Why Does CSST Want to Go Private?By: John Honovich, Published on Jan 28, 2011
CSST [link no longer available], listed on the NY Stock Exchange and one of the largest providers in the Chinese market is trying to go private. On first glance, this is surprising. The stock markets have rebounded globally in the past 2 years and a number of their Chinese peers have recently went public. In the midst of this, why would they want to go private? We suspect they believe they are significantly undervalued relative to the growing stock market bubble in China.
Let's start with understanding CSST's current situation. CSST is on pace for $600 - $700 Million USD 2010 annual revenue. Most of that revenue is from system integration in the Chinese market with a minority from manufacturing and product distribution. The company's net profit margins have averaged 10-15% over the last few years (e.g., in 2009, operating income was $66 Million). Revenue grew from about $100 Million in 2006 to nearly $600 Million in 2009. However, recent revenue growth is much lower - in the range of 10%-20%.
Despite the company's rather large earnings, profits and growth rates, the stock price has lagged. As of January 28, 2010, the market capitalization is less than $500 Million USD, a low valuation for a company with such performance (e.g., price to sales ratio of less than 1 and a P/E ratio of less than 10). The company's market valuation peaked in October 2007 with a valuation of about $2.5 Billion, falling more than 80% since then.
Moreover, CSST's valuation is way out of line with Hikvision and Infinova - two public surveillance companies trading in the Shenzhen market. For instance, Infinova has less total revenue than CSST has operating income yet Infinova is valued nearly 3 times more than CSST. While there are some differences between the company, such valuation discrepancies are quite large and out of line.
When companies go private it is often because they believe they are unfairly valued by the market. Companies as large as CSST generally don't stay private indefinitely. They makes changes or wait for more opportune times and then go public again.
Indeed, there is a general trend of Chinese companies listed overseas planning to move back home [link no longer available]. One article notes, "They are being attracted by the relatively higher price-earning ratios, higher underwriting prices and higher levels of funds raised by many companies that have gone public in China rather than on overseas exchanges."
Our speculation, based on no inside information, is that CSST is dissatisfied with their low valuation on the NYSE and is seeking ways to tap into the more lucrative Chinese investment market.
CSST's CEO, who is proposing this plan, states in a government filing [link no longer available] that he will seek financing from private equity firms active in Asia.
We believe this could substantially increase CSST's valuation. On the other hand, as we contended in our Infinova IPO review, we do not believe Chinese valuation of surveillance companies are sustainable. For a company that primarily does system integration, CSST's valuation, by American standards is not bad. While the company might be somewhat undervalued, the Chinese market valuations are far far overvalued (unless these companies grow at 40% CAGR for the next 5 years or so).
The outcome of this will be interesting to see. If CSST can execute this move, they may wind up with a much higher valuation and a warchest of new capital to invest into the surveillance market.