Household Appliance News
- Software firm tunes in as nation switches to digital TV
Date: 8-Oct-2007 Sources: (Shenzhen Daily)
CHINA ranks No. 1 in the number of television viewers: Some 362 million Chinese households have TV sets - more than triple the U.S. count. However, just 38 percent of those houses have cable, and only 3.5 percent have digital cable. By contrast, more than half of U.S. households have gone digital.
The Chinese Government wants to rectify that imbalance. It has demanded that all TV programs be digital by 2010, and by 2015 it wants TV stations to switch off their analog. The government is putting its money behind this through a regime of tax breaks.
China Digital TV Holding Co. Ltd. is happily in the middle of all this. Despite its name, the company doesn't actually provide the digital TV. Instead, it makes software that digital providers use to protect their content and offer interactive services.
The business is still quite small, drawing US$30 million in revenue last year. But investor appetite for young Chinese tech companies is powerful, going by the performance of even tinier companies like Perfect World .
'It's a small company, and the valuation is going to be outsized,'said Tom Taulli, author of 'Investing in IPOs.''But these Chinese companies seem to be able to sustain the valuation so long as they keep revenue momentum going.'
China Digital pulled just US$3.6 million in sales in 2004, so it's already ramping nicely.
The operating company, called Super TV, was created in 2004 from existing businesses within Novel-Tongfang, which is still affiliated with Super TV. The holding company was incorporated in the Cayman Islands in April.
Super TV makes conditional access, or CA, systems. This consists of a 'smart card?inserted in a TV set-top box, with supporting software both in the box and at the cable provider's end. The system takes care of policing functions like making sure the box is in the right location and turning it off if users don't pay. It also gives parents the ability to block certain shows from their kids and enables on-demand video and messaging.
The company estimates that it has an industry-leading 44 percent market share. It has installed its systems for 130 digital cable providers in 26 of China's provinces.
China Digital is in a niche market of a niche market, and its fortunes depend entirely on one product line. Any disruption in China's digitalization process, or superior products from a competitor, could sink its fortunes.
Government support is one important driver of digital TV in China. A change in policy or in the regime could alter the friendly tax environment for digital providers. The government also heavily regulates the TV market, especially encryption products.
The company's growth also depends on the disposable income of the Chinese, since digital TV isn't one of life's necessities. An economic downturn could hurt the business.
Super TV's short operating history, though impressive, doesn't give much of a track record for investors to go on.
During the IPO preparation process, the firm identified some weaknesses in its internal accounting controls. It is still addressing these weaknesses, and warns that others may turn up.
In the first half of this year, sales more than doubled over the year-ago period to US$21.6 million.
China Digital expects to net US$131 million from the offering of 12 million shares, or US$151 million if the underwriters exercise their options in full. It does not have any specific plans for the money, but expects to spend it on research and development, marketing, buyouts and general corporate purposes.
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