Zst Digital Networks Inc (OTC:ZSTN)

ITEM 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers: Compensatory Arrangements of Certain Officers.

 On March 29th, 2013, Henry H. Ngan resigned as our Chief Financial Officer. Mr. Ngan who served as Chief Financial officer since March 2011 has decided to pursue other opportunities, and we want to thank him for his contribution to the Company and wish him well with his future endeavors. Xia Zhao, the current financial manager will be promoted to the Chief Financial Officer position effective immediately.

ZHENGZHOU, China, June 4, 2012 /PRNewswire-Asia-FirstCall/ -- ZST Digital Networks, Inc. ("ZST" or the "Company"), a major developer, manufacturer and supplier of digital and optical network equipment to cable system operators and providers of GPS tracking devices and support services for transport-related enterprises in China, has issued an announcement to clarify its current status in the US capital markets.

The purpose of this press release is to provide further clarification in response to recent inquiries received with respect to the trading status of ZST Digital Networks, Inc. Common Stock. The Company is still a publicly traded company in the United States, the Company's common stock continues trading on the over-the-counter market under the ticker symbol "ZSTN".

ITEM 4.01. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.

On May 15, 2012, the Audit Committee of the Board of Directors of ZST Digital Networks, Inc. (the “Company”) appointed Crowe Horwath (HK) CPA Limited (“Crowe Horwath”) as the Company’s independent registered public accounting firm, effective immediately.

During the Company’s two most recent fiscal years ended December 31, 2011 and 2010 and through the subsequent interim period to May 15, 2012, the Company did not consult Crowe Horwath with respect to (a) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and neither a written report was provided to the Company or oral advice was provided that Crowe Horwath concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (b) any matter that was the subject of either a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-K or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.

ZHENGZHOU, China, April 19, 2012 /PRNewswire-Asia-FirstCall/ -- ZST Digital Networks, Inc. ("ZST" or the "Company"), a major developer, manufacturer and supplier of digital and optical network equipment to cable system operators and provider of GPS tracking devices and support services for transport-related enterprises in China, today issued an update to investors on recent developments at the Company. As previously announced, ZST Digital and BDO China Dahua, CPA Co. Ltd. ("BDO China"), the Company's former auditor, had a disagreement over an audit procedure during the fiscal year ended December 31, 2011. Despite its best efforts to cooperate in full with the auditor, the Company was not able to reach a consensus with BDO China. As a result, BDO China effectively resigned as the company's auditor on March 26th, 2012, and the Company was unable to submit its annual report for the year ended December 31, 2011 on schedule. The Company regrets the outcome of this situation.

Mr. Zhong Bo, the Company's Chairman and Chief Executive Officer said, "I would like to express my sincere gratitude for your continued support during this challenging period. Since the company was founded, we have delivered steady and profitable growth, supported by favorable local government policies, and we have run our business in an ethical manner with a focus on transparency and disclosure. All of these factors have helped us to not only win the support of the local government but the trust and appreciation of our customers. We have built a solid foundation and our business remains fundamentally sound. We firmly believe that the recent challenges we have faced are temporary in nature, and we have confidence in the continued leadership of our Board of Directors and management team.

"As a first step to bring the Company back in compliance with our financial reporting obligations, we are seeking to hire a reputable independent registered accounting firm. We again thank you for your continued support, and we will continue to work tirelessly for the benefit of our shareholders, customers and employees."

ZHENGZHOU, China, April 7, 2012 /PRNewswire-Asia-FirstCall/ -- ZST Digital Networks, Inc. ("ZST" or the "Company"), a major developer, manufacturer and supplier of digital and optical network equipment to cable system operators and providers of GPS tracking devices and support services for transport-related enterprises in China, today announced that its Board of Directors has decided to seek a voluntary delisting from the NASDAQ Global Market ("Nasdaq GM").

As previously disclosed in the Company's Current Report on Form 8-K, filed with the Securities and Exchange Commission ("SEC") on March 30, 2012, BDO China Dahua CPA Co., Ltd. ("BDO") informed ZST of its decision to resign as the Company's independent registered public accounting firm, effective March 26, 2012. In addition, BDO informed the Company that BDO can no longer support its opinion dated March 3, 2011 relating to its audit of the Company's consolidated financial statements for the year ended December 31, 2010 contained in its Form 10-K filed with the SEC on March 4, 2011. As a result, the Company anticipates that it will be unable to file its annual report on Form 10-K for the fiscal year ended December 31, 2011 on a timely basis in accordance with the Securities Exchange Act of 1934, as amended.

In view of the Company's inability to continue to comply with the NASDAQ's continued listing requirements set forth in Listing Rule 5250(c)(1) requiring filings to be made with the SEC on a timely basis, the Company has notified The NASDAQ Stock Market of its intent to voluntarily delist its common stock from the Nasdaq GM. The Company intends to file a Form 25 with the SEC on or about April 16, 2012 and anticipates that the delisting of its common stock will become effective on or about April 26, 2012. The Company expects that its common stock will be eligible for trading on the over-the-counter market thereafter. No assurance, however, can be made that trading in the Company's common stock on the over-the-counter market will commence or be maintained. Following delisting, the Company will continue to be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and intends to continue to file all periodic and other reports with the SEC under applicable federal securities laws as required.

