China Digital TV Issues Guidance 'Disaster'

Shares of China Digital TV (STV) continued their uninterrupted nose dive to the single digits last night after management issued weak Q308 revenue growth guidance of just 8-15%. This compares to the 74.2% revenue growth the company posted for Q208.

Management sited the May earthquake and Beijing Olympic Games as the primary reasons why cable operators were delaying purchasing the company's smart cards.

In spite of the anticipated Q3 revenue shortfall, the company reiterated its full year smart card sales forecast of 11M units but did lower the high end of their full year 2008 revenue guidance from $84M to $83M indicating a deeper than expected reduction in the average selling price [ASP] for their smart cards.

The Q3 revenue warning, ASP pressures, rising R&D and SG&A expenses, coupled with the issues I raised in a previous Seeking Alpha article titled China Digital TV: Red Flag Warning? make investing in the company's shares a major risk at this point.

For these reasons, I anticipate the shares will selloff to the $8.00 to $9.00 range over the next 60 days before rebounding slightly in anticipation of the Q3 earnings report. Even at $8.00, the company would have a price to revenue ratio of approximately 7, which is above that of a company like Apple (AAPL) which has a solid track record of performance and a more stable revenue and earnings outlook.

The only solid item die hard long investors can bank on is the company's current $269.7M net cash position, which equates to nearly $4.50 per share. Management could choose to use some of this cash to buyback shares which would prevent any further share price erosion over the near term and may actually result in a significant short term bounce, since major holders control over 70% of the company's outstanding shares leaving only around 18M shares freely available for trading.

Another possibility is that Capital International Inc., who currently owns nearly 20% of STV's outstanding shares, may choose to average down on their original investment by purchasing additional shares. Earlier this year, the company purchased nearly 12M shares at a price of $20.00 per share. Since Capital International Inc. has already lost over 40% on their original investment, I believe such a transaction is highly unlikely.

Unbelievably, in spite of the stock's steady decline from $55.31 to just above $10.00, Credit Suisse and Morgan Stanley still maintain price targets above $30.00. At $30.00, STV would have a price to revenue ratio of over 25. Only a handful of hyper growth companies like Baidu (BIDU) and VisionChina (VISN) currently support such valuations. Unfortunately China Digital TV is not in the same league as these companies as the market for smartcards is finite and the company currently has minimal sources of recurring revenue.

Keep in mind that both Credit Suisse and Morgan Stanley were underwriters of the STV IPO and have been consistently touting the stock as it has continue to fall unabated. I believe the latest report will force both firms to severely reduce their price targets, which will no doubt anger those unfortunate investors who purchased shares on their recommendations.

At this point STV is a " Missouri " or "show me" stock. The company must meet and or preferably exceed their revenue and profitability targets for both Q3 and Q408, issue strong revenue growth guidance for 2009 and clear up several of the key outstanding risks prior to regaining the confidence of investors.

Disclosure: The author currently maintains an actively traded long position in shares of China Digital TV.

Comments

[stvcomment:]

you might want to show some other metrics for valuing the stock price. The PEG for example coupled with the cash is very attractive.

You are long STV ?

2008 Aug 07 07:47 AM

[tilut:]

STV , like several other companies , has seen its business significantly affected by the earthquake but it changes nothing for its business prospects which remain strong and will get more and more diversified over time.The company is cash rich and has a brilliant management that will take this company to a high level.Would not be suprise to see the stock in the 30s one year from now.

2008 Aug 07 08:09 AM

[Chinese Inv...:]

That is the worst analysis I have ever seen! Why did the author only focus on revenues? EPS? P/E? STV's revenue multiples look high is because their operating margin is extremely high!

2008 Aug 07 09:32 AM

[not so risky:]

This author seems to be following the tape instead of reading up on the company. Conf call mentioned 2 years of high growth even if they didn't add any new customers or get revenue from new initiatives. ASP is going down, but they have gross margin 79.8% and are gaining market share on competitors with much lower prices, pushing some out of business. The market for smart cards is only finite until they sell new ones. It is about a 5 year cycle, but considering China has about 5 times more people than the US, the market is huge.

2008 Aug 07 12:13 PM

[Urbane Gori...:]

Several 'less expensive' Chinese stocks have been exhibiting an almost identical chart. (Err.... Upper left to lower right with a little bump last month..) .. Overlay SPRD, QXM or XING and they could be spawn from the same litter... Both XING and SPRD have pretty good growth and numbers and all three occupy a good niche in China... Be interesting to see what all 4 look like is September...

jegan ;-)

2008 Aug 07 02:37 PM

[waf76:]

The stock is getting beat up right now but if you're long on STV you should definitely buy more. I've bought on the way down to lower my cost per share. I have to admit I thought the stock would run up just before the olympics due to the demand in China to watch the games. I didnt think the prospect of interupted service would delay upgrades and also the earthquake was something that you cannot foresee. Despite these factors, the stock is not getting beat up that bad and the lowered guidance is only $1M on the high side.

2008 Aug 07 04:47 PM

[CEO:]

Stv sells a commodity, yawn. Finite market, no recurring rev, I wouldn't touch it.

2008 Aug 08 11:26 PM

[Dreamliner:]

I bought some shares at 30 bucks the first day of its IPO. The day after its price surged to $50 level and Cramer commented he discovered another BIDU......

After couple of months, we can tell its stock can't be categorized "Growth". In this market, you can't find a growth stock with PE of 10s. See, that of BIDU and FSLR is around 100. VMW was recently penalized due to the competition which hurts its growing prospect, so its PE has dropped to 40s and may keep dropping. The future of STV depends on if it can be defined as growing company or not.

I used to trust its management team as it contains a group of talents, but not any more:

Almost all of C-Level executives are Tsinghua graduates and their entire career has been with this same company (or its parent). Obiviously there is no diversification and out-of-box thinking. They probably are proud of that Mason Xu - their "kid" CFO can represent a model of "diversified experience" and "International Exporsure". Dipping into his brief Bio, you can tell this is not the case.

Mason (Legal name probably is still Liang as he may not spend 100 bucks in US court to have the name changed) is a Tsinghua graduate, working as head of sales with this college-based company after graduation, definitely no diversification and out-of-box thinking then. His golden credential is MBA from HBS without any US working experience. He probably doesn't know much about NCAA and Rose Bowl, may surprise Big-10 has 11 teams. I believe many of his former co-workers in Intel China who haven't had chance to study in US must understand Chinese market much better than he does. What doe one year venture capitalist role in China mean? I don't see much value there.

I bet STV needs a CFO with more corporate financial management experience and creativities. Unless, this company will be acquired by any of media conglomerate of which Mason's type of CFO can utilize his connection through HBS alum to secure a better deal.

2008 Aug 09 12:54 AM

[mccai:]

If all customer installed their products, does it mean the end of their operations, or close out their company?

2008 Aug 09 05:38 AM