China Digital TV Holding Co. Enters the Bargain Bin

| About: China Digital (STV)

We all know of the tremendous hype associated with anything China-related over the last year or so. The initial euphoria over China Digital TV Holding Co., Ltd.'s (NYSE:STV) IPO back on Oct. 8th was no exception to this Phenomenon. After initially pricing at $11-$13, then revised to $13-$15 due to huge demand, Morgan Stanley priced this IPO at $16 for 12 million shares and opened trading at $30.

Mind you the timing of this particular IPO couldn't have been better, China was "on fire" during that time frame and, low and behold, STV's share price surged to a BIDU like share price of $55 within 48 hours, for a gain of 243% from the original pricing date, (compare that to BIDU's IPO (two years ago) which was priced at $27, opened at $66 and peaked at $154 the next day (a 470% gain!).

FYI -Within 6 months BIDU traded as low as $44 ($44.44 to be exact).

Today? BIDU is trading at $392 currently and reached $429 only a short month ago.

After this initial run-up in STV shares, we experienced the much anticipated "correction" in all things China and China Digital TV Holdings shares were knocked all the way down to $25 (Q4 guidance didn't help)!

Is This the Opportunity of a life-time?

Getting another chance to buy this Gem at Pre-IPO prices

China Digital TV Holdings is the largest vendor of smart cards for CA systems with a market share of 44% in 1H07. China has the largest TV viewing market in the world with TVs in 362 Million households of which 139 Million subscribe to Cable TV. STV derives the majority of its revenue from selling smart cards (88% of revs in 1H07) for set top boxes.

Chinese TV Network operators are in the early stages of switching from analog to digital transmissions and the government has set a target of 2015 to complete the digital transition. STV is the primary beneficiary, because CA systems are an essential component to any Pay-TV platform. There are few alternative services, such as satellite broadcasting, that transmit programming beyond 6 analog channels. With China's economy growing at almost a double-digit clip (about 8% growth yr/yr), more TVs in more households due to higher incomes is an inevitability.

Let's talk numbers

The company is profitable and posted 1H07 net revenue of $21.6 million, up 108% y/y with operating margins of 61%! (Just for comparison, BIDU's margins are at 33%.)

STV's Q3 numbers beat expectations; EPS of $0.20 vs the street $0.15; Revs. at $14.4 million vs. the street $12.9 million with operating margins of 65%.

Management gave 'in-line' guidance for Q4 ($15.5 - $17.5 million vs. the Street's $16.05), a nice change from the over-promise, but usually under-deliver guidance given by most other hyper-growth companies out there.

Also, on the conference call the company mentioned the signing of yet another 18 contracts potentially worth up to 12 million more households (contract length is usually 5+ years) .

If you apply a Growth rate of 1.5 (see Thomas Kelly's very capable calculations), STV's share price should and will see $50+ within a short amount of time and probably post larger gains beyond that once institutional support comes along.

So, having said all that, Wednesday's closing price of $31.55 is a steal in my opinion and probably your last chance to get in at/around the IPO first day trading price !

Full Disclosure: Author is long June 2008 50 calls.