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2013 Could See The Rise Of VelaTel Global

|Includes:CHA, CHL, CHU, VelaTel Global Communications, Inc. (VELA)

VelaTel Global Communications Inc. (OTCPK:VELA) is a very little-known name of a holding company for telecommunications carriers in Asia, Europe, and South America. The company (formerly named China Tel Group) first began with one project in China, but has since expanded operations across the world. The stock has only had a few years of history - and it doesn't take a rocket scientist to figure out that after looking at the chart, it has pretty much been all negative. Before I get into why it may be different in 2013, here is a brief history on how the company (and stock) got to where it is now.

It All Began With Chinacomm

In 2008, China Tel merged with Chinacomm, a People's Republic of China [PRC] licensed company that held a license to build a high speed wireless broadband system in 29 cities. Sparing the details of the ups and downs of the relationship, the two entities parted ways in 2011 due to Chinacomm wanting more control of the situation (while also wanting more capital). In November of that year, VelaTel (formerly China Tel) filed suit against Chinacomm for manipulating documents that resulted in the loss of $4,749,599. In October of 2012, VelaTel won their first judgment to continue injunctions - meaning that the court believed that there are criminal doings by Chinacomm.

A Foray Into South America With GO MOVIL of Peru

In April of 2009, China Tel acquired 95% of Perusat, now known as VelaTel Peru. After roughly two and half years, the GO MOVIL WBA network was launched in September of 2011 in the cities of Chiclayo, Chimbote, Ica, Piura, and Trujillo. The deployment of two additional cities is pending while the company is also in talks to acquire 2.5Ghz spectrum in what would be the grand prize of the country, the capital city of Lima.

Operations continue to move forward and retail stores featuring ZTE equipment (under the company's GO MOVIL brand) have been opened, however subscriber growth is going slower than what the company had hoped for. With this being VelaTel's only property in South America, I would not be surprised if this unit was sold in the future -especially if they do not obtain spectrum in Lima. The proceeds from such a transaction could be put towards more profitable operations in other strategic parts of the world.

The Not-So-Golden Bridge

In 2010, China Tel entered into an memorandum of understanding [MOU] with Golden Bridge Network Communications [GBNC]. Over time, this situation began to resemble a path similar to that of the Chinacomm deal, whereas GBNC wanted more control of the operation. After disagreements over the direction of business, the two sides ultimately parted ways.

The ZTE Partnership - When The Game Began to Change

While the failures of the two China business agreements were major setbacks for VelaTel (which almost ended up being a one-two punch that knocked out the company), one of the most important relationships was developed in that time. In August of 2010, China Tel signed an MOU with ZTE Corporation, a global provider of telecommunications equipment that is currently 5th in the world in smartphone market share. Although effects of this partnership were not immediately seen, the relationship has developed into a game-changer for the company (which has since changed its name to VelaTel) over the past couple of years - with very favorable financing as a bonus.

The NGSN & CASC Business Agreements

With its business agreement with New Generation Special Network Communication Technology [NGSN] signed in October of 2011, VelaTel began a transformational shift in direction. The operational contract is focused on deploying a 4G network that will employ TD-LTE technology using equipment already commercially available and manufactured by ZTE. The business-to-business model is focusing on delivering personalized navigation and location based services [LBS] including GPS, mobile resource management solutions that allow enterprises to monitor and manage mobile workforces and assets.

Following up on the NGSN agreement, less than a month later VelaTel entered into a business agreement with China Aerospace Science and Technology Group [CASC]. With over 120,000 employees, CASC is the chief contractor for the PRC's space program.

VelaTel Accepted Into GTI Membership

In December of 2011 VelaTel was accepted to membership by the Global TD-LTE initiative [GTI]. The GTI is a reputable trade group designed to bring together leading operators from across the world to develop and enhance the TD-LTE ecosystem. The group is comprised of some very well-known names, including founders China Mobile, Vodafone (NASDAQ:VOD), and SoftBank, to name a few.

The Addition of Luo Hongye

Also in December of 2011 VelaTel announced the appointment of Luo Hongye as the chairman of its operating company in China. Being that Mr. Hongye is a co-founder of ZTE Corporation and served as the director of their international marketing department, this was an enormous positive for VelaTel. Although retired from ZTE, Mr. Hongye is very active within the telecom industry as he is the founder of VN Technologies, a company that specializes in the R&D and production of hydrogen fuel cells. Over the past year-plus, he has become an integral part in VelaTel's business negotiations, as his influence has allowed VelaTel to gain solid control over the direction of their new investments.

VelaTel Adds Eastern Europe to Its Footprint With Novi-Net & Montenegro Connect

In December of 2011, VelaTel signed on to a 75% stake in deals for Croatia's Novi-Net and Montenegro's Montenegro Connect. With equipment from partner ZTE, VelaTel is focusing on the deployment and expansion of the networks. In exchange for its equity stake, VelaTel will contribute all CAPEX and OPEX necessary to deploy and operate the networks until it becomes cash flow positive.

The Acquisition of Zapna

In April of 2012, VelaTel acquired 75% of Denmark-based Zapna, a provider of telephony and broadband solutions which came in with $1 million in existing revenue. Zapna specializes in providing mobile applications and Smart SIM cards that reduce mobile long distance and roaming charges. Since the acquisition, various agreements have expanded operations to Germany, Holland, Norway, and Spain.

Setting The Plan Into China Motion

In November of 2012, VelaTel acquired Hong Kong MVNO (mobile virtual network operator) China Motion for $5.8 million USD. Different from the Chinacomm and Golden Bridge agreements, VelaTel will be in 100% control of this investment. During its last fiscal year completed in March of 2012, China Motion generated $12 million in revenue with $2 million in EBITDA.