As previously disclosed in a current report on Form 8-K, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2012, BDO China Dahua CPA Co., Ltd. (“BDO”) informed ZST Digital Networks, Inc. (the "Company") of its decision to resign as the Company's independent registered public accounting firm, effective Mach 26, 2012. In addition, BDO informed the Company that BDO can no longer support its opinion dated March 3, 2011 related to its audit of the Company’s consolidated financial statements for the year ended December 31, 2010 contained in the Form 10-K filed with the SEC on March 4, 2011. As a result, the Company does not anticipate that it will be able to file the annual report on Form 10-K for the fiscal year ended December 31, 2011 timely in accordance with the Securities Exchange Act of 1934.

On April 2, 2012, the Board of Directors of the Company determined that it is in the best interest of the Company to voluntarily delist the Company’s common stock from the NASDAQ Global Market. In connection therewith, the Company notified The NASDAQ Stock Market on April 6, 2012 of the Company’s intention to file a Form 25, Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities Exchange Act of 1934, with the SEC on or about April 16, 2012.

Letter From BDO:

We hereby give you an official notice of our resignation as auditor of the Company.

During the process of auditing of the Company’s consolidated statements for the year ended December 31, 2011, our audit procedures were seriously restricted by the Company. Consequently, we were unable to continue providing our services as the Independent Registered Public Accounting Firm for the Company. In consideration of the agreed upon procedures we completed on December 20, 2011 for the cash verification requested by NASDAQ, which including visiting in person of the bank, physically observing bank employees printing bank statements, etc., we planned a more simple procedure to confirm the bank balance; but the Company refused and insisted we follow the process the Company had arranged.

On March 6, 2012, the Company informed us that the bank account with the largest balance as of December 31, 2011 was closed on February 24, 2012 and the balance on this bank account was transferred to a new account in another bank. The balance as of December 31, 2011 on the former bank account was no longer available for confirmation as we previously requested.

The restrictions placed on us by the Company had substantially limited our work scope and we determined were severe enough that caused us from being able to complete the December 31, 2011 audit. Therefore, we must resign as auditor of the Company. In addition, the restrictions on the audit procedures could indicate a probability that there were material errors in previously issued financial statements. As a result of the restriction and work scope limitation, we are unable to rely on the Company’s management’s representations as they related to previously issued financial statements. Consequently, we can no longer support our opinion dated March 3, 2011 related to our audit of the consolidated financial statements of the Company as of December 31, 2010 included in the Form 10--K filed with the SEC on March 4, 2011.

ZHENGZHOU, China,Jan. 9, 2012 /PRNewswire-Asia-FirstCall/ -- ZST Digital Networks, Inc. ("ZST" or the "Company") (NASDAQ: ZSTN), a major developer, manufacturer and supplier of digital and optical network equipment to cable system operators and provider of GPS tracking devices and support services for transport-related enterprises in China, today announced the completion of its US$1 million share repurchase program, authorized in August 2010. Further details of the completion of the stock buyback including number of shares and average price will be provided in the Company's fourth quarter and fiscal year 2011 earnings release.  

Mr. Zhong Bo, Chairman and Chief Executive Officer of ZST, commented, "The completion of our share repurchase program underscores our commitment to increasing value for our shareholders.  Given our consistent performance and the continuing strong demand for our products and services, repurchase of our shares at what we believe to be compelling valuations have constituted an effective use of capital.  The growth opportunities in the IPTV and commercial GPS products and services markets in Henan province remain robust, and we believe we are well positioned to continue expanding our share of these growing markets. We will remain focused on the execution of our growth strategy in the year ahead while evaluating additional options to increase shareholder returns."    

Third Quarter 2011 Results

The Company and several of its directors and officers have been named as defendants in a purported securities class action lawsuit filed in the U.S. District Court for the Central District of California. The complaint was filed on April 25, 2011 and is captioned Robert Scott v. ZST Digital Networks, Inc., et al. The complaint alleges that the Company and certain of our current and former officers and directors violated Federal securities laws by making false and/or misleading statements and failing to disclose material adverse facts about the Company's business, operations, prospects, performance, and internal controls. Named in the complaint as individual defendants are Zhong Bo, our CEO and Chairman of the Board; Zhong Lin, our COO and a member of our Board; and John Chen and Zeng Yun Su, two former CFOs.

The complaint asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, on behalf of all persons who purchased or otherwise acquired common stock of the Company pursuant or traceable to the registration statement and prospectus filed in connection with the Company's October 20, 2009 public offering (the “Registration Statement”), and claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, on behalf of purchasers of the Company's common stock during the period October 20, 2009 to April 21, 2011. Specifically, the complaint alleges that the Registration Statement contained falsely stated revenue for fiscal 2008 and the first six months of fiscal 2009 and that the Company's Form 10-K for the fiscal year ended December 31, 2009 (“2009 Form 10-K") provided false revenue amounts for fiscal years 2008 and 2009. In support of its allegations, the complaint, inter alia, references an April 21, 2011 report published by an online financial news website entitled seekingalpha.com that reported that documents filed by the Company’s subsidiary Zhengzhou Shenyang Technology Company Limited with the SAIC (State Administration of Industry and Commerce) in the PRC reported revenue amounts for the applicable periods that were substantially lower than revenue reported in the Company's Registration Statement and 2009 Form 10-K.

