China Digital Sails Smoothly in Second Quarter

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Conditional access systems provider China Digital TV (NYS: STV) posted strong growth during the second quarter. The Beijing-based smartcard maker also raised its outlook for the next quarter and is teeming with optimism given the boom in China's digital TV market.

Let's delve a little deeper into the company's prospects.

A look at the quarter
Revenues for the quarter rose by a sizeable 29.2% to $24.7 million from $19.1 million a year ago. Shipments of smartcards shot up by almost 29.5% from the year-ago quarter to 4.64 million, propelling revenues northwards. Operating income grew by a solid 40.6% to $12.5 million in the quarter, riding on high shipments and controlled costs.

The company managed to keep costs under control, with costs of goods sold increasing by just $0.5 million. However, selling, general, and administrative expenses along with R&D expenses rose by $1.4 million from the previous year because of stock-based compensation awarded to employees.

A look at the books
The company sports a healthy debt-to-equity ratio of 30.9% and an interest-coverage ratio of 35.3. Both these metrics point toward the ability of the company to service debt in case it wishes to borrow further. Once you factor in the company's cash, it sits at a healthy net cash position of more than $110 million. That's a pretty high figure for a company that is only valued at about $286 million total. Best of all, the digital TV market in China is growing by the day, and China Digital holds the lion's share with approximately a 52% market share.

The sunny road ahead
China is planning to switch to a digital network by 2015, which means that every set-top box is set to need a smartcard. The total number of households with a TV in China is estimated to be 400 million by 2015, pointing toward a surge in sales of smartcards. China Digital expects to witness a thrust in sales once the switch to digital networks is complete.

In addition, China Digital supplies its smartcards to illustrious players like Intel (NAS: INTC) , Motorola Mobility (NYS: MMI) , Panasonic (NYS: PC) and a host of others in the Chinese market for their set-top boxes. These companies' business further cements the fact that China Digital is expected to perform strongly in the future.

The Foolish bottom line
With the market in China growing, the company is well on its way to experience windfall gains. Backed by a positive outlook for the upcoming quarter and a growing cash pile, I think China Digital looks like a good investment at today's prices.

At the time this article was published Fool contributor Harsh Chauhan doesn't own any shares in the companies mentioned in this article.The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of China Digital TV Holding and Intel, as well as creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. 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.

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