuck to high-end model design, a factor that has kept them out of many developing markets and limited their ability to become serious global players.(Source: Reuters, Japan looks offshore for cell phone R&D)
We expect that the high-end section will still be occupied by top firms in Japan and Korea. TechFaith is not following the game rule with these high-end designers. The focus of TechFaith is COST. Thus, the B-model of Techfaith is totally different comparing with major design houses in Japan and Korea. According to TechFaith's CFO Eva Hon, TechFaith charges about $1.5 million per model, which is 8 to 10 times lower than its Japanese competitors.
We believe that at the mid and low level, design house from Japan and Korea could not compete with TechFaith and other Chinese and Taiwan incumbents. Japanese designers will stay in the high-end niche, thus will not be a real threat to TechFaith's business model in the following years.
- China will move up on the value chain.
This is a trend for most of the Chinese high-tech industries. Given this environmental trend, we can expected companies in China fall into the high-tech catogriy will continuely increase their competitive advantage in more sophsticated tech development thus better fit customer's need. From this point of view, TechFaith is better positioned against its global competitors for the following couple of years.
- The demand from handset manufacturing customers will be still strong in the following years.
We expect the handset market in Asia will continue to have strong demand for the design house like TechFaith, given the end-customer demand. Handset market in Europe and NA will become more diversified and personalized; therefore we expect TechFaith's contract from these two markets will continue to increase.
THE COMPANY
TeachFaith is trying to move down to the application design, including mobile software and one stop solution. But with its original business model and the mass manufacturing assemble line concept, we can't expect TechFaith will move up the value chain to chip design or key module design.
The business from module design and turnkey solution design will be expected to have a lower growth rate. We can foresee that TechFaith will invest more in the software design and application development and revenue from this part is expected to growth gradually. But given TechFaith's original business model, the transform from mass development of design solution to application development will not proceed very fast.
According to the CEO during the 2Q 2005 Call, the cell phone design work is 70% software-related. This is one of the reasons TechFaith wants to transform their growing engine from solution design to mobile software development.
THE B-MODEL OF TECHFAITH
- Low cost focused
- Mid and low level design
- Fast turnaround
- Close to most demanded customers (Asian market)
- Building up the "know how", tactic knowledge
- XX% from international clients, globalization, derivate the risks
- Transforming from solution and circus design to software development for mobile terminals, which has a unclear future.
THE SUPPLIERS
- Moving down the value chain, which makes the competition tougher
Analyze from the value chain perspective, players at the upper part of the value chain, like chip designers, tend to invade in the field where TechFaith stands. While as long as the end product market becoming more matured, manufactures have to increase their competitive advantage by investing in their own R&D department. The transition of the value chain is expected to complete in the following 5 years. So it is a very critical time for TechFaith since the revenue growth from circus design will turning flat and TechFaith must find new niche market and build up new competitive advantage in the next 5 years.
- Faster turnaround speed (in favor of CNTF)
- The modules are more integrated, leaving less work for Design house
THE COMPETITION
- The competition in this niche market is becoming tougher, very fast.
As the competition in this niche area becoming tougher, the margin of TechFaith's design business will drop to XX% in the following 2 years. The revenue model on which TechFaith build its business is to change the knowledge intensive process to labor intensive process. So TechFaith could survive with a relatively low margin. But investment return will not be stay at the same level.
- Niche market segmentation, including high-end and low-end
With above, I see a brighter future of TechFaith. I'd suggest a BUY.
Beijing-based Sinovac has three fully tested and approved vaccines (Hep A, Hep A & B, and endemic (not bird) flu, in various stages of marketing, production and sales. It has a Japanese Encephalitis vaccine in development. And it has two potential blockbuster vaccines: a SARS vaccine that is the only such vaccine in clinical trials (it has completed phase I trials, but progress has slowed with the (temporary?) ebbing of SARS mania) and a bird flu vaccine that has just completed preclinical testing and is about to start clinical testing this month, making its human avian flu vaccine one of only five or six in the world in clinical testing and the only Asian one, even though East Asia is 'ground zero' for the pandemic. China is totally behind Sinovac's bird flu vaccine; it has fast-tracked the approval process, is fully funding all R&D costs, and appears to be supporting pending Sinovac partnerships with other Asian nations, especially Thailand.
Bird flu is headline news and has brought a lot of attention and recent share price gains to SVA, yet, because it is Chinese and because Westerners assume that Chinese cannot compete in biotech, it is still way below the radar.
SVA's core business plan is NOT speculative, but poised for tremendous growth based on the unique products that SVA offers, its unique position within the Chinese health system and distribution network, and the support it enjoys from the Chinese govt. On the downside, it has suffered through some management 'hiccups,' such as a private placement involving unscrupulous investors and delayed financial reporting. But it seems to be improving and is committed to meeting international standards for its products and mgmt.
wins major Chinese Internet TV contract - CNBC.