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.

ZHENGZHOU, China, June 8, 2011 /PRNewswire-Asia-FirstCall/ -- ZST Digital Networks, Inc. (NASDAQ: ZSTN) ("ZST" or the "Company"), a major developer, manufacturer and supplier of digital and optical network equipment to cable system operators and provider of GPS tracking devices and support services for transport-related enterprises in China, has signed a Letter of Intent with EarthSearch Communications International, Inc. ("EarthSearch"), a subsidiary of East Coast Diversified Corporation (OTC.BB: ECDC) as the basis for further discussion regarding the terms and conditions that may apply in a formal agreement to be executed between both parties in the future.

Under any such formal agreement, ZST Digital would be granted Chinese distribution and marketing rights to EarthSearch's Logiboxx product, a proprietary technology for integrated wireless communication between GPS and RFID, and ZST would provide technical and administrative support for the product in China.

Mr. Zhong Bo, Chairman and Chief Executive Officer of ZST, commented, "While our discussions with EarthSearch are still in a preliminary phase, we are interested in exploring the potential synergies between their Logiboxx integrated GPS and RFID solution and our own GPS fleet management technology. We continue to be on the lookout for partners with whom ZST can work together to achieve our long-term expansion strategy and create meaningful value for our shareholders. We feel that EarthSearch may be just such a partner, and we look forward to exploring possible cooperation with them in the future."

ZHENGZHOU, China, May 23, 2011 /PRNewswire-Asia-FirstCall/ --  ZST Digital Networks, Inc. (NASDAQ: ZSTN) ("ZST" or the "Company"), a major developer, manufacturer and supplier of digital and optical network equipment to cable system operators and provider of GPS tracking devices and support services for transport-related enterprises in China, today announced that several PRC regulatory bodies, including the Ministry of Transport, Ministry of Public Security, the State Administration of Work Safety and the Ministry of Industry and Information Technology, have issued new regulations relating to supervision of road transport vehicles in China.    

The new regulations aim to improve safety conditions for drivers employed by road transport enterprises, strengthen supervision of commercial road transport vehicles, and reduce traffic accidents.  As part of the new regulations, relevant commercial transport vehicles, including tour buses, minibuses and vehicles for the transport of hazardous materials, will be required to install and utilize GPS tracking and monitoring systems before December 31, 2011.  The regulations indicate that transport enterprises must install GPS systems that meet the relevant government requirements, and that the GPS systems must be linked to the national commercial vehicles network and control system. The installation of a GPS system will be required for all new commercial vehicles that go into operation from August 1, 2011 in order for those vehicles to receive a road transport permit.  Vehicles that have already received permits but that do not as of yet operate a GPS tracking and monitoring device will be encouraged to have GPS systems installed and linked to the national network and control system.  

Mr. Zhong Bo, Chairman and Chief Executive Officer of ZST, commented, "We believe the new regulations announced by the government will encourage the long-term development of the commercial GPS market in China, and create further opportunity for our growing commercial GPS business segment. Given our focus on commercial road transport enterprises, and the comprehensive capabilities of our GPS tracking and monitoring systems and support services, we believe we stand to benefit directly from the implementation of these new regulations.  We will work closely with the relevant government bodies in Henan province and with our commercial GPS customers as the regulations go into effect to best position ZST Digital for the next phase of growth in the commercial GPS market in China."  

ZHENGZHOU, China, May 11, 2011 /PRNewswire-Asia-FirstCall/ -- ZST Digital Networks, Inc. announces that it has posted to its website a letter from Yiyang Radio & Television Bureau, one of ZST Digitals cable TV related equipment segment customers. The full text of the letter (translated to English) and a scanned copy of the original letter can be accessed on the company's website at www.zstdigital.com/english.  

Mr. Zhong Bo, Chairman and Chief Executive Officer of ZST, commented, "As we look forward into 2011 and focus our attention on the continued growth of our business, I would like to thank our customers who have demonstrated their support for ZST Digital over the years. We have built close relationships with many of our customers, who continue to engage ZST Digital as a result of our high quality products, consistent customer service and technical expertise. I would like to specifically thank Yiyang Radio & Television Bureau, one of our cable TV related customers, which has publicly declared its support of ZST Digital.  We have posted the letter of declaration from this customer on our website, and we welcome our shareholders to visit the website to review the document."

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.

First Quarter Results:

Mr. Zhong Bo, Chairman and Chief Executive Officer of ZST, commented, "We are pleased to report another strong top- and bottom-line performance in what is typically our slowest quarter of the year.  Our results extend our track record of consistent financial and operational execution, and demonstrate the strength of our strategy.  Our results for the quarter were driven by broad-based demand across our product segments, as we continue to benefit from positive macroeconomic trends and continued government support for the development of our end markets.  Sales revenue from our IPTV, GPS and cable TV network equipment segments accounted for approximately 39%, 28% and 33% of total net revenues, respectively.  In addition, GPS related service revenue increased over 300% year-over-year to $2.5 million, highlighting the rapid growth of this high margin segment.  

