IPO Report: GDC Technology

Francis Gaskins |

Based in North Point, Hong Kong, GDC Technology Ltd (GDCT) scheduled a $75 million IPO with a market capitalization of $299 million, at a price range mid-point of $13 for Thursday, June 27, 2013.

10 IPOs are scheduled to trade the week of June 24th.  The full IPO calendar is at IPOpremium. Trial and paid & trial subscribers get early, complete financial analysis.

F-1A filed June 12, 2013

Manager, Joint Managers: Barclays; Jefferies; Piper Jaffray

Conclusion

First, there is no recurring revenue in GDCT’s business model.

Second, if Lucas & Spielberg believe the movie theater business is facing an ‘implosion’, then that implosion could be expected to drag GDCT down with it, even though the P/E multiple of 10.7 times 2012 earnings appears attractive (the business is seasonal).

However, If the market holds stable GDCT may edge up from its IPO price.  The rating is neutral to negative

Summary

GDCT has the largest installed based of digital cinema servers for movie theaters. At some point the market will be saturated, of course – not sure when that will happen but as an investor it’s not good to overstay the welcome.

Plus, Lucas and Spielberg believe there will be an ‘implosion’ of the film industry, which would negatively affect, of course, GDCT.

Revenue up, gross margin down
(indicating price pressure from customers?)

In Q1 ’13 gross profit declined to 35% from 41% for Q1 ’12, while sales increased 38% to $32 million from $24 million.

Valuation

Based on 2012 results (because the business is seasonal) the P/E multiple is 10.7, but the tax rate is only 15%.

Big Risk: decreases in cinema attendance worldwide could lead to a substantial decline in digital cinema equipment purchases, which could materially and adversely impact GDCT’s revenue.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

annualizing Q1 ’13

Cap (mm)

Sls

Erngs

BkVlue

TanBV

in IPO

GDC Technology Ltd (GDCT)

$299

2.3

14.1

3.2

3.2

25%

P/E based on 2012 results, because seasonal

10.7

     

Glossary


Business

GDCT is a leading global digital cinema solutions provider with the largest installed base of digital cinema servers in the Asia-Pacific region and the second largest globally as of March 31, 2013.

In the first quarter of 2013, GDCT became the global market leader by capturing the largest market share of incremental digital cinema servers installations on a worldwide basis.

GDCT develops, manufactures and sells digital cinema servers that meet the highly demanding performance, security and reliability requirements established by Hollywood studios. Since inception, GDCT has shipped over 25,000 digital cinema servers worldwide.

GDCT also partners with other manufacturers to offer a one-stop solution for exhibiting digital cinema content, including integrated projection systems and 3D products.

Large installed based
When will the market be saturated enough so that growth will level off?

GDCT has the largest installed base of digital cinema servers in a number of territories, including China, Japan, South Korea, Taiwan, Singapore and Hong Kong as of March 31, 2013. All of the top 10 cinema chains in China, as measured by their respective number of cinema screens at the end of 2012, have installed GDCT digital cinema servers.

GDCT has installed digital cinema servers for 7,927 screens in China as of March 31, 2013 and has installed 8,377 digital cinema servers in the United States as of March 31, 2013.

In 2012, GDCT shipped 300 integrated projection systems to the second largest cinema chain in India, as measured by its total number of cinema screens at the end of 2012.

GDCT has entered into a contract to ship 1,750 digital cinema servers to the second largest cinema chain in Mexico, as measured by its total number of cinema screens at the end of 2012, and have shipped over 400 units as of March 31, 2013.

Technical expertise

GDCT is one of the few manufacturers in the world with digital cinema servers that are compliant with the specifications of Digital Cinema Initiatives, LLC, or DCI, a body formed by Hollywood studios to establish digital cinema industry standards.

Cinema admissions remain stable, so far

Despite global box office revenue growth from US$29.4 billion in 2009 to an estimated US$34.4 billion in 2012, cinema admissions worldwide are estimated to have remained relatively stable at 7.0 billion during the same period, as home theatre and other private venues have attracted viewership away from cinemas.

Exhibitors face competition for patrons from a number of alternative motion picture distribution channels, such as blu-ray disc, network and syndicated television, video-on-demand, pay-per-view television, the Internet and other channels.

Exhibitors also compete for patrons’ leisure time and disposable income with other forms of entertainment such as concerts, amusement parks and sporting events.

An increase in popularity of these alternative film distribution channels and competing forms of entertainment could drive down cinema attendance further and potentially cause exhibitors to close their theatres.

Large scale theatre closures could significantly reduce demand from analog-to-digital cinema screen conversion, new installations, extend the product replacement cycle and discourage exhibitors from making additional investments on upgrades.

Seasonal

GDCT historically experienced higher sales in the fourth quarter of a year, compared to the other three quarters of the same year, because customers tend to purchase digital cinema equipment immediately before the winter holiday season, which is typically the peak season for box office revenues.

GDCT historically experienced the lowest sales in the first quarter of a year for similar reasons. The timing of movie releases slao can have a significant effect results of operations

Competition

Competitors in the sale of digital cinema servers and integrated projection systems include, among others, Doremi, Dolby and SONY.

Digital projector manufacturers for our integrated projection systems may also integrate and sell the digital projectors they manufacture with digital cinema servers manufactured by GDCT or our competitors.

GDCT also faces competition in service offerings and in each of the product categories that GDCT resells, including 3D systems, projector lamps and silver screens.

5% stockholders pre-IPO

CAG Digital Investment Holdings Limited, 48.8%
Sweet Light (HK) Limited, 18.3%
GDC Holdings, 11.5%
Huayi Brothers International Investment Limited, 9.0%

Use of proceeds

GDCT expects to net $67 million from its IPO. Proceeds are allocated for working capital and general corporate purposes.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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