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Company ChinaCache (Nasdaq: CCIH)
Submitted By: TMFBreakerForce
Member Rating: 79.61
Submitted On: 11/16/2010
Stock Price At Recommendation: $31.38

ChinaCache Profile

Star Rating *****
Headquarters Beijing, China
Industry Internet Software and Services
Market Cap $727.3 million
Competitors & Peers Level 3 Communications (Nasdaq: LVLT)
Limelight (Nasdaq: LLNW)

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:

Howdy Fools,

Here are some notes another another company that IPO'd this year, and also seems very interesting-and has a similar business model as fellow Breaker Akamai (Nasdaq: AKAM):

ChinaCache International Holdings (CCIH)

The company had its IPO on October 1, 2010. 6.1 Million ADR shares at $13.90, raising $84 Million in the process. The shares soared about 95% on the first day of trading.

Proceeds from the offering will be used to finance R&D, Capital expenditures, and possible acquisitions. Company indicated $15mln will go to R&D, $27.6mln for Capex, and the remainder for above mentioned corporate purposes, and/or potential acquisitions.

The company is a leading provider of Internet content to businesses and government agencies, serves customers from Beijing-based China Mobile Ltd. [(NYSE: CHL)] to Alibaba Group Holding Ltd.

China had an estimated 420 million Internet users at the end of June, an increase of 36 million from six months earlier, according to data from the government-sponsored China Internet Network Information Center. The U.S. population is about 310 million, according to the Census Bureau's website, while about 231 million Americans have access to the Internet, according to the Washington-based World Bank.

Intel [(Nasdaq: INTC)] owns a 6.6% stake in the company.

Co-founders Song Wang and Jean Kou own approximately 20% of the company.

According to the prospectus, ChinaCache controlled a 52% market share of Internet Content and Application Delivery in China at the end of 2009.

Financials

Revenues:
2007: $23.6 mln
2008: $42.7 mln
2009: $39.9 mln
2010: $25.1 mln (Through six months of 2010)

Net Income:

2009: (.02)
2010: (.01)-> through the first 6 months 2010

Business Info

Customer Count:

2007: 129
2008: 204
2009: 281
2010: 418 (thru 6 months)

With the increase in customers, the concentration level has decreased over the years. Top five customers accounted for 42% of revs in 2007, now down to 32% thru 6/30/10. ChinaCache expects this percentage to continue to decline as its customer base grows.

ChinaCaches largest customer contributed 24% and 16% of revenues in 2007 and 2008.
Tencent was 2009's biggest draw, with 14.8% of revenues. China Mobile holds the top spot through June 30, 2010 with 12.8% of revenues.

Largest Customers by revenue and industry:

* Media: CCTV, People's Daily Online, China Radio International, Xinhua News Agency, Shanghai Media Group

* Mobile Internet: China Mobile

* Online Games: 9 You, Kingsoft, Perfect World, Sohu/Changyou , Taomi

* E-commerce: Alibaba, Pepop, Joyo (Amazon.cn), BitAuto, 500 Wan

* Internet & Software: Oak Interactive, KaiXin, Microsoft, Tencent, Top100 Music

* Enterprises: AirChina, L'Oreal, Sony, GE, BMW China

* Financials: ICM Bank of China, China Securities Online, CITIC, Shanghai Stock Exchange, Grand Wise Stock Online

Plus various assortment of Government Agencies.

Average selling price:

Company charges on a per-gigabit per second basis for the bandwidth usage, or traffic volume used. [Average selling price (ASP)] has declined over the years, and the company expects that trend to continue as competition increases. Management is aware and aims to reduce its COGS to offset the lower ASPs.

As of 6/30/10 ChinaCache had over 7,000 servers and 260 service nodes throughout China.

Industry

As most of you know, China surpassed the U.S. as the largest Internet market in the world in June 2008. Chinese Internet users are expected to grow to 416 million users by 2012. 60% of users are between the age of 10 and 29.


Likewise, the growth of rich media content such as online videos, music, and television is expected to grow to 527 million users in 2012 from 234 million in 2008.


China is also the largest mobile market in the world-747 million mobile subscribers as of 12/31/09. Many of these users will use their cellphones to access the Internet. In fact, almost 61% were using their phones for just that as of December, 2009. This number should grow when China introduces 3G.
Lastly, we cannot forget how popular MMORPG are in China, which is expected to grow from 49 million players in 2008 to 94.5 million by 2013.

Competition

As you might expect, this is a very competitive market. The prospectus lists ChinaNetCenter, Dnion Technology and 21 Vianet as their primary domestic adversaries. Many smaller startups will surely try and enter the market as well.
Current Government regulatory restrictions prevent multinational companies from having a significant presence, so that's a good thing for the company.

Auditor

As with all Chinese companies, small caps in particular, it is very important to see who is auditing the company's financials. In this case, we can breathe a sigh of relief that it is not some unknown company. Ernst and Young HuaMing is the company's current auditor.

Conclusion

So we have a play here on the fast growing Internet segment in China. With each passing day, people are finding more things to do online-from recreational gaming, shopping, downloading music, videos, and trading stocks among other things. With the unbelievable amount of Internet users in China now and what is projected in the future-the demand for ChinaCache's services should only continue in one direction-- up! Obviously being a recent IPO, we will need time to see how the company treats its shareholders, and monitor how the company progresses toward profitability. I'm sure there will be plenty of volatility, especially when Chinese stocks fall out of favor with investors. But I really like what I see so far and feel that the company has tremendous potential, with the stellar growth in new customers, and dominating 52% market share in the content delivery space.

Comments, thoughts, complaints, always welcome!

Best,
Matt (TMFBreakerForce)

(Long CCIH)

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Sohu is a Motley Fool Rule Breakers recommendation. Intel and Microsoft are Motley Fool Inside Value recommendations. Akamai Technologies is a Motley Fool Rule Breakers pick. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of China Mobile and Microsoft.

The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.