• Gross profit for the first quarter of 2011 was US$8.3 million, representing a 100% year-over-year increase
• Net income for the first quarter of 2011 was US$5.2 million, a year-over-year increase of 166% from US$2.0 million in the first quarter of 2010. Net margin was 15.5% for the first quarter of 2011 up from 11.6% in the first quarter of 2010.
• Diluted net income per share was US$0.45 in the first quarter 2011, compared to US$0.17 for the first quarter of 2010, based on weighted-average common shares outstanding of 11,628,328 and 11,650,442, respectively.

Full Year 2011 Outlook – For the full year 2011, the Company reiterates its estimates that revenues will range between US$160 million and US$175 million, and net income will range between US$28 million and US$30 million. This represents the Company's current and preliminary view, which is subject to change.    

Chairman's Letter

April 29, 2011

Dear Shareholders,

As I indicated in my letter to you on April 22, we intend to provide honest, factual information to our investors in a timely fashion. As such, I am writing to answer some of your recent questions regarding our operations and financial disclosure.

Differences Between SAIC and SEC Reports:

A number of you have asked why it is that our Chinese State Administration of Industry and Commerce (SAIC) and SEC reports do not match, and the answer is that the SAIC filings are a formality, for the purposes of business license renewal with the government, and are not audited. It is very common for Chinese companies to have differences between these two sets of financials and we would encourage our investors to focus on our audited SEC filings. Short-sellers, who profit from a decline in our stock price, often point to these differences as a way to undercut the credibility of a particular company, when in fact the real focus should be on audited, SEC filings. U.S. companies have one set of financials: audited SEC filings; Chinese companies have various other filings for a myriad of purposes, but the SEC filings remain the true measure of financial performance. Our SEC filings are audited by BDO China Li Xin D Hua CPA Co., Ltd., a BDO Member Firm, a very highly regarded firm, which continues to stand by our audited financials.

For more information on the inherent differences in the SAIC, State Administration and Taxation (SAT), and SEC filings, please refer to Roth Capital Partners' July 12, 2010 research note, titled "Comparing PRC Filings and SEC Filings – A Primer", which gives an overview of the reasons why the PRC filings often do not correspond to the SEC filings.

In an effort to give our shareholders an additional level of comfort, ZST Digital is voluntarily reviewing its 2008 and 2009 SAIC filings to determine if these filings can be amended so that they more closely track the SEC filings. We will provide you with an update when possible.

Purchase of Office Space

Like all fast-growing companies, we recently purchased additional office space, and we are pleased to answer your questions regarding these recent purchases. We were fortunate to be able to secure all the needed space in one building, which is the most efficient solution to our need for additional space; and in addition, we are fortunate to have secured both additional spaces at a cost below the average purchase price for comparable space on a per square meter basis. We purchased the 27th – 29th floors at an average price of 5,300 RMB per square meter (zoned for mixed commercial or residential development) in March 2010, with a subsequent purchase of the 3rd – 4th floors in December 2010 at an average price of 18,000 RMB per square meter (zoned for commercial use-only). Naturally, the commercial space on lower floors is more desirable and therefore commands a higher price as compared to the mixed-use upper level floors.

Some of you have also asked how we were able to purchase the property before the developers had obtained a sales license. Based on our knowledge of the property owners and their previous track record in real estate, we were confident that the license would be granted. Furthermore, through the structuring of a subscription agreement, which committed both buyer and seller to the transaction prior to the seller receiving a sales license, we were able to secure a more favorable per square meter price.

Please find below a summary of our research on prices per square meter in the

surrounding area. We have included contact information for each property in an effort to be as transparent as possible; please feel free to contact the property managers directly if you would like to confirm the data we have included herein or simply visit the follow website www.soufun.com,.

Comparable Real Estate:

Clarification Regarding Customer Base

Just as in any state, there are numerous government agencies and market opportunities, and we would like to clarify what our focus is within the Henan province. As far as we know, VCOM is leasing China Unicom's fiber optic network to develop the IPTV set-top box market in Henan province. VCOM's main customers are the Party development departments within the local governments, with the goal of providing a comprehensive educational system for party members. ZST's customers are local government departments, such as the Radio and Television Bureau; cable TV stations; and cable TV networks. The local governments in Yijan, Huaxian, and Kaifeng, for example, are some of our main customers for the set-top box division. Essentially, we serve a very different customer base as compared to VCOM.

Regarding our market opportunity with the Road Transportation Department of Shangqui City, we reiterate that the total number of commercial vehicles that will potentially use our technology is 60,000.

With regard to a specific customer, Henan Wanli, we have received some inquiries asking us to confirm whether or not this entity is a customer. To clarify, the Henan Wanli Group is comprised of numerous subsidiaries, one of which is Henan Wanli Auto Trade Co. We understand that with such a large number of subsidiaries it can be confusing, but we are hereby confirming that our customer is the Henan Wanli Auto Trade Co.

Some of you have asked what ZST Digital plans to do in response to the short-seller allegations against us. We are in the process of hiring an independent legal counsel to advise us on our rights, and continue to evaluate various legal options with respect to such baseless statements. We are focused on delivering operational and financial excellence for our shareholders, and we will not be distracted by unsubstantiated allegations made in an effort to financially profit from a decline in our stock price.

