Robert Hsu has been a lot quieter over the last six months than he was in 2007 and early 2008 — back when “buy what China buys” was the mantra and almost every Chinese company with a US-listed stock was booming, his China Strategy newsletter was very popular with my readers, and his ads always drew a lot of attention.
During the China “bust” last year? Not so much attention, and probably a lot of anguish for Hsu’s momentum-driven picks, though as with other Asia-focused newsletters I imagine he probably recommended a lot of patience and cash-holding when things were bleak.
But perhaps we’re back now, eh? China has been on a tear this year, thanks to their own stimulus packages and some good earnings, and a relative lack of exposure to the US subprime fiasco and financial meltdown (though God knows they’re still very exposed to the “buying crap you don’t need on credit” bubble, since every good producer needs consumers).
So China’s back, at least a little bit — and so is Robert Hsu. He’s been touting two stocks in the last few days, the first one is a digital television company that he calls the “most phenomenal company I’ve seen in five years.”
No pulling punches here:
“But once you see my full write up on this, I guarantee you’ll agree the profits from this little- known digital TV technology company are going to knock your socks off.
“If you can grab this one now, before it declares earnings May 11th, you could easily grab a double in the next 90 days.”
I haven’t had my socks knocked off in days, so I’m looking forward to this. Chilly toes be damned!
“You see, just as the United States is due to switch from analog to digital TV broadcasting on June 12, 2009, China is doing the very same thing!
“When that happens more than 217 million households will have to convert to digital TV or they will lose their favorite shows!
“And the profits from the switchover are going to be huge—especially for this our digital technology company we spotted on our trip to Shanghai.
“The reason is simple:
“The company is the leading seller of Smart Cards that cable boxes MUST USE to receive premium digital content….
“As you’ll discover in tonight’s report, our company is already beginning to profit, with 200 broadcasting carrier customers signed up (that serve millions of households) in 27 Chinese provinces.
“As a result, our company is looking at—hold on to your hat—a potential windfall of hundreds of millions of dollars!
“So it’s no wonder the stock’s price is up 20% in the past 30 days or why the company is buying back $40 million worth of stock… or why the few analysts who follow this one expect a blow out quarter come May 11th.”
Hoo Dat, you ask? And the Gumshoe answers, China Digital TV (STV)
So China is certainly the home of the descriptive name today, if perhaps a touch lacking in creativity. They will be reporting on May 12 — and the last earnings release, which confirms our basic teaser info, is available here from the fourth quarter.
Will there be a huge wave of new business during the digital switch in China? On that, I have no idea. I can just tell you that this is Hsu’s prediction — and guessing from the action in the shares last week, I imagine that he still releases his newsletter on Thursday evenings, the shares saw a big spike on Friday last week and have since settled down a little bit. They’re still well above the $8 range where they traded back in April, but well off the high of near $12 that we saw during the day on Monday. If the premarket trading this morning is any indication, the shares will probably open around $10 today.
STV handily beat estimates in the last quarter, and analysts have a fairly narrow range of estimates for this year and next, they’re telling us that STV is trading at a current year PE of just about 15. This gets a little bit interesting, though, in part because they’ve got a whole heck of a lot of cash — according to the current numbers on Yahoo Finance they’ve got $4.80 a share in cash and no long term debt, which means that if you pull the cash out of the equation you could consider the PE to be closer to 8. I have no idea what they’ll do with that cash, I assume it came from their IPO and that they must have expansion plans of some kind, but it is a nice backstop.
So — are you on board with Robert Hsu and interested in picking up a cable card maker and TV software company? I’d be terrified about an intellectual property-based company like this in China if it were a US company, but since it’s Chinese and the Chinese government has recently been pushing to protect their own companies’ patents, perhaps they’ll be able to hold their market. I don’t know that the big digital switchover has been real exciting for US companies, though it did present some opportunity for scammers, but perhaps it will be different in China.
Oh, and one more thing — this is the dominant company in its space, you can argue, and one of the biggest (it’s still small, about a half billion dollar market cap) — but just because it may be the only easily tradeable company of its kind in the US doesn’t mean they don’t have competition. I often see people assuming that the public markets represent the business environment (meaning, if Coke and Pepsi are the only two soda stocks, they must dominate the soda market). Sometimes that’s true, but it’s often not true for foreign companies that trade in the US — there are almost always local competitors in their home markets that we haven’t heard of, and that don’t trade in New York (or that are private or government owned). Being listed in New York can mean they might have a financial advantage, since it can sometimes get them cheaper funding than they might get at home, but it doesn’t necessarily mean these companies have anything like monopoly power.
We saw what happened when the US tried to switch to digital TV — it got pushed back by years at first, and then when the deadline approached it got scooched back still further, and the government subsidized equipment, and Congress became terrified that someone out there might lose their access to television. What happens if people can’t afford new cable boxes or televisions or what have you in China, if that is even the threat of what might happen? (I have no idea whether the switchover is technically similar to the US switch — certainly US over-the-air television watchers didn’t need any kind of cards, so if it’s similar then the assumption must be that people will get cable or digital cable who didn’t previously have it. I know most of urban China has cable television access, but don’t have any idea what the rural television distribution is like).
Does the government ignore any problems in the switch to digital, or stop the switchover or postpone it, or step in with price controls? Beats me, but with unemployment rising they’re probably eager not to take away Wheel of Fortune (or whatever the Chinese equivalent is) and piss people off.
I think I’ve exposed enough of my ignorance of the Chinese television business here, you can fee free to jump in with your thoughts with a comment below. All I can really tell you is that this is a real, profitable company that has a good market position in cable access-control software and cards in China. And that Robert Hsu seems to like them a lot.
But I’ve got more work to do — we’ve got another Chinese company also being actively teased by Hsu over the last few days … and many of you probably already know it, I’ll post a writeup of that one a bit later in the day toda