Check on China: China Digital TV Holding Co. Ltd.

Shannon Roxborough | May 29, 2008 6:20am EDT | Comment

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A generation ago, less than half of Chinese households owned a television set — just one in 10 rural homes. Two decades later, things look decidedly different. Today, TV ownership in China is almost universal, and the Chinese channel surf with the best of us. All of China, it seems, has embraced the latest technology wholeheartedly, and the country is poised for a digital television boom.

That's where China Digital TV Holding Co. Ltd. (NYSE:STV) enters the picture. Beijing-based China Digital TV provides conditional access (CA) systems to mainland China's digital television market. The company’s CA systems, which include security code-programmed smart cards and software that communicates with smart cards, allow television network operators and TV set-top box manufacturers to provide custom content, electronic program guides and subscriber management systems (SMS). China Digital's head-end software gives its customers the ability to selectively charge subscribers on a per-channel or per-view basis, and to restrict viewers from copying the programs they watch. Its SMS software is capable of maintaining subscriber information databases; processing orders for new services; maintaining billing, payment and authorization records; and processing service requests (to repair or replace defective or lost equipment). The company also licenses its designs of set-top boxes to manufacturers, and provides its customers with computer chips for set-top boxes made to its specifications by third-party fabricators. The majority of China Digital's revenues are derived from smart card sales.

The digital cable TV market is one of the China's fastest-growing consumer sectors (it is expected to grow at a five-year compound annual growth rate of 45% (between 2007 and 2012), as the nation preps for a digital television explosion. The government has mandated a transition from older analog signals to state-of-the-art technology in all major cities by the end of this year and nationwide by 2015. Eyeing the huge potential of the marketplace, China Digital TV is looking to broaden its reach in China (it already has contracts with 170 digital television network operators in 26 of China's 32 provinces, autonomous regions and centrally administered municipalities).

In March, China Digital announced the signing of a collaboration agreement with Intel Corporation (Nasdaq:INTC), a move that will allow China Digital to package its software with Intel’s CE 2110 advanced media processor. The integrated product, which will improve digital transmission by making it easier for TV systems to read digital signals, will be sold to set-top box manufacturers in China. Jianhua Zhu, CEO of China Digital, said advanced, high-definition technology is the future of China's digital television industry, and that the company's relationship with Intel will bring next-generation digital television solutions to the Chinese market. Zhu added that the relationship between the companies will help China Digital to prepare for increased digital television penetration in China.

China Digital and co-developer ViXS Systems launched a new product in March: an ultra secure PC-based digital TV capture solution and conditional access PCI card, the first PC capture card with enhanced security available in the Chinese market. The video capture card gives users the ability to inexpensively capture HD broadcast video content on their PCs for real-time viewing or recording onto their hard drive for later playback. As digital television penetration deepens and PC sales continue to soar in China, the future is bright for this type of value-added product tailored to the wants of Chinese consumers, especially leading up to the Olympics.

On May 14, China Digital released first-quarter financials, reporting an 84% rise in net earnings, to $11.4 million, or $0.19 a share, beating the Street's $0.16 mean estimate. Revenue in the three months ended March 31 rose to $17.2 million from $10.4 million in the same period last year, versus analysts' $16 million consensus estimate. The company is looking for its second-quarter revenues to come in between $17.5 million and $19.5 million, and its full-year 2008 revenue to range between $79 million and $84 million. Wall Street expects second-quarter revenue of $18 million and 2008 revenue of $81 million.

According to market research firm CCID Consulting, by the end of 2007, 27 million Chinese homes had access to digital TV, double the number from the previous year. Even so, household penetration in China is only 3.5%, compared with 76% in the United Kingdom and 56% in the United States. The number of households making the switch from analog rabbit-ear sets to slick digital flat-panel displays is expected to reach 46 million by 2009, 111 million by 2011 and some 250 million by 2015.

The leading provider of smart cards in China, China Digital sending clear signals by fast closing in on 50% domestic market share (it also has plans to expand into the greater Asian marketplace). The conditional access systems provider's dominance and breakneck industry growth make it a good play on the Chinese digital TV market.

Shares closed at $17.10 on Wednesday. The stock's 52-week trading range is $15.02 to $55.31. Analysts' consensus one-year target is $31.40.

Stay tuned!