We are hopeful that the above answers effectively address your questions, and we will continue to communicate openly with our shareholders on an ongoing basis. We thank you for the support you have shown for ZST, and are looking forward to delivering value to you as a shareholder, as well as to our loyal customers in China.

Sincerely,

Chairman's Letter

April 22, 2011

Dear Shareholders,

I am writing to address shareholder questions that have emerged following some very targeted negative online media commentary. These accusations are being circulated by individual investors who are short-sellers, which is to say that they benefit financially if our stock price declines. There are no facts to support these accusations and I believe many of our sophisticated institutional investors continue to support us by holding positions in our Company.

ZST Digital Networks is a major developer, manufacturer and supplier of digital and optical network equipment to cable system operators and provider of GPS tracking devices and support services for transport-related enterprises in Henan Province in the People's Republic of China. We are well positioned to take advantage of the tremendous growth opportunities in one of the fastest growing economies in the world. Our year-over-year net income growth for 2010, in financial statements certified by BDO China Li Xin Da Hua CPA Co., Ltd, a BDO Member Firm, was 117%. We look forward to continue to deliver such tangible results for our shareholders, and to focus on strong top and bottom line growth.

I have never sold a single share of ZST Digital Networks in our Company's history because I believe in the long term growth potential for our business, as a number of our initiatives are supported by local government. I am confident in our track record of success, including the continued expansion of our GPS platform. I would like to welcome our investors, current and potential, to visit our headquarters located in Zhengzhou City to learn more about our operations and will continue to provide honest, factual information to our investors and the market as a whole.

I thank you for your continued support and confidence in ZST Digital Networks; we will communicate updates as appropriate and are looking forward to putting this matter behind us in an expeditious manner.

Sincerely,

Zhong Bo

Chairman of the Board of Directors, and Chief Executive Officer

ZST Digital Networks, Inc.

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.

ZHENGZHOU, China, March 23, 2011 /PRNewswire-Asia-FirstCall/ -- ZST Digital Networks, Inc. today announced the appointment of Mr. Henry Ngan to the position of Chief Financial Officer ("CFO").  Mr. Ngan replaces Dr. John Chen, who resigned on the date of Mr. Ngan's appointment. Dr. Chen will continue to work with the ZST Digital Board of Directors and its senior management team to ensure a smooth transition.

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.

ZSTN crushed estimates.  Based on guidance and current share count, 2011 EPS would come in at $2.48.  All segments of business were strong. We will take the implied 2011 estimate with a grain of salt, since a raise appears likely. SAIC filings do not match SEC.  we also need to keep in mind that numbers have not been audited yet.

Fourth Quarter Highlights:

• Total revenue was US$46.0 million, an increase of 51% compared to the fourth quarter of 2009.
• Gross profit for the fourth quarter 2010 was US$12.4 million, an increase of 113% compared to the fourth quarter 2009.  Gross profit margin for the fourth quarter 2010 was 27%, compared to 19% for the fourth quarter of 2009.
• Operating income for the fourth quarter 2010 was US$11.0 million, an increase of 161% compared to the fourth quarter of 2009.
• Net income for the fourth quarter 2010 was US$8.5 million, an increase of 176% compared to the fourth quarter of 2009.
• Net income margin for the fourth quarter of 2010 was 18.5%, compared to 10.1% for the fourth quarter of 2009.
• Non-GAAP EPS of $0.73 vs. $0.28 the year before.

For the full year 2011, the Company estimates that revenues will range between US$160 million and US$175 million, and net income will range between US$28 million and US$30 million. This represents the Company's current and preliminary view, which is subject to change.  

Mr. Zhong Bo, Chairman and Chief Executive Officer of ZST, commented, "I am pleased to report a strong set of results exceeding our guidance for the fourth quarter and full year.  Our results were supported by continued growth across our three main product lines, IPTV set-top boxes, commercial GPS products and services and cable TV network equipment"

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.

Third quarter 2010

• Revenue for the third quarter 2010 was US$38.5 million, representing an increase of 34.6% from US$28.6 million in the third quarter 2009.  

• Gross profit for the third quarter 2010 was US$10.0 million, representing a 108.6% year-over-year increase. Gross profit margin for the third quarter 2010 was 26.0%, up from 16.8% in the third quarter 2009.  

• Income from operations was US$8.8 millionin the third quarter of 2010, an increase of 98.3% compared to operating income of US$4.5 millionin the third quarter of 2009.

• Net income for the third quarter of 2010 was US$6.4 million, a year-over-year increase of 94.7% from US$3.3 millionin the third quarter of 2009.  Net margin was 16.6% for the third quarter of 2010, compared to 11.5% in the third quarter of 2009.

• Diluted net income per share was US$0.55in the third quarter of 2010, compared to US$0.39for the third quarter of 2009.

Fourth Quarter and Full Year 2010 Outlook –

• Revenue for the fourth quarter of 2010 will range between US$35 million and US$41 million.
• Net income for the fourth quarter of 2010 will range between US$5.5 million and US$6.5 million.  

• For the full year 2010, the Company estimates that revenues will range between US$125 million and US$130 million
• Net income will now range between US$20 million and US$21 million, up from the previously announced guidance of US$17 million to US$19 million.

