China Digital Holding: Buy This IPO

| About: China Digital (STV)

China Digital TV Holding (NYSE:STV) is the leading provider of CA (conditional access) systems to the rapidly growing Chinese digital television market.

The company provides digital TV network operators with products and services which are key components on-demand viewing and pay-per-channel programming, allowing them conditional access content-wise.

The company's core products and services include end-to-end CA systems, head-end software and terminal-end software, other digital television application software for television network operators, integrated circuit cards and set-top box designs.

As of June 30, 2007, China Digital TV had installed CA systems at 130 digital television network operators in 26 of the 32 provinces, autonomous regions and centrally administered municipalities in the PRC (People's Republic of China).

Key Points

The digital cable TV market in China is experiencing significant growth and could be described currently as a booming market.

Last year, the digital cable market more than tripled helped by the Chinese government's ambitious goal of converting its over 380 million analog TV subscribers to digital TV by 2015. The digital transmission technology is continuously being explored by researchers for a robust and yet flexible, future-proof modulation scheme.

According to reports, the number of digital cable TV subscribers in China already surpassed the 16 million mark and could reach as high as 25 million by the end of 2007 alone. The number is projected to rise to nearly 170 million households by 2010.

China is not only one of the fastest-growing markets for digital and cable TV, but the country also has become an important supplier of digital set-top boxes in recent years and that trend is only going upward. In fiscal '04, China supplied almost 40 percent of the worldwide digital set-top box market, including the domestic one.

By the end of the decade, China will be producing more than 50 percent of the world's digital set-top boxes.

The estimates for China depend a great deal upon continued economic growth, stability and significant investment in infrastructure however, its growth prospects - in this segment again, remain significantly strong.

In this context, STV (China Digital TV Holding) seems very well-positioned to translate present market conditions favorably and continue developing its digital broadcasting business strategy while strengthening its capital base and financial position. This will subsequently facilitate its rapid roll-out of TV digitalization in the country and prompt further market share ownership.

China Digital TV is currently run by a very capable and well-connected management team. STV's research department, took part in the creation of China's industry standards transition for CA systems which are an essential component of any pay-television platform. This led to Digital TV establishing a significant presence geographically of network operators and as result, gains of additional customer base. Digital TV beat the competition in the first half of fiscal '07 with a 44% share of smart cards shipped, more than double that of its closest competitor.

Financial Data

One year sales growth came in at 133% to $30.6 million in fiscal '06 from $13.1 million in fiscal '05. Net revenues posted an increase of 132% to $30.4 million in fiscal '06 from $13.1 million in fiscal '05. Net income increased by 186% to $13.0 million in fiscal '06 from $4.5 million in fiscal '05.

In the six months ended June 30, China Digital more than tripled its profit to $12.2 million, from $3.4 million in the year-ago period. Revenues from sales of smart cards accounted for 85.6% and 87.9% of total revenues in 2006 and in the six months ended June 30, 2007, respectively.

China Digital TV Holding's IPO price range has been revised to $13.00-$15.00 per ADS from initial $11.00 to $13.00 per ADS. 12 million shares have been offered. The company plans to use proceeds from the IPO, which are estimated at about $131 million, for research and development, sales and marketing, acquisitions and general corporate purposes.

Underwriter(s) are Morgan Stanley and Credit Suisse Bank.


Based on the combination of an experienced and well-connected management team along with company's strong fundamentals, this IPO should be considered as a buy.

Disclosure: none