Channel monopolization and weak periodicity. The company’s turnover and operational capital flow are insusceptible towards economic cycle, and its main businesses are quite defensive; cable network users keep an annual surge of 250,000 -30 ,000.
Beneficiary of inflation. Price cut in set-top box leads substantial decrease in expenditure of cable digital TV transformation, while improvement of basic TV service charge makes the sector an impetus to its performance growth.
Acquisition is completed, and management mechanism has been rationalized. Newly formed management team is abundant in experience, and eager to progress. Team members have clear mind in construction of a modern enterprise management system and an advanced operation system, and they have tried to work those experiences out with positive attitude. Meanwhile, the company is also making effort to get more financial support from the government. As analyzed above, the company is expected to perform well in the future.
Potential profitability. While the company is of advantage in terms of its user amount, increase of TV service charge and government’s support, its average service fee of Rmb950/family as well as 6% net margin are far below those of sector average. With improvement of cable digital TV transformation technology & management, we predict that its net margin in 2010 will increase to 16%.
Valuation and investment suggestion: Viewing from PE and PB, the company suffers the lowest valuation among its peers. However, its future performance is most predictable. Companies of cable network operation have been enjoying the above-market valuation. Given PE at 30x or EV/EBITDA at 10x, its reasonable valuation is Rmb10.8. According to our DCF model, suppose WACC=10.03%, G=1%, its absolute valuation is Rmb13.86.
Potential risks: Control of satellite TV settling in the urban area relaxed; failing to enjoy tax exemption, and not-so-optimistic performance in 2008.