GeoTeam® September 2010 Rodman & Renshaw notes:

ZSTN Zhengzhou Shenyang Technology Co., Ltd. (NASDAQ:ZSTN)

• Management had targeted GPS to contribute 20% of revenue by year end. They are already there.
• GPS generates revenues from hardware sales, installation and the service center. GPS will provide recurring revenues and drive margin expansion.
• Growth area is in GPS division
• GPS to be 20% of revenue by end of year
• Too early to determine how fast and how much GPS could grow. (was very bullish)
• Cap ex and cost of revenues one in the same. Manufacturing all outsourced to OEM suppliers.
• Strong commitment to internal controls. Management working with BDO to achieve full SOX compliance, although they are not yet required to do so.
• CFO stated he is aware of SAIC, SAT and SEC filings issues and that companies should be cognizant of this issue. He said the companies that get in trouble with local filings do so because they are being too aggressive limiting their liabilities.

GeoInvesting questions on recent 10Q excerpts

Excerpt 1:

"Based on an evaluation carried out as of the end of the period covered by this quarterly report, under the supervision and with the participation of our management, including our CEO and CFO, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were not effective as of June 30, 2010."

This seems like a downgrade from just one qtr ago, when controls were effective. What happened?

Company Response:

Internal Control: We have retained UHY as our internal control consultant and we look to be SOX compliant by year-end. The original assessment was based on our previous auditor's recommendation. However, we do not believe it would be reasonable for us to make the same assessment while retaining a SOX consultant to improve our internal control policies at the same time. Therefore, we are actively communicating to investors our continued effort to be as transparent as possible to the highest standard required by a Nasdaq listed company.

Excerpt 2:

"The cash and cash equivalents is enough to meet our day-to-day requirements at current operating level. We may need to seek for external financing resources to supplement operating cash flows if we successfully expand our GPS related business rapidly

Is there a reason to be concerned with respect to above statement?

Company Response:

The language is for disclosure purpose. The management currently do not have plan to access the capital market for a equity financing

ZST Digital Networks, Inc. announced that its Board of Directors has authorized the Company to repurchase outstanding shares of the Company's common stock in an amount not to exceed $1 millionin open market purchases, with block trades being permitted, from time to time in the discretion of the Company's management and as market conditions allow.

Mr. Bo Zhong, Chairman and Chief Executive Officer of ZST, commented, "The Board's authorization of the share repurchase program reflects our confidence in the favorable growth outlook for ZST. As we enter the second half of 2010, the demand for our products and services remains robust, supported by the continued expansion of our end markets. In addition, our strong second quarter 2010 results and the rapid development of our commercial GPS products give us confidence in the long-term growth prospects of our business. As such, we believe that current share price levels do not fully reflect the fundamental strength of our business and outlook. We remain committed to maximizing long-term shareholder value, and believe that our stable financial position and healthy balance sheet will allow us to execute a share repurchase program while continuing to invest in our business."

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.

Second Quarter 2010 Financial Highlights: (On the way to conquering one of the road blocks we had mentioned)

•  Total revenue for the second quarter of 2010 was US$33.0 million, an increase of 39.6% compared to the second quarter of 2009.
• Gross profit for the second quarter of 2010 was US$8.2 million, an increase of 130.8% compared to the second quarter of 2009. Gross profit margin for the second quarter of 2010 was 25.0% compared to 15.1% for the second quarter of 2009.
• Operating income for the second quarter of 2010 was US$7.2 million, an increase of 111.6% compared to the second quarter of 2009.
• Net income for the second quarter of 2010 was US$5.2 million, an increase of 103.1% compared to the second quarter of 2009.
• EPS of $0.45 vs. 0.30
• Net income margin for the second quarter of 2010 was 15.7% compared to 10.8% for the second quarter of 2009.

Based on the current estimates, the Company approximates:

• Revenue for the third quarter of 2010 will range between US$34.0 million and US$37.0 million.
• Net income for the third quarter of 2010 will range between US$5.5 million and US$6.0 million.

The company has updated it guidance for the full year 2010 from what was previously announced on May 14, 2010 as a result of continuing strong demand for its products and services. The Company now estimates:

• Revenues will range betweenUS$125 million and US$130 million
• Net income will range between US$17 million and US$19 million.

The Company had previously expected that its revenues would range between US$115 million and US$125 million, and net income would range between US$13 million and US$15 million. This represents the Company's current and preliminary view, which is subject to change.

The GeoTeam® is still awaiting for the release of the the quarter's SEC filing for information on liquidity needs.

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.

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially)

Added to the GeoSpecial list on October 20, 2009 @ $7.61

Catalyst: Company was involved in some “hot” industries, in particular in the GPS market; track record of consistent top and bottom line growth.
Peak Performance: Reached $11.90 on January 11, 2010
Current Price: $5.35

Current road block: ZSTN’s legacy bread & butter business which supplies digital and optical network equipment to cable system operators can be considered mature, as ZTN has captured a significant percentage of its target region's market share; Margins in the legacy business have come down; For its 2010 first quarter, ZSTN’s share count increased 49.4%.

