China Tracker - Details for ZST Digital Networks (ZSTN)

 WARNING: Form 15 filed with the SEC!
 ZST Digital Networks
 Analyst Coverage
2011-05-05Rodman & RenshawReiterationOutperform$14.00
 

The stock has attracted market scrutiny driven by short seller allegations against the business and insiders and accordingly has been under pressure. Over the last month management and short sellers have been debating publicly over various issues. These developments are clouding the operational aspect of the story and, in our opinion, are a near term overhang for the stock. The stock did react positively to the company's 1Q11 results but drifted lower to settle close to the company's cash per share levels. Despite various positives in 1Q11 performance including the appointment of a new CFO, we believe market regaining confidence in management and the business will be the single most important catalyst for this story.

For 2Q11, we are now projecting revenue, net income, and diluted EPS of $36.4 MM, $5.8 MM, and $0.46 per share. Gross and EBIT margins are expected to be maintained at 25% and 21% levels. For the full year FY11, our projections are revised to $172.9 MM for top-line, $28.3 MM for bottom-line, and $2.27 for diluted EPS, in line with the full year guidance.

At current levels ZSTN is trading at a P/E multiple of ~1.6x to our FY2011 earnings estimates. This is a substantially lower multiple compared to an average of ~20.0x for network equipment makers and ~13.4x for GPS / navigation providers based on forward FY11 consensus earnings. We are comfortable maintaining our $14.00 price target on ZSTN, which translates into a P/E multiple of ~6.2x to our estimates for FY2011, which still implies a discount to its peer group.

2011-04-14Rodman & RenshawReiterationOutperform$14.00
 

At current levels ZSTN is trading at a P/E multiple of ~2.2x to our FY2011 earnings estimates. This is a substantially lower multiple compared to an average of ~19.2x for network equipment makers and ~13.7x for GPS / navigation providers based on forward FY11 consensus earnings. We believe ZSTN should trade in line with the averages given the relative growth opportunity associated with it. We are comfortable maintaining our $14.00 price target on ZSTN, which translates into a P/E multiple of ~6.3x to our estimates for FY2011, which still implies a discount to its peer group.

2011-03-14Rodman & RenshawReiterationOutperform$14.00
 

At current levels ZSTN is trading at a P/E multiple of ~3.0x to our FY2011 earnings estimates. This is a substantially lower multiple compared to an average of ~17.4x for network equipment makers and ~12.3x for GPS / navigation providers based on forward FY11 consensus earnings. We believe ZSTN should trade in line with the averages given the relative growth opportunity associated with it. We are comfortable maintaining our $14.00 price target on ZSTN, which translates into a P/E multiple of ~6.3x to our estimates for FY2011, which still implies a discount to its peer group.

2010-11-03Rodman & RenshawReiterationOutperform$14.00
 

Strong 3Q10 Results ZSTN today announced its 3Q10 results with revenue, net income and diluted EPS of $38.5 MM, $6.4 MM and $0.55, beating our expectations of $35.2 MM, $5.5 MM, and $0.47, respectively. Top-line grew by 34.6% Y-o-Y from $28.6 MM and 16.5% sequentially from $33 MM. Revenue growth in 3Q10 was primarily driven by healthy demand for cable TV networking and set top box equipment and sequentially higher GPS system and services revenue. GPS segment contributed ~$8 MM in revenue, representing 21% of total. Gross profit was ~$10 MM, implying 26.0% in gross margin, compared to $4.8 MM or 16.8% margin in 3Q09 and $8.3 MM or 25% margin in 2Q10. We believe margin improvements were driven by higher contribution from the GPS segment. Operating expenses were ~$1.2 MM, representing 3% of revenue, compared to $0.35 MM or 1.2% of revenue in 3Q09 and ~$1 MM or 3.15% of revenue in 2Q10. The company ended the quarter with cash balance of $34.2 MM and working capital of ~$60 MM.

Collection improvements helped the company put up a strong cash flow performance going into 2H10. Cash provided by operating activities for nine months in 2010 topped $21 MM. We believe the company should be able to end 2010 with positive cash flow from operations.

ZSTN has come under pressure from a negative article published earlier today in Seeking Alpha by an investor who claims a short position in the name. In the prior quarter ZSTN had moved higher into earnings release and was mirroring a similar trend for this quarter driven by expectations of solid results and in line with this ZSTN's results today were higher than our projections and in line with expectations set by management for 2010. However, investors have been cautious about the small cap China sector over the past few months driven by negative news flow for some of the companies in the space and investors seem to be overlooking ZSTN's announced results that include higher GPS driven revenues and much improved cash flows and focusing on the negative commentary. Management will have to find a way to alleviate concerns around issues raised. The company still has a share buy back in place that could provide support to the stock.

