Get to know a company in less than five minutes: That's what a Motley Fool Cheat Sheet is all about. If you're new to China Digital TV
What it does:
China Digital TV makes conditional access (CA) systems which allow the secure broadcasting of digital cable. Conditional access is a fancy word for being able to control who can and who can't view the contents of your network (as you would imagine a cable company would want to be able to do). The company's primary products are smart cards. These smart cards are essentially the CPU or brains of the set-top boxes (or cable boxes) that cable companies install in their customer's homes.
When to get interested:
Just as the U.S. last year switched over to an entirely digital television standard, China is also set to go digital by 2015. China Digital TV currently has 52% market share with installed CA systems at 244 cable operators. Out of context, that seems like a lot, but as of 2008, only 17% of cable TV homes currently use digital. That leaves 127 million households that currently subscribe to cable that still need to switch over.
However, 2015 is still a while away, which means a lot of companies are procrastinating and delaying the inevitable capital expenditures. This has been exacerbated by an enormous amount of consolidation in the cable industry in the past year, leaving many operators not wanting to reach into their pockets until they can figure out whose money it is exactly they're spending. That hesitation has left China Digital TV's stock price hanging in limbo.
What to watch out for:
The procrastination has also revealed the commodity nature of China Digital TV's products. Despite theoretically being technologically superior to its competitors offerings (the founders of CDTV developed the systems while at China's MIT, Tsinghua University), cable operators are simply trying to clear the government hurdle and get by with the least cost, thereby driving the company's average selling price down. Make no mistake though, China Digital TV still makes a premium product: Intel
Why you should care:
Despite lower margins, the total amount of revenue to be generated in the space is still enormous. China Digital TV's market projection is quite simple. Every single digital cable subscribing television requires a corresponding set-top box which requires a corresponding smart card. Said again, by 2015, all 400 million or so TV households will need at least one smart card if they want cable in their homes, and they'll need more than one if they want to hook up multiple televisions. With this market context in mind, also note that the company has a 31% free cash flow margin and has continued to gain market share over the past few years. As the inevitable becomes impossible to put off and the cable operators begin to loosen up their capex budgets again, China Digital TV will stand ready for its long-awaited windfall.
Business Stats (FY2009):