China Digital TV (STV)

STV's market is conditional access systems in China. They install smart cards into Digital TVs for network operators in China. Their demand is consequently a derivative of Chinese HD TV demand. In the PRC, the government has mandated that all TV will be digital by 2015 - not bad to have the government mandating that the product you provide to a potential market of a billion people is mandatory. They also entered into a deal with Intel on 4/28 to:

"modify its CA software to run optimally on the Intel(R) CE 2110 Media Processor, a complete system-on-a-chip that features an advanced processing unit supporting MPEG-2 and H.264 hardware video decoders, DDR2 memory interface and 2D/3D graphics accelerators. The cooperation will allow China Digital TV to package its CA software with the Intel(R) CE 2110 Media Processor to sell to China's set top box manufacturers. The integrated solution will enhance the system's ability to encrypt and decrypt signals for digital television systems." (taken from CAPIQ article on 4/28)

I listened to the conference call after the earnings report. STV had estimates on it for .16 EPS and it reported .19 EPS. I suppose the whisper number might have been higher, or at least that expectations were higher, given the recent sell off in after hours trading. The management team sounded competent enough, and answered some good questions although they left me wondering about a few things.

For one, STV is taxed at a higher rate than they had been in the past. They applied to the government to keep their lower tax status but apparently that still is in the works with the communist government. The CEO said he expected more news about that this quarter.

Secondly, STV is experiencing a growing pinch in competition in the digital smart cards market. Their competition is not very large, it's mostly rural providers who service some of the more remote areas in China. Apparently these rural providers are selling the smart cards at approximately HALF of what STV is in order to gain market share. This is not expected to continue, however it's clear to me that the market has attracted competitors from the profit potential.

Third, STV's revenues decreased QoQ fro 19.5 M to 17.4 M. According to the company, this is a seasonal adjust of weak demand in the first quarter.

Their guidance is for revenues of 17.5-19.5 M in the second quarter and a full year guidance of 76-84M for fiscal year 2008 with EPS clocked at .83. I think they'll probably earn exactly that. Assuming that's correct, we're then experiencing a growth rate of 50% revenue growth, and an EPS growth of 22%. Forward 1 YR P/E = 24. Thomson financial forecasts a long term growth of 20% but I believe that's a bit conservative given the economic climate. YoY revenues from the first quarter clocked in at 84% growth.

Not bad at all.

In the conference call the investor relations representative mentioned that the company will be announcing in the near future some new contract deals with network providers. Their are some concerns, however mitigated. I'm betting that STV will continue to lead the CA market in China and that they will grow at a decent clip.