Maintaining ZSTN as a GeoSpecial is a tough call. The company's financial statements appear healthy:

• Cash stands at $20.8 million
• Account receivables have been drawn down 37.2%
• Company is debt free
• 2010 annual operating cash flow is tracking at $34.8 million
• Free cash flow is tracking at 28 million. (this figure does not assume an increase in capital investments past $7.0 million).

However, there are issues that may not excite many investors. 2010 Second quarter net income guidance of $3.0 to $3.5 million implies EPS of $0.26 to $0.30 or flat growth versus the reported second quarter 2009 EPS of $0.30. Furthermore, in observing analyst EPS estimates for the next seven quarters, only one is showing EPS growth of over 30%. The EPS growth rate for the remaining six quarters ranges between negative 12.8% to positive 23.5%. 2010 EPS is expected to grow only 5.3% to $1.20 followed by 26.7% in 2011. Yes, ZSTN's trailing and forward P/E are tiny, but will investors pick ZSTN over other stories that have better growth profiles and similar valuations? The answer may depend upon ZSTN's ability to handily exceed estimates. This is another case and point of the negative ramifications of massive dilution.

Speaking of dilution, it appears safe to assume ZSTN will tap the equity markets in the near future, giving us concerns that dilution could erode what little EPS growth the company is on track to achieve.

Excerpt from first quarter 10Q:

"The cash and cash equivalents is enough to meet our day-to-day requirements at current operating level. We may need to seek for external financing resources to supplement operating cash flows if we successfully expand our GPS related business rapidly."

Well, It seems obvious from the recent 2010 first quarter commentary that ZSTN's GPS business is exceeding expectations.

"We will continue to capitalize on these favorable trends by executing our strategy to increase sales in the IPTV set-top box market, expand our products and services, especially within the GPS market, and continue to build our brand and technology platform."

"John Chen, Chief Financial Officer of ZST, commented, "We are pleased to report revenue and net income for the quarter ahead of our guidance, supported by the continued growth of our GPS sales and services. In addition, we delivered positive operating cash flow during the quarter, further strengthening our balance sheet. We believe the growing demand for our commercial GPS products and services will continue to make 2010 a transformative year for ZST Digital."

Until the company is more specific on this topic we are compelled to remove ZSTN from the GeoSpecial list. We don’t fully understand why ZSTN will require additional capital given its current cash and cash flow position. Long-term value investors may feel ZSTN is eventually worth well more than the current price of $5.35. We do feel there is upside to company guidance and analyst estimates.  Investors who are able to make an investment decision based on 2011 estimates may be well rewarded, given ZSTN's low peg ratio. We will place the stock on the GeoSpecial on the Radar list as we monitor developments.

Rodman @ Renshaw is still bullish on ZSTN:

Maintain Market Outperform Rating (May 14, 2010) : At current levels ZSTN is trading at a P/E multiple of ~5.5x and ~4.2x to our FY2010 and FY2011 earnings estimates. This is a substantially lower multiple compared to an average of ~26x for network equipment makers and ~13x for GPS / navigation providers based on forward FY2010 consensus earnings. We believe ZSTN should at a minimum trade in line with the averages the relative growth opportunity associated with it. We are comfortable maintaining ZSTN the $14.00 price targett, 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.

Mr. Bo Zhong, Chairman and Chief Executive Officer of ZST, commented, "I am pleased to report healthy results exceeding our guidance in what is typically the seasonally lowest quarter of the year. Our results were underpinned by a substantial increase in sales of our high margin commercial GPS tracking products and services with the previously announced signing of a major contract at the quarter end. As a result, revenue from our GPS segment accounted for approximately 16% of our total revenues at the quarter end and we expect this percentage to increase in the coming quarters. We are very pleased with the rapid growth of this newly launched product segment and believe we are well positioned to continue to penetrate the rapidly expanding commercial transport market in Henan.

We continue to experience healthy demand for our IPTV set-top boxes, supported by the government backed initiatives to increase digital cable penetration in Henan Province. As this initiative gathers momentum, we have seen a dramatic increase in order size for our IPTV products. This is clearly a positive trend in terms of the overall growth of the market, and as the leading IPTV provider in the Province, we stand to benefit from these policies over the long-term. In order to increase sales of our IPTV products outside of the larger cities in Henan Province, we introduced a Standard Definition IPTV product in the first quarter at a lower price point to complement our High Definition IPTV set-top box. While this has impacted our average selling price, it has also allowed us to tap into a large and expanding market opportunity, and we expect to see continued unit growth on a full year basis. We will continue to capitalize on these favorable trends by executing our strategy to increase sales in the IPTV set-top box market, expand our products and services, especially within the GPS market, and continue to build our brand and technology platform."

John Chen, Chief Financial Officer of ZST, commented, "We are pleased to report revenue and net income for the quarter ahead of our guidance, supported by the continued growth of our GPS sales and services. In addition, we delivered positive operating cash flow during the quarter, further strengthening our balance sheet. We believe the growing demand for our commercial GPS products and services will continue to make 2010 a transformative year for ZST Digital."

Second Quarter 2010 Outlook -

• Revenue:  Between US$28.0 million and US$31.0 million.
• Net income for the second quarter 2010 will range between US$3.0 million and US$3.5 million.

