A Low Risk High Reward Opportunity in China
Zack is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The People's Republic of China is home to over 1.3 billion people, which is one of the largest populations in the world. And according to the investment bank Goldman Sachs, China's middle class is expected to grow to 650 million by 2015. With a huge potential growing consumer base in China, opportunistic investors should be thinking of ways to capitalize on this opportunity. China Digital TV (NYSE: STV) is well positioned to jump on this opportunity. China Digital TV has the software that enables digital television operators to control the distribution of content. With the increase of customers now choosing to watch cable television, and the unrivaled software that China Digital TV uses, it should see great growth for years to come. But the best part is how Mr. Market is undervaluing its shares.
The balance sheet carries $202 million worth of cash, which is very healthy considering the company only has a market capitalization of $164 million. To put it into simple terms, STV is trading below its cash value. But if you factor in its liabilities of $115 million, STV is only trading at 2 times its cash value. This is unheard of, especially for a company who should experience rapid growth, and for a company whose revenue has been consistently increasing. To top it all off, STV is trading at .89 times book and 4.62 times earnings. The conclusion I draw from the balance sheet is that STV is extremely undervalued. Wall Street has assigned a value for China Digital TV that suggests the company will soon go bankrupt. But that couldn't be further from the truth as explained by the income statement.
For the last 5 years, China Digital TV has generated revenue of $56, $71, $56, $88 and $101 million dollars indicating nice revenue growth. (keep in mind the great recession). While revenue has increased, net income has as well. (keep in mind this is after spending around $10 million in research and development each year) Net income has been $33, $43, $25, $33, and $41 million over the last 5 years. So if net income keeps increasing, China Digital TV should be trading at 1/2 times its cash if the share price stays depressed. Now I might be able to understand the depressed price if China Digital TV was in a dying industry, but they aren't.
Even though China Digital TV should capitalize on rapid growth, the most exciting prospect of this investment is the shareholder friendly management. Since 2010, STV has been earning large amounts of cash. Instead of just letting it build up, management has issued about $2.50 a share in the form of dividends. That equates to around $150 million dollars of straight cash going into shareholder hands. So even though the market has not rewarded China Digital TV's shareholders these past years, management has tried to compensate them.
The China Factor
Other notable Chinese companies have recieved a considerable amount of interest in the United States, but not a lot of love. Yongye-International (NASDAQ: YONG) has sold off from its all time high of $10, to its current $3 share price. Yongye's fundementals have stayed true, as its agriculture products are still selling. Its current net income of $85 million equates to Yongye trading at only 1.8 times earnings. The large investment bank Morgan Stanley has recognized a great opportunity at Yongye International, and they invested $50 million in it. If an investor has a long term outlook, China is presenting a great opportunity.
This current Motley Fool Rule Breaker recommendation has a very intriguing story. But the only reason I think that the shares are so depressed is because it is based in China. With the recent China scares, it is easy for some investors to have the perception that Chinese companies are scams. But if you believe that China Digital TV is a legit company, you are not alone. They have paid millions of dollars worth of dividends, and a fake company wouldn't be able to do that. They are listed on the New York Stock Exchange which alleviates the uncertainty associated with the pink sheets. China Digital TV shouldnt trade much lower since it is trading below its cash value. Patient investors should be rewarded with a multi-bagger if the middle class in China continues to grow and purchase cable television. But if Mr. Market still doesnt realize their exciting business, I will gladly reinvest my dividend checks at these low prices.
Zack currently owns shares of China Digital TV. The Motley Fool owns shares of JPMorgan Chase & Co. Motley Fool newsletter services recommend China Digital TV and Yongye International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.