MVNO operators are similar to standard telecom carriers with their own independent business strategies, billing capabilities, customer services, branding and technical support. The only exception to this is that MVNOs do not invest in or have their own cellular sites. Instead, they use the incumbents as allowed by law (for economical and environmental reasons).

Just last month, it was reported by State media that the country may open up the telecom sector to MVNOs. There are six local licenses that will be awarded and trial tested by June of this year and these licenses are only open to Chinese applicants who meet the prerequisites. Because China has no experienced MVNO operator and China Motion is the only applicant that has Hong Kong MVNO experience, the company looks to be in prime position for a license.

The MVNO license would allow VelaTel to provide voice call services to subscribers and consumers both in Hong Kong and China. With a local MVNO license, it would allow China Motion to acquire bandwidth in other parts of China. This added bandwidth would then allow for China Motion to provide increased, higher-grade B2B services on other platforms (such as the previously mentioned NGSN and CASC).

VelaTel isn't the only one who sees the value in China Motion. Just weeks after the transaction was announced, VelaTel entered into a stock purchase agreement with Ironridge Technology Inc. for $12 million in funding at .20 per share - a tranche of which will go toward the purchase of China Motion. And yes, that is .20 with no 0 in front of the 2, and yes, that is over 600% above where shares closed trading on Friday.

Where There Is Fear, There Can Also Be Opportunity

On February 4, an extension to close the China Motion deal was filed via 8-K. VelaTel's stock has since continued its slide to near-historical lows, most likely in part to the fear that the deal may not close. I would bet that some firms out there are looking to make a quick profit by shorting VELA, while other weak-handed investors may have just been scared off. Whatever the case, I am in the camp that says the deal will close (note the S-1 filed at the end of January for details on all operations) and that this will be the first of multiple good news items to hit for VelaTel in 2013.

The VN Wild Card

As if all of the recent developments were not enough to pique your interest, there is one last wild card that could end up being the biggest hit of all - VN Technologies. As I previously mentioned, VN Tech specializes in the R&D and production of hydrogen fuel cells and is led by co-founder of ZTE, CEO Luo Hongye.

This past September, leaders of the Chinese telecom industry met at an invite-only conference to exchange ideas on developing the framework for implementing a single detailed industry standard for hydrogen fuel cell power systems across the communications industry in China. Mr. Hongye was selected as one of the invitees.

Since then, China's Ministry of Industry and Information Technology [MIIT] initiated a formal organization to set the policies for future needs for green energy and back-up energy for the telecommunication sector. The "members list" of this formal organization reads like a "who's who" of Chinese telecommunications, featuring China Mobile (NYSE:CHL), China Unicom (NYSE:CHU), and China Telecom (NYSE:CHA), as well as the MIIT and top Chinese universities. There is also another party on that list. You guessed it - VN Tech and Luo Hongye.

With China rapidly adopting green energy as an industry standard (see this PDF for more information on fuel cells and hydrogen in China), especially in the area of communications, VN Tech is in a very strong position (to say the least) to reap the rewards of this multi-billion dollar movement. As China continues its push to green energy (with subsidies for the carriers to convert to hydrogen fuel cells), I would expect orders to be placed once procedures are finalized. With connections to the three first tier carriers - not to mention the possibility of ZTE becoming a reseller of VN's batteries - I would not be surprised to see the first of multiple purchase orders placed to VN Tech in the coming months.

Tying All of the China Pieces Together

So to recap, VelaTel has two lucrative business-to-business agreements (CASC & NGSN) as well as MVNO operations through China Motion. Add to those one more key piece, and that is Sino Crossings - 34,000 km of fiber optic cable that VelaTel holds the rights to. With this piece of digital real estate, the potential is there for VelaTel to provide national transport for its wireless broadband access networks across China. Throw in VN Tech for good measure, and VelaTel is sitting on an impressive list of holdings in the PRC. Current or potential investors can begin to draw their own conclusions from this portfolio of Chinese assets, but I have a feeling that VelaTel CEO George Alvarez will begin to put these pieces together for us over the coming months.

Investing In VelaTel

Any time shares of a stock trade for pennies, it is always considered a highly speculative investment. Businesses in their infancy go through huge challenges and dilution is always a threat to shareholders. This proved to be the case with VelaTel as the company had to pay its staff with shares in the second half of 2012. Because of the dilution these payments and other business deals caused, a 1:100 reverse split was announced last summer.

I have owned shares of VELA for years now and have been accumulating some since the reverse split. Even after the split, shares continued to slide. As of the writing/submission of this piece, the stock was priced at .032. That, by the way, puts VelaTel at a current market cap that is less than what they could be owed by the Chinacomm lawsuit. Or, to look at it another way, it gives VelaTel zero credit for the spectrum they already have. What I also find very intriguing is that Friday was the highest volume trading day in over three years. With relatively little movement in the price, it appears that buyers could be accumulating the name in size.

With the close of the China Motion deal, shares should start to make a positive, extended turn. Add into that a possible purchase order to VN Tech, not to mention any naked shorts (that typically stalk these lower priced stocks) being forced to cover, and these prices could seem like a dream by this summer.

There are never guarantees in stock investing, but there are also risk/reward scenarios that only come along once every so often that offer a "ground floor" opportunity. Depending upon what the company delivers in 2013, VELA could be one of those stocks.

Disclosure: I am long OTCPK:VELA.