Shares of China Digital TV (STV: Charts, News, Offers) have been upgraded through March and April, as American analysts have taken note of the company’s massive growth potential, low P/E and high operating margins. China Digital manufactures conditional access (CA) systems to television network operators for both the content provider and the customer. These technologies include smart cards, head-end software for network operators and terminal-end software for set-top box manufacturers, which are used together to control content distribution and filtering of normal and premium television services, and to block unauthorized access to the television networks. The company’s technology is essential to digital TV operators, over 300 of which have installed China Digital’s products across 27 of China’s 32 provinces. In addition to cards and software, the company also licenses its set-top box design to manufacturers to assure hardware and software compatibility, and offers electronic program guides to operators.
Daily Chart
China Digital has had a wild 52-week ride, bouncing between $5.21 and $9.49. STV’s 50-day moving average of $6.66 and 200-day moving average of $7.11 make its current price under $7 seem like an attractive entry point for new investors looking to build a position. The company’s P/E of 12.26 is also attractive to investors looking for Chinese stocks that have not been overvalued, overbought and topped with lofty expectations. Despite its crucial technology to the budding digital TV industry, the company still has a featherweight market cap of $433.1 million while boasting operating margins of 44.32% for fiscal 2010.
If the Chinese government softens its stance against international entertainment, particularly western television shows and movies, demand for digital, satellite and mobile broadcasting hardware and software will increase exponentially. The decline of television prices coupled with a rising middle class across China will create a high demand scenario for high quality digital television, which is far superior in both quality and convenience to its older land line cable counterparts. The company’s $6 million investment in Shanghai-based 3DiJoy, which gives the company a 24% equity interest, also gives it access to new technologies which can add video game capabilities with motion controls to its existing set-top box hardware and software.
In addition, China Digital also announced a partnership with media advertising company Concurrent (CCUR: Charts, News, Offers) to create a cloud-based interactive TV platform, tentatively called “Quick VOD.” This new technology, the first Chinese joint venture for Duluth,Georgia-based Concurrent, is geared at creating a faster, more efficient video delivery system which will allow China Digital to remain the top choice for digital television networks. Concurrent’s head of Asia-Pacific operations, Steve Vonder Haar, has stated that “Concurrent’s strategy is for the Asia-Pacific market to play an increasingly important role in our global growth objectives. Working in partnership with China Digital TV is an important element in support of Concurrent’s strategy in China.”
China Digital has provided positive guidance for the first quarter of 2011, expecting revenues between $19.22-$20.24 million USD, higher than the analysts’ consensus of $18.85 million. In addition, the company issued a special $2 per share dividend last year, payable in two installments – the first of which was paid in January.
Looking forward, China Digital currently controls 52% of the conditional access hardware and software market. The largest catalyst on the horizon is the imminent switch of China’s nationwide television system to the digital format by 2015 – after which traditional cable and over-the-air programming is scheduled to be discontinued. By 2015, over 400 million projected households will require a digital cable subscription, which will require a set-top box running on China Digital’s smart cards and software. In the meanwhile, China Digital TV’s smart cards are used in set-top boxes from Intel (INTC: Charts, News, Offers), Motorola and Panasonic (PC: Charts, News, Offers) and provide the company with a healthy 31% free cash flow margin. Component costs for smart cards are expected to decrease while prices are expected to either remain the same or increase, increasing margins significantly.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
Looks like people from all around the world are starting to switch to digital TV.