For the full year 2010, the Company reiterates its guidance-

• Revenues will between US$115 million and US$125 million
• Net income will range between US$13 million and US$15 million.

This represents the Company's current and preliminary view, which is subject to change.

Zst Digital Networks capped off the year 2009 with a strong fourth quarter.

• 2010 first quarter guidance which was much less than investor expectations.

"Based on the current estimates, the Company approximates that revenue for the first quarter 2010 will range between US$12 million and US$15 million." This would equate to EPS 17."

• Fourth quarter EPS results were rather dismal.

The good news is that 2010 sales and net income guidance are still bullish.

For the full year 2010, the Company estimates that:

• Revenues will range between US$115 million and US$125 million, and
• Net income will range between US$13 million and US$15 million. 

Using the current diluted share count of 9.69 million and the midpoint of ZSTN 2010 guidance, EPS would be $1.45.  

Investors may need to exercise patience as Wall Street pieces this story together. Temporary timing issues generally don’t interfere with the GeoTeam’s company analysis.  However we must be aware that ZSTN issued net income guidance but no EPS guidance. Investors could infer this to mean that the company may have to tap the capital markets in 2010.

Dilution risk is becoming a significant risk in the China space.

John Chen, Chief Financial Officer of ZST, commented, "Our 2009 financial results reflect the continued growth in our core IPTV market, our primary revenue driver for the fourth quarter and full year 2009. As a newly public company, we experienced an expected increase in G&A expenses during the fourth quarter. However, we will continue to focus on maintaining effective cost control measures to enhance profitability. In addition, we believe there will be an overall improvement in both the gross and net margin in the fiscal year 2010 as we ramp up sales of our commercial line of GPS products and services. With strong demand in our core IPTV market and a growing opportunity in GPS, we believe we are well positioned to deliver healthy financial and operational gains in the coming year."

Based on the current estimates, the Company approximates that:

• Revenue for the first quarter 2010 will range between $12.0 million and $15.0 million.
• Net income for the first quarter 2010 will range between $1.4 million and $1.6 million.
• Full year 2010 revenues will range between $115.0 million and $125.0 million,
• Full year 2010 net income will range between $13.0 million and $15.0 million.

This represents the Company's current and preliminary view, which is subject to change.

Hot Industry, Trading Opportunity

The GeoTeam® is coding ZSTN as GeoSpecial at its opening price yet to be determined.

ZST Digital Network Inc. (NASDAQ:ZSTN) 

Legacy Business:

Supplies digital and optical network equipment to cable system operators . Cable network devices include amplifiers, optical receivers. ZSTN offers a line of fiber-optic receivers and transmitters, cable transmission amplifiers and other network products which provide the flexibility, speed and clarity necessary in 1996 communications systems.

The company has also developed a line of internet protocol television (“IPTV”) set-top boxes that are used to provide bundled cable television, Internet and telephone services to residential and commercial customers.

GPS Business:

In addition, ZSTN is currently in the process of establishing a partnership with China Unicom, a wireless network provider, in connection with the Company’s development and sale of its new GPS tracking units. In March 2009, the Company entered into a technical cooperation agreement with China Unicom that allows the Company to use the China Unicom wireless network to provide GPS location and tracking services to third parties. Upon completion of this offering, the Company intends to negotiate a reseller agreement with China Unicom whereby GPS tracking units supplied by the Company would be sold in China Unicom retail stores, with the Company receiving a share of subscriber revenue collected by China Unicom.

Reasons for consideration:

1. Quick implementation of business strategy- In just two years ZSTN has become the leader in the IPTV set top box market in its region. 
   
2. Strong Track Record of growth-  
   
       2006 to 2008 Revenue Compounded Annual Growth Rate: 99% 
       2006 to 2008 Net Income Compounded Annual Growth Rate: 113%
   
3. The Company is experiencing stable income generation from its legacy cable business, while it participates in the attractive IPTV industry and enters the high growth GPS market.
   
            -China's Cable subscriber market is growing at approximately 10% to 15% and expected to remain healthy aided by the government mandated analog to digital conversion taking place over the next several years.
   
            -In the Henan Province only 10.8% of the population are cable subscribers.  China's Cable subscriber market in the Henan Province is expected to grow between 10%-20%
   
            -Company is focusing on the IPTV market which should experience faster growth than traditional cable services. 
   
            -China GPS Industry Trends: Less than 10% of vehicles are equipped with GPS devices, compared to 20% to 60% in more developed nations.  GPS business should have an immediate impact on revenues as the Company has yet to generate revenues from this product line.  
   
4. Barrier to entry: Leading market share position and loyal customer base have created a barrier to entry.

Important Note:  We have coded ZSTN as GeoSpecial as opposed to a GeoBargain.  We need to attain a better grip on the EPS outlook for 2009 and 2010.   Margins in legacy business have been affected by price reductions in order to gain market share.  Despite this, it is possible the market will notice ZSTN shares due to its involvement in some 'hot' industries. At the very least, recent China IPOs have been offering trading opportunities as they are occurring at significant discounts to industry multiples, something we have rarely seen in the traditional U.S. IPO market.

This Article is not intended to be investment advice. It is are provided to aid investors in making their own investment decisions.