Zst Digital Networks (PINK:ZSTN)

Rodman and Renshaw on ZSTN                                 8/4/2011

ZSTN: 2Q11 Earnings Update

2Q11 Results: ZSTN announced its 2Q11 results with revenue, net income and diluted EPS of $41.4 MM, $6.4 MM and $0.55, higher than our expectations of $36.4 MM, $5.9 MM, and $0.47, respectively. Top-line grew by 25.3% y-o-y from $33.0 MM in 2Q10 and 22.5% sequentially from $33.8 MM in 1Q11. GPS and cable TV segments each accounted for 29% and 71% of total quarterly sales.

GPS Business Remains Top-line Driver: During the earnings call, management disclosed that revenue growth is being supported by strong performance in GPS and related services, which increased 35% y-o-y in shipment volume to a total of 53,830 units and 102% y-o-y in sales. Revenue mix for the quarter was similar to the last quarter, with 29% of total sales or $12.1 MM from GPS and related services and 71% from cable TV business, which grew by 3% y-o-y from last year.

FY11 Guidance Reiterated: Management reiterated the previously issued 2011 financial guidance of $160 MM ~ $175 MM for revenue and $28 MM ~ $30 MM for net income.

Outlook: ZSTN stock had moved higher into the earnings release but gave up most of those gains after the results were announced. Management indicated that the company has bought approximately 120 K shares under its announced share buyback program so far and intends to continue executing on the program. Despite maintaining its 2011 guidance and growing its cash balance to $50 MM the stock failed to generate buying interest. We believe previous short seller allegations remain an overhang for the story. We continue to maintain that market regaining confidence in management and the business will be the single most important catalyst for this story.

Revising Estimates and Introducing FY12 Forecast: We are revising our estimates for 3Q11 revenue, earnings, and diluted EPS slightly downward to $44.7 MM, $6.9 MM, and $0.59, compared to our previous estimates of $46.2 MM, $7.6 MM, and $0.60, respectively. For full year FY11, our estimates for revenue, net income and EPS are $173.6 MM, $26.9 MM, and $2.29. We are also introducing FY12 estimates with top-line, bottom-line, and EPS of $194.4 MM, $29.6 MM, and $2.39, respectively, indicating a 12% top-line growth and 10% bottom-line growth.

Valuation: At current levels ZSTN is trading at a P/E multiple of ~1.4x and ~1.3x to our FY2011 and FY2012 earnings estimates. We believe ZSTN should trade in line with the averages given the relative growth opportunity associated with it. We maintain our $14.00 price target on ZSTN, which translates into a P/E multiple of ~6.1x and ~5.9x to our estimates for FY2011 and FY2012, which still implies a significant discount to its peer group.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member SIPC.
Member FINRA.

Rodman and Renshaw on ZSTN                            5/06/2011

ZSTN: 1Q11 Earnings Update

1Q11 Results: ZSTN announced its 1Q11 results with revenue, net income and diluted EPS of $33.8 MM, $5.2 MM and $0.45, compared to our expectations of $27.3 MM, $4.5 MM, and $0.37, respectively. Top-line grew by 98.3% y-o-y from $17.0 MM in 1Q10 but declined 26.4% sequentially from $46.0 MM in 4Q10 due to seasonality. GPS and cable TV segments each accounted for 28% and 72% of total quarterly sales.

Color on GPS Segment: The company sold ~41,000 units of GPS units during 1Q11. The ASP for these units is approximately $120/unit for the devices and price per unit can range from $60 to $210 depending on specs / features, The company charges a service fee of $55 per subscriber. In the first year of the service ZSTN subsidizes ~$33/unit for initial installation and the balance is amortized over twelve months. Beginning in the second year of service, ZSTN receives ~$44/unit/year for services ($55/subscriber/year of service fee minus $11/year fee paid to China Unicom).

Stock Performance: 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.

FY11 Guidance Reiterated: ZSTN reiterated its FY11 guidance of revenue and net income of $160 MM~$175 MM and $28 MM ~$30 MM.

Our Financial Projections: 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.

Valuation: 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.

Risks: 1) Intense Competition 2) Country Risk 3) Volatility in raw material prices.


Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman and Renshaw on ZSTN                                  4/14/2011

ZSTN: New GSP Contract Win Announced

New Contract: ZSTN announced that it has signed a new supply agreement with Jiyuan Universal Taxi Leasing Company in Jiyuan City of Henan province to provide GPS tracking and monitoring products for Jiyuan Universal’s 1,382 taxis. The contract includes the installation of GPS devices, surveillance systems, voice announcement systems, and related training services for Jiyuan Universal’s staff. Upfront installation and service fee will be RMB ¥2.8 MM ($430K), and ZSTN will charge an annual fee of $55.0 per installed GPS after the first year of the contract.

Key Takeaways: ZSTN continues to penetrate 2^nd and 3^rd tier cities in Henan province, where near term growth potential is supported by less competition. Jiyuan city is a small city in Henan with total population of ~682,000 and area of ~1,931 square kilometers.

Valuation: 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.

Risks – 1) Intense Competition 2) Country Risk 3) Volatility in raw material prices.


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman and Renshaw on ZSTN                                                  3/14/2011

ZSTN: Strong 4Q & FY10 Results; Valuation Attractive Relative To 2011 Guidance

4Q10 Beat: ZSTN announced its 4Q10 results with revenue, net income and diluted EPS of $46.0 MM, $8.5 MM and $0.73, beating our expectations of $41.0 MM, $6.7 MM, and $0.57, respectively.