At current levels ZSTN is trading at a P/E multiple of ~4.0x and ~3.8x to our FY2010and FY2011 earnings estimates. This is a substantially lower multiple compared to an average of ~16x for network equipment makers and ~12x for GPS / navigation providers based on forward FY11 consensus earnings. We believe ZSTN should trade in line with the averages given the relative growth opportunity associated with it. We are comfortable maintaining our $14.00 price target on ZSTN, which translates into a P/E multiple of ~8.1x and ~7.6x to our estimates for FY2010 and FY2011.

2010-08-24Rodman & RenshawReiterationBuy$14.00
 

ZSTN today announced that the Board has authorized the company to buy back up to $1 MM worth of ZSTN’s common shares in the open market (at management’s discretion). We believe management is correctly taking advantage of the company’s low share price relative to the earnings outlook. Management’s follow through with this program should provide a certain level of support for the stock price. Since the 2Q10 earnings release on August 10, 2010, ZSTN shares rose ~11.5%, but still down 32.5% YTD from $8.76 levels at the beginning of 2010. We are not making any changes to our outstanding share count expectations yet.We are comfortable maintaining our $14.00 price target on ZSTN, which translates into a P/E multiple of ~8.8x and ~8.5x to our estimates for FY2010 and FY2011. We justify this by pointing investors to the company’s low PEG ratio of ~0.17x at these multiples based on our estimate for FY11 EPS growth. 

2010-08-10Rodman & RenshawReiterationBuy$14.00
 

Adjusting Our Estimates: For 3Q10, we are now projecting revenue and net income of $35.2 MM and $5.6 MM, with diluted EPS of $0.47. For FY10 we expect a revenue and net income of $127.2 MM and $18.7 MM, while our estimates for FY11 are now adjusted to $146.5 MM and $20.9 MM. Our EPS estimates for FY10 and FY11 are $1.59 and $1.65, respectively. The company's GPS related efforts partly position it as an auto / transportation derivative play. We believe fleet management solutions will see demand growth as the industry moves to improving efficiencies in managing larger fleets.

2010-08-04Rodman & RenshawReiterationOutperform$14.00
 

On a full year basis, for FY10, we remain relatively conservative on the top-line for the rest of the year, given the uncertainties from government-led initiatives. We are not making changes to our 3Q10 and 4Q10 revenue estimates yet. With the higher adjustment for 2Q10 revenues, we are now projecting full year revenues of $123.3 MM. On the bottom-line, we now project a full year net income of $15.4 MM, or $1.31 per share diluted, compared to our prior estimates of $14.2 MM and $1.20 per share. For FY11 we are maintaining our revenue, net income and EPS estimates at $142.3 MM, $19.2 MM, and $1.52, respectively.

2010-05-14Rodman & RenshawReiterationOutperform$14.00
 

The company appears to have benefited from traction in the GPS business in 1Q10 and expects the segment to perform well in the remainder of 2010. We are maintaining our projections for 2010 and 2011. For 2010 we are projecting revenues and net income of $120.8MM and $14.2MM. Similarly, for 2011 we are projecting $142.3MM and $19.2MM in revenues and net income. Our EPS estimates for FY10 and FY11 are $1.20 and $1.52, respectively.

2010-04-21Rodman & RenshawReiterationOutperform$14.00
 

At current levels ZSTN is trading at a P/E multiple of ~5.9x and ~4.6x to our FY2010 and FY2011 earnings estimates. This is a substantially lower multiple compared to an average of ~29x for network equipment makers and ~14x for GPS / navigation providers based on forward FY2010 consensus earnings.

2010-04-20Rodman & RenshawReiterationOutperform$14.00
 

For FY10 we expect the company to deliver $120.8MM in revenue and $14.2MM in net income with $1.20 fully diluted EPS. For FY11 we are projecting revenue of $142.3MM and net income of $19.2MM, with $1.52 in EPS. This indicates 20.3% and 17.8% top-line growths in FY10 and FY11, while bottom-line growths are expected to reach 40% and 35%, respectively.

2010-02-03Red ChipInitiationBuy$15.00
2009-12-16Rodman & RenshawInitiationOutperform$14.00
 

Though the company is already a dominating player in its segment, we believe the market is not yet saturated and there should be room for further growth in this segment. We believe there are ~25 MM households in Henan of which ~7 MM households are cable TV subscribers. Within the 7 MM cable TV subscribers less than 1 MM are IPTV subscribers.

ZSTN
Telecommunications

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Current Price:  $0.01
F10k Day (2009-10-20): -99.91%$7.52
2009 Close: -99.93%$8.76
2010 Close: -99.90%$6.83
2011 Close: -99.70%$2.26
High (2012-07-11): -99.90%$6.75
Low (2012-04-26): -97.75%$0.31
Exchange: PNK
Market Capitalization: 0.08 mill
Total Shares: 11.63 mill
Float: n/a
Avg Volume: 57.80 k
Short Interest: 729.00 k
Short Ratio: 12.70%12.6 d
Last Quarter: 2011-03-31
Revenue (MRQ): 33.80 mill
Net Income (MRQ): 5.23 mill
Op. Cash Flow (MRQ): 8.74 mill
all financial data provided without warranty