China Digital TV Holding Co., Ltd. (ADR) (OTCMKTS: STVVY)

China Digital TV Holding Co., Ltd. went public in the U.S. on April 19, 2007. It is headquartered in Beijing, China and is a provider of CA systems to the China’s expanding digital television market. CA (conditional access) consist of smart cards that are inserted into set-top boxes at the subscriber’s end; software installed at the digital television network operator’s transmission point; software for set-top boxes, enabling digital television network operators to control the distribution of contents and value-added services to their subscribers and block unauthorized access to their networks.

The financial performance of STV in the recent years is stellar (shown below):

The firm’s revenue keeps growing as shown below:

The financial Health index shown below indicates it is in good status:

On macro level, according to www.chinatechnews.com, Six Chinese ministries, including the National Development and Reform Commission, Ministry of Science and Technology, Ministry of Finance, Ministry of Information Industry, State Administration of Taxation and the State Administration of Radio, Film and Television, have jointly compiled a document called “Several Policies on Encouraging the Development of Digital Television Industry”, which says that from February 1, 2008 the six ministries will work together to promote the development of China’s digital television industry. According to China’s national strategy, the country aims to shift from a major television manufacturer to a digital television power during the development of digital television industry. The policies show that by 2010, the annual sales of China’s digital television sets and related products will reach RMB250 billion and the export volume will reach US$10 billion. By 2015, China’s digital television industry scale and technology level will rank among the top in the world and it will become one of the world’s largest digital television set and key components development and production bases. In 2010. The government claimed the encouragement of integrating three telephone, television and internet networks, which raised a hard request on IT technology for network operators.  I conclude that the market potential of STV’s business is huge and those companies that have an edge on technology will win out.

So what is the core competitive advantage of STV and its status in the competitive landscape?

Led by young elites graduated from one of China’s best Technology University – Tsinghua University, STV clearly claims that the success to date has in large part resulted from its strong research and development capabilities.  As of December 31, 2010, the research and development team consisted of 308 employees, while the total number of employees is 550. The expense on R&D expenses increased from US$6.9 million in 2008 to US$8.8 million in 2009 and US$10.4 million in 2010.

 

As of December 31, 2010, STV had installed CA systems at 297 digital television network operators in 27 of the 32 provinces, autonomous regions and centrally administered muniRcipalities in the PRC. STV had gained a market share of approximately 56% in the CA system market in PRC, according to Analysys International. With the establishment of N-S Media Investment and Dongguan SuperTV, STV is also gradually rolling out the plan to engage in the value-added digital television business by offering premium value-added digital television services.  Bluetooth CA, cloud calculation platform, unified application software based on brandnew X3net,  CW tracking techniques to solve the safety issue for network operators…, STV’s devotion in R&D makes it in the advanced frontier in this competitive industry.

The Company’s main international competitors in the in the CA systems business are NDS Group, Irdeto Access BV and Kudelski SA. The Company’s main domestic competitors are Sumavision Technologies Co., Ltd. and DVN Holdings Ltd., both of which are non-state-owned companies operating mainly in the PRC. As of December 31, 2010, Sumavision Technologies Co., Ltd. had approximately 12% market share, DVN Holdings Ltd. approximately 12% market share and Irdeto Access B.V. approximately 11% market share, NDS Group approximately 7% market share. Kudelski SA approximately 1% market share and others accounting for the remaining 1%.

The institutional holding status enhanced my judgment on STV. Take a look at the 76 focused or pure play companies under Technology > Hardware > Commercial Electronics > Electronic Security industry sector, STV’s shares holding by IH raised 303.7%, ranked second high in this sector.

 

However, the stock performance of STV in the last four years is very opposite to what I concluded from the fundamental respect of this firm. The share price jumped from highest as $30 per share in the beginning back in 2007 to $3.17 per share today, while even the net cash per share is $3.7 per share.

In the most recent quarter report, CEO Jianhua Zhu called this “another solid quarter” with “robust demand” and strong overall growth in the Chinese digital TV industry. There seems no sensible reason why the American investor are so bearish on this stock.

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