Or how else do you interpret the massive demand for the latest Chinese company to list in the US û a provider of connectivity access systems for ChinaÆs digital TV market? The newcomer, China Digital TV Holding, opened an astonishing 118% above its IPO price on Friday and, after a slight downward decline, ended its first trading session up 75% at $28. And that was after the company had first lifted the original price range for its IPO by $2 to $13-$15 on the final day of the bookbuild and then fixed the price a dollar above the new range at $16.
The final price allowed the company to raise $192 million from its base offer, which was a full $36 million, or 23%, more than the maximum it could have raised based on the original price range. If the 15% greenshoe is exercised in full, which seems highly likely given the aftermarket performance so far, the total proceeds will increase to $220.8 million. Credit Suisse and Morgan Stanley were the joint bookrunners.
Sources say more than 500 investors piled into the offering, which ended up 30 times covered even though individual orders were capped at 10% of the base deal. The final demand had a small bias towards hedge funds.
ôInvestors were impressed with the management, the growth story and the conversion ratio from the one-on-one meetings was above 90%,ö says one source, adding that it probably also helped that Asian ADRs have traded very well over the past couple of weeks.
However, the deal didnÆt only attract US investors. The portion of the demand that came from international investors was as high as 30% to 35%, which may be explained by the fact that this is the first Asian company involved in this particular business to go public.
Investors are expecting China Digital TV to be a major beneficiary as China converts is cable transmissions from analogue to digital over the next eight years as it is involved throughout the transmission chain. It develops the software that is used by the operators to encrypt the audio and video signals that are to be transmitted; it provides software for set-top boxes in the home that allows the digital TV network operators to control the distribution of content and value-added services and gives them the ability to block unauthorised access to their networks; and it sells the smart cards that are inserted into the set-top boxes to decrypt the signals.
Smart cards are currently the companyÆs biggest revenue driver and accounted for about 88% of its revenues in the six months to June this year. It also has a 44% share of this part of the market.
China currently has the lowest digital penetration rate in the world at 3.5% but has set a target that all TV broadcasts be made in digital format by 2010. It has also said that all analogue transmissions have to be switched off by 2015, with the exception that operators will have to continue to provide at least six analogue channels after 2015 to cater to those who do not wish to subscribe to the digital services.
Given that only 13 million of the 362 million Chinese households that had a TV at the end of last year were also digital subscribers, the growth potential is expected to be very large. Domestic research firm Analysys International forecast that the number of households linked to cable television networks will reach 176 million by the end of 2010, up from 139 million and the end of 2006, and the that the number of digital TV subscribers will increase to 111 million in the same period.
The listing candidate is such a believer in the potential of this business that it has named its operating subsidiary Beijing Super TV û hence the New York Stock Exchange listing code of STV. The company was set up in March 2004 by Lu Zhengxiang and Zhu Jianhua. They had previously worked together at one of ChinaÆs earliest vendors of conditional access systems, N-T Information Engineering, and bought this business out as a base for their new company.
China Digital TVÆs revenues have grown at a compound annual growth rate (CAGR) of 188% between 2004 and 2006. Last year it reported revenues of $30.4 million and a net profit of $7.3 million. Its gross and net margins last year stood at 61% and 43% respectively. In the first half of this year revenues were already at $21.6 million and the net profit exceeded that of the full year 2006 at $12.2 million.
As the base increases, the growth will slow somewhat, but according to sources the company is still expected to deliver revenue CAGR of 47% and net income CAGR of 70% in 2006-2008. For 2007, they anticipate a gross margin of about 60% and a net margin of 57%.
This kind of growth is well above that of its peers in Europe and the US where the markets are much more mature with lower selling prices margins, which explains why US investors were so keen on the stock. Sources close to the company note that this also warrants a significant premium over those other players.
Analysts view US-listed NDS or Swiss exchange-listed Kudelski Group as the closest comparables in terms of the business û although not with regard to the growth profile. As of the close of business on Thursday, NDS was quoted at 18.1 times its 2008 earnings and Kudelski fetched 13.6 times. China DigitalÆs IPO price of $16 valued the company at 25.8 times, but this widened to 45 times after the first trading day.
The share price then added a further 4.3% to $29.19 in aftermarket trading.
Hong Kong-listed DVN Holdings, which is also active in the same industry although primarily on the hardware side, was quoted at only 5.5 times its 2008 earnings on Friday.
China Digital offered 12 million American depositary shares, or 21.6% of its existing share capital. All the shares are new and each ADS accounts for one common share.
A pre-IPO round of funding brought in Softbank and the Indus hedge fund as shareholders of the company. After the IPO they will hold 17.1% and 3.2% of the company, respectively.
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