Are you looking to add a little Chinese Internet flavor to your investment diet, but worried about getting a case of indigestion? Look no further than shares of CDC
Don't get me wrong. CDC -- like Motley Fool Rule Breakers picks Shanda Interactive
Let's take a quick look, shall we?
The Chinese WVAS market
I'll be the first to admit that CDC's mobile application business suffered somewhat in the most recent quarter, which ended Sept. 30. Revenues came in at $6.4 million, down 35% from last year's period, due to the recent regulatory changes to all subscription services offered by China Mobile
That's a fair amount of growth potential for the CDC Mobile business to tap into, and the same applies for the company's CDC Games unit and its China.com, both of which I consider "traditional" Internet businesses.
The Chinese Internet market
We all know the numbers: China currently boasts the world's second-largest Internet population, with more than 137 million people surfing the Web at present, according to the China Internet Information Center. That number is up 24% in the past year, and could reach roughly 210 million over the next two years -- but that still represents only 16% of China's population.
All subsectors of the market are experiencing rapid growth. Online gaming is a prime example. According to iResearch, China currently boasts an Internet gaming population of roughly 30 million to 40 million, which is expected to plunk down roughly $1 billion in 2007 alone. Likewise, the online advertising market in China is expected to hit close to $860 million in 2008, up from $550 million in 2006, according to market research firm Analysis International.
Pretty impressive numbers, eh? Well, CDC is certainly positioning itself to benefit from the potential of these sectors. CDC Games recently launched an upgrade of its popular online role-playing game Yulgang, and it has licensed a number of new games for launch in 2007, including The Lord of the Rings Online: Shadows of Angmar, Special Force, and Stone Age 2. Similarly, the company is expanding its efforts to attract advertising dollars to its China.com portal through new initiatives -- for example, its recently announced online-dating joint venture with European leader Meetic and its exclusive online partnership deal with the sixth annual Asian Winter Games.
Now, while the growth potential of CDC's mobile and Internet businesses alone is a reason to consider investing in shares, the real kicker for me is that these businesses are buttressed by the underlying strength of the company's international enterprise software unit, CDC Software.
While I tend to look at CDC Software as a buffer to the more volatile mobile and Internet units, I'm not implying that the business is as stodgy as it sounds. In the most recent quarter, CDC Software posted sales of $61.4 million, up 22% over last year's quarter and driven primarily by a 35% increase in license software sales. I like the fact that this predictable business represented 78% of total revenue and that roughly 83% of its sales came from outside the Asia/Pacific region, giving the overall company a fairly diversified revenue base. Furthermore, growth doesn't look to be slowing. CDC recently came out and raised its expectations for fourth-quarter license revenue to a record $13.8 million-$14.2 million, a 37% increase over last year's quarter and up 18% sequentially.
Last but not least: Valuation
At a recent price of $10.15 per share, CDC Corporation trades at roughly 20 times fiscal 2007 estimates, a 26% discount to its estimated long-term growth rate. Given the earnings potential of its three business units (including the "defensive" software business), I believe this discount will narrow going forward. I believe shares should trade in line with projected growth, or at roughly $13-$14 per share, over the next 12 months.
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Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than reading The Financial Times, rooting for the Jints, or taking a nap. He welcomes your feedback and does not own shares in any of the companies mentioned above. The Fool's disclosure policy has no MSG.