Wednesday, March 14, 2007

LTON: Another WVAS near cash value

LTON is one of several Chinese internet stocks I've been looking at recently trading near cash value. Like KONG, LTON has been smacked due to increasing pressure on the WVAS providers. Shares recently dropped when LTON announced dismal earnings, and reported that it would money the next 2-3 quarter as it planned to make investments in its business.

If you believe LTON can find another profitable business, or turn around the WVAS business, the shares are cheap. LTON is trading roughly at both its book value and, after subtracting out cash and short term investments, you get the underlying business for free. The company has initiated a $20M buyback program, on which it has currently purchased $1.5M.

Revenue increased 8% to about $80M in FY06, while net income decline 45% to $6.4M. Q4 is more representative of the real trend, however, in the business. Revenue declined to $14M from about $20M the year prior. Net income was a miniscule $.4M. About 85% of revenue was attributable to China Mobile, the largest mobile operator in china, who has been particularly aggresive with new restrictions on WVAS services. Clearly, if trends hold, it is unclear to what degree this business will be able to generate any significant revenue going forward. That said, if China Mobil continues to squeeze LTON and other WVAS providers as they are, they risk compromising WVAS revenues, which are very lucrative for the company.

Transitioning from a middle-man to a content provider

LTON has signed multiple deals with large TV providers in China to develop WVAS content based on the networks' television properties. I do not quite understand the specifics of these arrangements (and neither, apparently do most the analysts on their conference call), but it appears as though these have the potential to be extremely lucrative. In particular, an exclusive deal with
Hainan Satellite seems particularly lucrative. As providers with popular content in high demand, LTON should have more bargaining power with wireless carriers to acheive more attractive margins.

Advertising Services
The company is also positioning themselves as being able to deliver advertising services accross multiple platforms--from TV to radio to newspaper to mobile. This is simmilar to Google's approach and, if its any indication, Google has been largely unsuccessful in this effort to date. LTON appears to have made some progress in this division. The company reported under $1M in revenue from this division last year, and expects margins long term to be 10%. For now, nothing to exciting to write home about.

So, what's it worth?
To be honest, I have no idea. There are lots of unkowns here right now--the company appears to be in transition from its dying WVAS services business to a new suite of products and services. Given current valuation, it seems like its the risk, given the strong margin of safety in the cash position, but I want to understand the WVAS business and new businesses better before I make any investment. Expect more work on this in the near future.


Ohad said...
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Ohad said...

been thinking about buying an initial position in them as they dropped below 3$. Recent price action probably means results shouldn't be too great, but it seems like the market's expectations are exaggeratedly low.

I expect them to start buying back stock after earnings