As the leading supplier of IPTV set-top boxes in Henan Province (China’s largest province by population with over 130 million people), ZST Digital Networks, Inc. (NasdaqGM: ZSTN) is well positioned to capitalize on the switch to digital television and the expansion of China’s broadband infrastructure.
Internet protocol television (IPTV) is digital television supplied through secure networks operated by carriers. Although still very similar to traditional cable and satellite services, IPTV carries distinct advantages to traditional cable platforms including the ability to play music, interactive audio and video, video on demand (VOD), games, and access to e-mail systems all through one IPTV set-top box connected to TV.
In China, which is currently the world’s largest cable market with over 172 million users, there are four million IPTV subscribers. From 2007-2008, China’s IPTV market grew 100%.
In 2007 the Chinese Government launched a rural outreach subsidy program in an effort to bring more home appliances to rural areas. With the new program, farmers may receive subsidies of up to 13% for new televisions, washing machines, and other household appliances previously inaccessible to them, thus unlocking a whole new consumer base in products like digital television. Much of Henan Province is rural, and rural incomes have been increasing steadily for the last 11 years. With an immense consumer base emerging, ZSTN’s 62% of the IPTV market in Henan Province is likely to grow over the coming years.
ZSTN’s revenues for the nine months ended September 30, 2009 grew nearly 71% year-over-year to $70.1 million with diluted earnings per share of $0.60.
Aside from supplying an IPTV product, ZSTN is diligently expanding into new product areas. In 2009 the company launched a new line of business manufacturing, selling, and providing services for a global positioning satellite (GPS) system. GPS represents an underpenetrated market in China, with less than 10% of motor vehicles carrying GPS, compared to 20%-60% in developed nations. ZSTN will target fleet vehicles for its GPS units and offers a 24/7 call center to handle service and support.
ZSTN has already signed its first GPS contract with Xing Yang Security Service for 4 million RMB or approximately $585,000 USD, plus 0.5 million RMB each year for continued service. The GPS business line should have immediate impact on revenues due to a higher margin revenue stream. The company also intends to negotiate a reseller agreement with China Unicom in order to sell its GPS units at China Unicom retail stores, thus receiving another share of subscriber revenue.
ZSTN’s business lines represent the future of China’s technology adoption. A new high margin GPS product coupled with a dominant position in the Henan IPTV Set-Top box market has research analyst Amit Dayal of Rodman and Renshaw initiating coverage of ZSTN with a market outperform rating and $14 price target. Currently trading at a P/E of less than 10x we expect the stock to gain momentum when Q4 numbers are released giving us a first glimpse into the effect of GPS sales on the company’s financial results.
Disclosure: ZST Digital Networks, Inc. is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.