China Digital bets on product replacement
China Digital TV, the largest maker of conditional access (CA) systems for digital cable television on the mainland, expects product replacement and value-added service will drive growth.
The mainland has about 150 million cable subscribers, almost half of the country's 347 million television viewing households.
China Digital's CA system consists of smart cards and software, which enable digital cable network operators to control the distribution of content and value-added services to their subscribers and block unauthorised access.
It benefits from a government policy to switch from analogue to digital signals for television broadcasting by 2010 and complete digitalisation of cable television by 2015.
Digital cable subscriptions on the mainland reached 25 million households by the end of last year and are expected to grow to over 110 million by 2011, according to Analysys.
China Digital TV has 50 per cent of the market. The CA system is used by 170 digital television network operators in 27 provinces, which cover more than 70 million households.
China Digital's sales have been skyrocketing in the past three years. Last year, it shipped 7.3 million smart cards, a far cry from 200,000 in 2004.
Profit shot up to US$33.8 million from just US$4.5 million in 2005, as net revenue jumped more than fourfold to US$55.45 million.
However, its share price has been falling since it listed in New York last October. It traded at US$9.40 last Friday, down 41.25 per cent from its initial public offering price of US$16.
'Investors worry that once China finishes its digitalisation of cable TV by 2015, the company will have no business,' said an analyst.
Mason Xu, the company's chief financial officer, disagreed. He said: 'The physical life of a smart card is about three years in the US. And we expect about five years in China. There will be replacement order for our products, just like cell phones.'
Richard Ji, executive director of Morgan Stanley, estimated 10 to 20 per cent of the company's revenue would come from replacement orders in 2010 to 2012.
However, not everyone believes orders will be huge. 'Set-top boxes and smart cards seldom break. I don't believe the replacement story,' said an analyst.
Nevertheless, the company is getting ready to transform its business. It is betting on value-added services, such as pay-per-view broadcasting and selling advertising space in the electronic programme guide.
The average household on the mainland pays about 20 yuan (HK$22.75) a month for their cable services, leaving room to sell them upgrades and additional service. However, most cable operators are too small and lack research and development capability to take advantage of the situation.
Mr Ji believes China Digital's 'gatekeeper' status, with over 50 per cent market share of smart cards sold, may help it become a 'super carrier' for value-added services, including video-on-demand, home shopping and interactive gaming.