UTSI-8.81 , + 2.24 (34.09%)
Coal is still the mainstay of energy in China. With new technologies, such as coal-to-liquids and coal gasification - including clean-burning technologies to reduce pollution, YZC should be a growing 'keeper.'
today the currency conversion stood at $1 = 8.08 yuan, the highest level in a very long time. RMB has appreciated just shy of 2.5% since july.
economist tao dong recently predicted that china may grow at a surprising rate of 10.1% in GDP for 2006, even though most western economists subscribe to massive slow down of asset investment growth from about 28% to 15%.
most western economists were in fact predicting either a hard or soft landing for chinese economy during 2005. but the much hyped bubble never quite developed and the landing never occurred.
if there is a chinese bubble, it was proven not to be contained within its boundary. the huge rise in export in 2005 has primarily been the result of a very rapid shift toward heavier and hi-tech industrial outputs, for example, steel, electric machinery, electronics, computers, etc.
even official consumption has been rising far faster than the GDP growth rate at 13+% annually for the recent years. auto and other durable goods outputs and home construction have been rising in more than lock-step.
rising affluence and consumption is mostly visible in the performance of CTRP and LONG --- travel and leisure have been rising enormously at above 50% clip this year.
NDRC's most recent forecast of $100 billion trade surplus for 2005 but only $117 billion for 2006 is probably preferring accelerating growth and consumption to accelerating RMB to dollar exchange rate. a view not dissimilar to that of tao dong. but no doubt the pressure to upped the RMB will continue to be very strong.
therefore, the space for rising online advertisement spending will be enormous in the coming year as the economic climate will remain upward dynamic and robustly expansive.
china reaction to the bird flu also has been quite sophisticated and organized. the government's policy seems clearly in favor of not to restrict mobility and commerce but to attack and contain the outbreaks with proportional forces.
as powerful as SARS was, it did not bend the trajectory of china's economic growth. and it was during the SARS the chinese internet industry underwent the fastest and most decisive growth in the recent memory.
all these bode extremely well for the internet industry, and in particular for SINA.
also The9 (NCTY). while Netease and Shanda are seeing growth slow, the9 should see world of warcraft grow over the next few quarters, boosting revenue. WoW is stealing users from Shanda and netease's games, and there are no new blockbusters coming out to challenge it. (Sahnda's D&D online will probably be late 2006 in china)
Besides comments already made, CNTF has recently opened offices in both the US and Japan to futher build business with companies outside of China.
ADY occupies a niche role in Chinese dairy production, producing powdered milk and infant formula for the growing middle market under the popular Feihe label. Acquisitions have opened up the markets for rice-based products, and ADY is expanding its production of soy and walnut based offerings which are also growing in popularity in China.
Legend Merchant Group reports, "China consumes 11 kg of total dairy per capita, versus a world average of almost 100 kg (266 kg in the US). Increasing disposable income, health consciousness, distribution and government support are driving growth. Despite lactose intolerance among Asians, precedent set by more developed Asian markets indicates consumption is driven primarily by disposable income. According to USDA statistics for dry nonfat milk, South Korea consumes 7 times China per capita, Taiwan 11x and Japan 16x. Given China’s population, modest increases in per capita consumption translate into substantial volume growth."
Company risk factors: ADY is concentrated in the Heilongjiang province. ADY does not own dairy cows, which could put price pressure on supplies and decrease margins in the future. This is partially offset by ADY's location in the milk-producing belt of China which decreases transportation costs.
Stock risk factors: The company is young, becoming a private company (publicly traded) in 1997. The stock is closely held by management and is currently illiquid. Management is still learning how to play in the big leagues of American stock exchanges - rookie mistakes have happened and will continue as they travel the learning curve.
Bottom line: ADY occupies a great position between the small mom and pop milk producers throughout China, and the large, inefficient state owned companies. ADY is a pure play on China's rising dairy consumption and remains a cheap stock. It has an enormous and expanding market. ADY will eventually attract both institutional investors as well as be courted by international companies looking for an entry into China. Not for the risk averse, but a small company with clear opportunities and management that is demonstrating its business skill.
best,
Jack Straw
Looking for a <b>low risk way to gain exposure to China?</b> CAX may be your answer. CAX tracks the AMEX China Index. This is an index that AMEX (American Stock Exchange) created. The Index is comprised "...of selected publicly traded stocks and American Depositary Receipts ("ADRs") of companies with significant exposure to the Chinese economy.
CAX is trading at $9.00, well below its $10 maturity guarantee. CAX is also 2.7% below its NAV of $9.22.
What does this mean? Well for one thing <b>there isn't any Price Risk</b> when held to maturity. Even if the Index stays depressed or drops further, <b>you'll still make 11% by maturity ($10-$9=$1 / $9 = 11%)</b>.
How about upside potential? The maturity payment will depend upon the percentage increase, if any, by which the "Final Average Index Value" exceeds the inital Index level of 112.05. The Index is currently valued at 103.40.
A more complete analysis of CAX is available on my
blog.
Jay Buster