Full Year Results: On a full year basis, revenue grew by 34% to $134.6 MM, while net income doubled from last year to $22.1 MM. Gross profit reached $34.8 MM, representing a gross margin of 25.9%, compared to $17.1 MM and 17.0% margin in FY09. Diluted EPS was $1.90, given a share count of 11.65 MM.

FY11 Guidance: ZSTN issued new guidance of revenue and net income of $160 MM~$175 MM and $28 MM ~$30 MM for FY11.

1Q11 Projections: For 1Q11, we expect the company to deliver revenue and net income of $27.3 MM and $4.5 MM with diluted EPS of $0.37. Our full year projections are $166.4 MM, $28.0 MM, and $2.22 per share, respectively.

Key Takeaways: The company’s 2010 results show that management was able to execute on its move into the GPS market. Recent news flow indicates that momentum in the GPS business should remain healthy in 2011. We also believe policy support for traffic and transportation management solutions should come into play with the introduction of the 12^thFive Year plan. From a longer term perspective one consideration for investors may revolve around the company’s ability to penetrate new provinces. We believe management should narrow the guidance range as we move closer to the third quarter. However we would not be surprised if the guidance range provided proves to be conservative. We believe the stock is trading very attractively on a multiples basis relative to the guidance provided.

Margin Improvement: Gross margin improvement from 17% in FY09 to 26% in FY10 was largely attributable to (1) growth of Standard Definition IPTV set-top boxes, which carry ~39.4% gross margin due to lower production costs and (2) greater revenue contribution from GPS value added services from 3.6% in 1Q10 to 5.5% in 4Q10. Normally GPS related services generate a gross margin of 90% plus.

Valuation: 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.

Risks: 1) Intense Competition 2) Country Risk 3) Volatility in raw material prices.


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on ZSTN

Strong 3Q10 Results ZSTN 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.  

Cash Flows Improve 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.  

Stock Performance 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.  

Valuation 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. 


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw update:

 2Q10 Results: ZSTN today announced its 2Q10 results with revenue and net income of $33.0 MM and $5.2 MM, with diluted EPS of $0.45, beating our expectations of $30.7 MM, $4.0 MM, and $0.34, respectively. Top-line grew by 39.6% Y-o-Y from $23.7 MM and 93.8% sequentially from $17.0 MM in 1Q10. ZSTN delivered a net income of $5.2 MM, growing by 22.7% Y-o-Y from $2.6 MM in 2Q09. Diluted EPS was $0.45, given 11.7 MM in diluted share count. 

Robust Top-Line Growth: Top-line growth remains healthy, driven by both TV set-top boxes and GPS related sales. During 2Q10, ZSTN’s legacy cable TV segment delivered a 51% Y-o-Y increase in revenue, aided by the continued government efforts in implementing the integration of (1) telecom network (2) cable TV net work and (3) broadband internet. Additionally the company also launched a new Standard Definition TV set-top box product to diversify its offering and improve its margin. GPS product and service segment contributed ~$6.0 MM, or ~18% of 2Q10 revenue, more than doubled the revenue in 1Q10. The stronger-than-expected GPS sales were primarily related to an increased government push in GPS application in public transportation and fleet management. 

Margin Improvement: We believe ZSTN is executing on its margin expansion strategy and we expect the gross margin to at least remain stable in the near-term as the percentage of GPS related sales climbs to 18%~20% of total revenue. 

Raising Guidance: Management raised its full year revenue and net income guidance to $125 MM~$130 MM and $17 MM~$19 MM, from previously announced $115 MM~$125 MM and $13 MM~$15 MM, respectively. For 3Q10, the company now expects $34.0 MM~$37.0 MM in revenue and $5.5 MM~$6.0 MM in net income. 

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. 

An Auto Derivative Play: ZSTN shares have gained ~23% intraday trading at $6.50 levels from last night’s close of $5.30. We believe investors are taking more confidence in management’s ability to meet annual guidance. 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. 

Valuation: 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.

Rodman & RenRenshaw upgrades ZSTN estimates.  We find this very interesting as it comes just days before ZSTN is slated to report 2010 second quarter results on August 10, 2010.

Excerpts:

Demand Remains Healthy: Our channel checks indicate that demand for GPS devices and relevant value-added services remains strong, mainly driven by the government’s “Logistics Industry Revitalization Plan” announced in March this year. Under the plan, GPS and related applications have been largely promoted and adopted in several areas including long-distance transportation of hazardous chemicals, container freight, inland shipping transportation, city taxi, and 2G/3G wireless GPS services.

2Q10 Earnings Preview; Raising Estimates: We are now projecting top-line, bottom-line, and EPS of $30.7 MM, $4.0 MM, and $0.34, respectively. This compares to our previous estimates of $28.1 MM, $3.3 MM, and $0.28 for 2Q10. The higher estimates are primarily driven by expectations of stronger revenue growth from GPS and GPS related services. We also expect a higher gross margin of 25% and EBIT margin of 17.5% for 2Q10 due to the larger contribution of GPS segment, compared to our previous estimates of 20% gross margin and 15.5% EBIT margin.

Full Year FY10 & FY11: 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.

Share Performance: ZSTN shares have pulled back ~42.5% YTD to $5.03 level from $8.76 level, we believe this has created a compelling entry point given the valuation. 2Q10 earnings release and positive news flow on relevant government-led initiatives could be the near-term catalysts.

Valuation: At current levels ZSTN is trading at a P/E multiple of ~3.9x and ~3.7x to our FY2010 and FY2011 earnings estimates. This is a substantially lower multiple compared to an average of ~28x for network equipment makers and ~12x for GPS / navigation providers based on forward FY10 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 ~12x and ~9x 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.

Risks – 1) Intense Competition 2) Country Risk 3) Volatility in raw material prices.