This research note is provided by Alpha Deal Group LLC. Alpha Deal works for buyside clients on special situation deal intelligence in select regional capital markets on mispriced equity idea generation, deal sourcing and deal networking introductions
ChinaCache (CCIH.O) is the leading total solutions provider of Internet content and application delivery services in China, accounting for 50% market share locally and 5% globally. Its products are designed to help improve the performance and reliability of online services and applications, and its customers include businesses, government agencies and other enterprises. However, will ChinaCache provide equally rich solutions for investors?
The company began operating in China in 2000 and listed on the NASDAQ in 2010. It was the first company to obtain a nationwide operating permit to provide content and application delivery services from the Ministry of Industry and Information Technology of China. For competitors, this is a significant barrier to entry.
During Alpha Deal Group’s initial due diligence call with ChinaCache, President Dr. Ken Zhang and Acting CFO Edith Kwan outlined that the company’s success is driven by the accelerated growth of China’s CDN (Content Delivery Network), echoing the words of Song Wang, the founder, chairman and chief executive officer.
Impressive Q3 results
ChinaCache ended its third quarter of 2013 with net revenues of RMB275.4 million (US$45.0 million), a 31.6% increase year-over-year, and gross profit of RMB87.6 million (US$14.3 million), an increase of 28.3% year-over-year.
“During the quarter, the company recorded net revenue growth across each of its industry segment, particularly in its Enterprise, Internet and software ones. Also, we are pleased to see continuous expansion of our Enterprise customer base which marks the highest increase among all of our customer segments.” said Wang.
Market growth
In the past five years, China’s CDN market grew from RMB210 million in 2007 to RMB1.23 billion in 2011; in the next five years it is expected to continue growing and double by 2015.
According to Zhang, “China’s Internet industry continues to be fueled by greater demand for higher quality Internet content and the urge of better connection speeds. Favorable government policies are also expected to drive growth in Internet traffic, which we expect will increase demand for our services. Additionally, we anticipate that growth in OTT and IPTV, as well as the continued expansion of 3G and the expected launch of 4G wireless technologies, will drive exponential increases in mobile traffic, creating a tremendous opportunity in the future for ChinaCache.”
Future strategy
In order to address these opportunities, Kwan said the company will continue to make strategic investments in areas such as R&D, talent acquisition, product development and network resources to enhance the management system and operational capabilities. It has already implemented a CRM system and upgraded its ERP system and will soon start the second phase of ERP upgrade. By implementing overall budget controls, human resources management and customer evaluations, ChinaCache can increase its visibility and realize more effective and organized company operations. The company sees these initiatives as important, to maintain its competitive advantage and to benefit from not only China’s rapidly developing Internet market, but also overseas markets.
Company Valuation
ChinaCache maintains a very strong financial position.
As stated earlier, net revenues continue growing. Net revenues rose from RMB209.2 million of 2012(Q3) to RMB275.4 million in 2013(Q3), thanks to the customer base growing at a rate of 39.6% in the past year.
ChinaCache has currently also a strong cash position, with cash and cash equivalents of RMB302 (US$49.4 million) in 2013 and liquid investments of RMB25 million (US $4.0 million).
These results have recently fueled interest and an increase in the stock price, most notably in the last two months.
Chart 1: ChinaCache stock market price
Source: Eikon/Starmine
Fueling China’s growing Internet population
There are several reasons why ChinaCache is expected to continue to have a strong market opportunity in the near future. It has a leadership position in the world’s largest Internet market while overseas peers are prohibited from operating in China. In addition, Internet population growth trends in the country will help ChinaCache maintain and grow its market.
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