China Tracker - Details for ChinaNet Online (CNET)

 ChinaNet Online
 Analyst Coverage
2011-05-20Roth CapitalDowngradeNeutral$2.50
2011-04-01Ladenburg ThalmannReiterationBuy$7.00
2011-04-01Roth CapitalReiterationBuy$5.00
 

We are revising our CY11/CY12 revenue and EPS estimates to reflect mgt's guidance, slower branded client acquisition, TV strategy change, higher OPEX, and a lower effective tax rate. We are lowering our CY11 revenue estimate to $50.1 million from $55.2 million. We assume gross margin of 61.0% (vs. 54.4% previously) and operating margin of 38% (vs. 40.0% previously), a 7.5% tax rate, resulting in pro-forma EPS of $0.84 (previously $0.90). For CY12, we lower our revenue estimate to $59.6 million from $69.1 million and EPS to $1.00 from $1.11.

We maintain BUY on CNET, but lower out PT to $5.00, which reflects reduced estimates, limited earnings visibility, and concerns over insufficient internal controls.

2011-02-22Ladenburg ThalmannInitiationBuy$7.00
2010-11-16Roth CapitalReiterationBuy$9.00
 

We analyze the market value of each CNET business segment. We project the Internet segment will generate 98% of the firm's profit while the TV business is primarily a cost center for marketing and branding purpose. The Chinese online advertising and B2B companies listed in the U.S., Hong Kong and Shenzhen trade at (cash-adjusted) 28x 2011 earnings. We believe a 9x to FY11 earnings is appropriate for CNET due to its much smaller operation than its peers, its new listing status, insufficient communication with investors and lack of research coverage. Applying a 9x to the segment profit, we believe the online operation is worth $8.10. Adding back $0.85 cash per share, we reach a price target of $9.00.

2010-11-11Roth CapitalInitiationBuy$9.00
 

ChinaNet Online is an advertising company promoting small business opportunities in China, primarily for franchising. The company runs a B2B website (www.28.com) and a TV infomercial company. It generates revenues from franchisors who advertise online or on TV to recruit franchisees. Strong franchising growth powers CNET's business. Chinese consumer spending, the backbone of franchise business, has grown at CAGR ~14% for the past 10 years. We expect the number of franchisors will increase from 3,500 in 2009 to 4,000 2010-end. iResearch estimates that online advertising for franchise opportunities will grow 40% yoy to $181 million in 2010.

Consumer-goods manufacturers expanding sales via distribution networks. Facing weak global demand, more Chinese manufacturers are shifting attention to the domestic market, establishing distribution networks. Franchising is an effective means of widening distribution. The expanding base of small business owners and rising unemployment is driving franchisee growth. China has over 30 million sole proprietors who are looking for low-cost business opportunities. Rising unemployment has also increased the pool of potential franchisees.

Large-customer strategy expands the market. To expand its market beyond small franchises and increase revenue per customer, CNET is aggressively pursuing large manufacturers with consumer brands to establish their distribution networks. CNET signed up 30 manufacturers in 1H, and we expect 50 signed clients by year end. Margin expansion through strong online growth. CNET is aggressively expanding its online business while reducing spending on high-cost TV infomercials, which should significantly increase gross margins in coming quarters. We project blended gross margin should expand from 44% in 2009 to 52% in 2010 and 56% in 2011.

Valuation compelling. CNET currently trades at 5x (or 3x net of cash) our estimated FY11 earnings of $0.90, a substantial discount to other Chinese online advertising and B2B companies listed in the U.S. and Hong Kong. Our $9 price target is based on valuation of its online business and cash per share, suggesting 110% upside from current levels. As such, we initiate coverage of CNET with a BUY rating.

We analyze the market value of each CNET business segment. We project the Internet segment will generate 98% of the firm's profit while the TV business is primarily a cost center for marketing and branding purpose. The Chinese online advertising and B2B companies listed in the U.S., Hong Kong and Shenzhen trade at (cash-adjusted) 28x 2011 earnings.

We believe a 9x to FY11 earnings is appropriate for CNET due to its much smaller operation than its peers, its new listing status, insufficient communication with investors and lack of research coverage. Applying a 9x to the segment profit, we believe the online operation is worth $8.10.

Adding back $0.85 cash per share, we reach a price target of $9.00.

CNET
Media & Advertising
SCORE
12
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MODERATE RISK
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Current Price:  $1.25
F10k Day (2009-09-22): -70.24%$4.20
2009 Close: -76.86%$5.40
2010 Close: -72.41%$4.53
2011 Close: 13.63%$1.10
High (2012-04-13): -3.85%$1.30
Low (2012-09-20): 278.78%$0.33
Exchange: NCM
Market Capitalization: 26.12 mill
Total Shares: 20.90 mill
Float: 7,523,000.00 mill
Avg Volume: 13.10 k
Short Interest: 19.50 k
Short Ratio: 0.09%1.5 d
Last Quarter: 2010-12-31
Revenue (MRQ): 10.41 mill
Net Income (MRQ): 4.71 mill
Op. Cash Flow (MRQ): 0.35 mill
all financial data provided without warranty