China Digital TV Holding Company (NYSE:STV) is the leading provider of CA (Conditional Access) systems to the PRC's (People's Republic of China) rapidly growing digital television market. Its CA systems, which consist of smart cards, head-end software for television network operators and terminal-end software for set-top box manufacturers, enable digital television network operators in the PRC to control the distribution of content and value-added services to their subscribers and block unauthorized access to their networks.
In addition, the company licenses its set-top box design to set-top box manufacturers and sells advanced digital television application software, such as electronic program guides and subscriber management systems, to digital television network operators.
The company derives revenues from the following two sources:
Products: Sales of smart cards and other products to digital television network operators.
Services: Provides CA system related software and services like software for CA systems, subscribers management systems and electronic program guides, licensing of set-top box design to set-top box manufacturers etc.
The market for digital television CA systems and software applications is intensely competitive. Competition is there from international as well as domestic companies.International competitors in the CA systems business are Conax AS, Irdeto Access BV, Kudelski SA, and NDS Group. These companies have longer operating histories and substantially greater financial, technical and other resources than the company. Main domestic competitors are Compunicate Technologies Inc., DVN Holdings Ltd., and Sumavision Technologies Co., Ltd., all of which are non-state-owned companies operating mainly in the China.
The company's main customers include RC television network operators, including cable, satellite and terrestrial television network operators, and enterprises that maintain private cable television networks within their facilities.
The company has showed very healthy revenue and profit growth in the recent past. Its revenues and operating income has rise by over 110% in H1 FY 2007 compared to the same period last year. The company's balance sheet is healthy. Cash flow is sufficient to meet current needs.
Valuation/Offer value/Company/Industry expectations (these are just assumptions and the company can perform differently)
At the offer price of $12 per share, company shares are available at PE nearly 28 (annualizing first half FY 2007).
Our IPO Score / Rating: 90/100
Expect the industry to grow at 80-90% year over year for the next couple of years and 40-50% for next two years and 25-30% thereafter. The company is expected grow in tandem with the industry. Due to rising competition, margins may see a downtrend.
- Competition is expected to rise. The company currently enjoys a high market share of nearly 45%, which is difficult to maintain due to rising competition.
- Highly regulated industry. Any adverse policy change by the government will affect the industry/company adversely.
- Any introduction of alternative and better technology will effect company adversely.
- N-T Digital TV** may be deemed not to be in full compliance with certain legal regulatory requirements relating to the production and sale of encryption products. The relevant Chinese government authorities could require N-T Digital TV to cease such activities and impose administrative penalties including fines, which could have a material adverse effect on company's business.
- The company has not yet obtained an encryption product sales license. The Chinese encryption authority recently introduced regulations that require users to use only encryption products that are certified by the encryption authority and purchased from vendors who hold an encryption product sales license. The company has commenced the process of applying for but not yet obtained an encryption product sales license.
- Company CA systems have not been certified by the encryption authority. The company's CA systems have not been certified by the encryption authority because the company has not adopted the government-designated algorithms for its CA systems. King & Wood, the company's Chinese counsel, has advised that because the encryption authority has allowed a transition period, of a duration yet to be determined at the sole discretion of the encryption authority, for the company to adopt the government-designated algorithms.
- Exceptional industry growth. Chinese television network operators are in the early stages of switching from analog to digital transmissions, and the Chinese government has set a target of 2015 for operators nationwide to complete the digital transition. This gives a huge growth opportunity for CA Systems providers in China.
- Leading position. The company currently enjoys a high market share of nearly 44% and due to its leadership position the company is expected to be the biggest beneficiary of exceptional industry growth.
- Countrywide coverage. As of June 30, 2007, the company had installed CA systems at 130 digital television network operators in 26 of the 32 provinces, this kind of reach can prove very useful for future growth due to geographical spread of country.
- Strong relationships: The company holds strong relationships with local cable television markets across the China. The company also hole extensive relationships with set-top box manufacturers and players in the cable television industry.
- The company already provides set-top box design services and it will help the company to manufacture their own set-top box if needed. All proceeds received by this offering will be utilized by company.
**The company is a Cayman Islands holding company and conducts substantially all of its business through Super TV, its operating subsidiary in the China, and through N-T Digital TV, a Chinese company that it control through contractual arrangements. The company owns 100% of the equity interest of CDTV BVI, a British Virgin Islands holding company that, in turn, directly owns 100% of the equity interest of Super TV.