China Digital rises on country's TV boom

China Digital TV Holding Co. is luring investors to its initial public offering by promising to capitalize on the potentially explosive growth of digital television in China.

'There's a hunger for Chinese companies that are leaders in their markets,' said IPODesktop.com President Francis Gaskins. 'The lake is rising and the boat is rising with it.'

China currently has the largest television viewing market in the world with TVs in 362 million households, according to data supplied by Analysys International. At the end of 2006, 139 million households subscribed to cable television, the research company said.

China Digital develops conditional access systems, which allow digital television network operators to control their subscribers' content and services, such as on-demand viewing and pay-per-channel programming.

As of June 30, China Digital had installed its CA systems at 130 digital television network operators.

On top of the huge numbers of television watchers in China, the company is also benefiting from the Chinese government's push for digital transmission. The government has required television network operators to switch from analog to digital by 2015.

'We are a primary beneficiary of this transition because CA systems are an essential component of any pay-television platform,' China Digital said in its prospectus.

Matthew Molberger, an analyst with Renaissance Capital, said the government mandate points to 'huge growth potential.'

IPO Financial Network President David Menlow said investors will also like the company's fundamentals. 'Here's a company running on some pretty fat net margins with a growth curve that looks extremely solid,' Menlow said. 'There's no hesitation at this point that the deal is going to be attractive.'

In the six months ended June 30, China Digital more than tripled its profit to $12.2 million, from $3.4 million in the year-ago period. The company's revenue more than doubled to $21.7 million from $10.4 million in the first half of 2006.

Meanwhile, China Digital's net margin expanded to 56.4 percent in the first half of 2007, compared with 33 percent in the same period of 2006. Gross margin totaled 81.9 percent in the first half of 2007.

Gaskins noted that growth slowed on a sequential basis over the past four quarters, which could raise questions with some investors. 'What you look for in these companies is sequential quarter-to-quarter growth in top line revenue,' he said.

Molberger downplayed the trend. He said fourth-quarter revenue was hurt by the shift of some revenues into the first quarter, and that the first quarter is seasonally weak due to the Chinese New Year.

On top of the fundamentals, Molberger said the offering price will appeal to investors.

The Beijing-based company expects the IPO, which totals 12 million American Depositary shares, to price between $11 and $13 per ADS. Each ADS represents one ordinary share.

The company has granted the underwriters the option to purchase up to an additional 1.8 million ADSs to cover any overallotments.

'The principal reasons for this offering are to create a public market for our ordinary shares for the benefit of all shareholders, to retain talented employees by providing them with equity incentives in a public company, to promote our corporate brand and image and to raise capital,' China Digital said in its prospectus.

The company plans to use proceeds from the IPO, which are estimated at about $131 million, for research and development, sales and marketing, acquisitions and general corporate purposes.

Morgan Stanley and Credit Suisse Securities are serving as the IPO's lead underwriters. Piper Jaffray, CIBC World Markets and Needham & Co. are also underwriting the offering.

China Digital plans to list its shares on the New York Stock Exchange under the symbol 'STV.'