China Digital TV's (STV) stock is up 14 percent on Wednesday to as high as $4.39 per share from Tuesday’s closing price of $3.78 per share. Driving the move is the company's framework agreement reached with Cinda Investment Co. Ltd.
According to the agreement, China Digital TV will sell its conditional access (CA) system, Network Broadcasitng Platform, and Video on Demand businesses to Cinda Investment's affiliate Shanghai Tongda Venture Capital Co., Ltd. After the agreement is completed, China Digital TV will take a controlling stake of Tongda Venture, with Tongda's $187 million payment, and Cinda Investment will receive warrants to purchase stock in China Digital TV.
China Digital TV Started to Recover Last Year
Compared to the China Digital TV's recent 5 year peak of $9.21 per share in 2010 December, China Digital TV is down since the middle of 2011, dropping under $3 a year after that high and below $2 in 2013.
The price, though, slowly started to pick up speed last year, clearing $3 per share again in the beginning of 2014 following strong Q4 2013 revenue and continuing to climb with the company’s announcement of a special cash dividend to shareholders in April.
A upward-sloping resistance line developed over the past half a year that was nearing $3.50 a share, but the stock crashed through that level on Tuesday when a recent buying surge carried shares higher this week. Breaking past resistance appeared to only further bolster the confidence of investors as shares were up over 14 percent this week even prior to the announcement of the new deal with Cinda.
Dipping Revenues Might The Reason of Restructure
Perhaps the most impressive aspect of this surge is that it doesn’t appear to be in line with the company’s most-recent earnings report. The company’s 2014 Q1 report indicates a 29.8 percent quarter-over-quarter decline from 2013 Q4, and a 8.7 percent drop in net revenues compared to the year-ago period. Earnings per share were down to $0.07 compared to 2013 Q1's $0.13 and 2013 Q4's $0.17. Its strongest segment, the smart card shipping business, dropped slightly from 4.95 million in the previous quarter to 3.56 million.
Although this was still in line with the company's guidance, there seems little chance for the company to significantly increase earnings this year, which could be a reason why China Digital TV is injecting some of its costlier departments into Tongda Venture.
Essentially, the company is restructuring its assets by repositioning departments. The move does not change much about its businesses, but it could potentially improve financial performance.
About China Digital TV
China Digital TV is the leading provider of conditional access (CA) systems and comprehensive services to China's expanding digital television market. The CA system is designed to prevent unauthorized access to subscriber's content across the country's digital cable, satellite, or mobile TV networks. Ended March 31, with more than 300 digital television operators installed across the country, the company has shipped over 102 million CA smart cards in Mainland China, which means it occupies half the market share for smart card shipments.