Sometimes when there is too much change over too short a time period, investors (myself included) can back off a stock and wait for the numbers to shake out and get a clearer picture of the stable picture of a company. Investors can even back off of a stock when the news flow is all positive just because of news flow overload.
I believe many investors have been unable to keep up with all of the news flow from SBAY, and as a result, are waiting on the sidelines to get a more stable picture of the company.
There is a lot of complex news with SBAY, but to me, it all looks very positive, so I decided to take the initiative and educate myself about all the recent activity at SBAY and the implications for its performance going forward. I recently had two very informative in-person meetings in Beijing with Jim Crane, CFO of SBAY. We spent about five hours going through SBAY past, present and future.
One thing worth noting up front is that the numbers (e.g. share count, P/E, market cap) shown on Google Finance and Yahoo! Finance are outdated and wrong. Most investors familiar with SBAY know that the numbers on these sites are wrong, but are unclear what the right numbers are. I am currently looking at a number of other situations, in addition to SBAY, where the time lag in these services creates an opportunity for those of us willing to do our homework.
There are a few reasons why I felt it was worthwhile to get in touch with Jim Crane. I think the potential upside from SBAY stems from the following: In terms of fundamentals and utilizing the recent guidance released, SBAY has shown two consecutive years of double-digit revenue growth, with gross and net margins of approximately 50% and 20%, respectively. The company is cash flow positive and has minimal debt. The current market cap is approximately $100 million (assuming 6.3 million shares as per the interview below).
Subaye CFO Jim Crane (right) with the author.
On a valuation basis, SBAY is trading at about seven times trailing earnings (based on correct share count). If the company's projections bear out, Subaye will generate EBITDA of $50 million in 2011, meaning that investors can currently buy SBAY at around two times 2011 EBITDA. I feel that this extremely low valuation is largely due to investor confusion and fatigue with the constant news flow, as well as the fact that the it trades OTC.
However, I think that once the company's details are fully understood, and if the company successfully uplists to Nasdaq, this could have the potential to trade on a significantly higher multiple, providing the potential for a three to five times return over the coming year. Qualitatively, there are a few other things that I view as favorable.
First, the CFO is available and proactive. I can reach him on his Beijing cell phone and he is responsive and knows his numbers from memory.
Second, SBAY has three independent board members, which I view as a positive for shareholders and as a necessity for an uplisting.
Third, the CFO has invited me to tour the company's facilities to get a first-hand look at the operations. I hope to do this in January and expect to provide photos and video to
Below is the text of my interview with Jim.
Could you please summarize your business model for me ?
Subaye is a leading video advertising and entertainment media provider in China. Subaye's platform includes production, upload, storage, sharing and publishing onto more than 33 main video-sharing portal Web sites. Subaye also offers SaaS business solutions and is in the process of developing what Subaye believes is the first online shopping mall in the world that will utilize 3D imaging throughout the online customer interface.
Subaye's video-sharing services, SaaS solutions and its online shopping mall will be fully integrated in 2010. Subaye's members will use Subaye's SaaS online content management software to manage their online video and graphic showcases, maintain customer data and to manage operations within their Webshops at the online shopping mall. These showcases offer a cost-effective venue for small- to mid-size enterprises ("SMEs") to advertise their products and services and establish and enhance their corporate brands. The visitors of Subaye's Web sites, namely
, view the video showcases for Subaye's members in order to select products or services they wish to purchase.
Subaye also utilizes its experience and contacts within the entertainment media industry in China to produce and place advertisements on behalf of its customers. Subaye's management also routinely invests the company's funds in entertainment productions in China. Typically, these investments consist of the purchase of the full or partial copyrights to an entertainment production.
On Dec. 22, 2009, "Dayoucun," Subaye's third significant motion picture investment in China, was released in Taiwan, Hong Kong and nationwide in mainland China in over 1,000 cinemas. The company invested in "The Pye-Dog" and "Big Movie," both of which are motion pictures previously released in Asia in 2007 and 2005, respectively. In 2010, Subaye expects its motion picture investments to generate significant revenue.
Subaye's trade services are offered to customers based in China, North America and Europe. These customers order products through Subaye and Subaye ships products both domestically within China and internationally.
What does the balance sheet and income statement look like post-acquisition of the 31% of Subaye.com?
The total shares outstanding are approximately 6.3 million and there are 22,000 warrants and no options outstanding. The minority interest figure previously displayed between the liability and equity section on the balance sheet will no longer appear on the balance sheet as of the Dec. 31, 2009 quarter. The company's actual current ratio, that is current assets to current liabilities, is approximately 5 to 1.
For internal purposes, as a result of this acquisition, we estimated that net income will increase by approximately $9.5 million for fiscal year 2010 and $48.6 million in total for the three fiscal years ended 2012. In terms of free cash flow, we estimated an additional approximate $17 million will be generated by the company for the fiscal year ending Sept. 30, 2010.
Are there other significant corporate events in the works?
The biggest events in the short term are the Nasdaq listing application, which is still in process as of today, and the release of Dayoucun, the company's third significant motion picture investment. Subaye invests in the copyrights to Asian movies. We do not produce movies. Dayoucun opened in theatres throughout mainland China and in Hong Kong and Taiwan on Dec. 22, 2009. The biggest event in the intermediate term is the finalizing of the 3D online shopping mall.
In the long term, the event an investor should focus on, in my opinion, is how well the company can successfully integrate and promote the 3D online shopping mall and video advertising platform together so that both platforms are generating significant profits for the company. If all goes well, we will not only earn significant profits from the businesses using our video advertising but also from the businesses and consumers utilizing our 3D online shopping mall.
What effort is Subaye undertaking to secure an institutional investor base?
Subaye is currently in the process of applying for a Nasdaq listing and will conduct an earnings release call for full-year 2009 in early January. In addition, members of management visited a number of institutions in the U.S. in December and will be returning for additional visits in January, with the intention of generating a larger institutional shareholder base.
The forward guidance suggests EBITDA of approximately $50 million in fiscal year 2011. How is that possible?
EBITDA will increase over time as the company's costs are generally fixed. In 2011, we are forecasting the release of at least three PRC motion pictures. When those motion pictures are released, the cost of the copyrights to those motion pictures will be amortized and should result in an even more dramatic variance between net income and EBITDA than this company usually generates.
Other significant factors include income taxes, which are projected to be approximately $3 million and $5 million in fiscal year 2010 and 2011, respectively, and amortization of Web site and software costs, which are expected to total approximately $9 million and $14 million in fiscal year 2010 and 2011, respectively.
-- Written by Rick Pearson in Beijing
At the time of publication, Rick Pearson was long Subaye.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Subaye to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. Until 2005, Pearson was a director at Deutsche Bank, spending nine years in equity capital markets in New York, Hong Kong and London. Previously, he spent time working in venture capital in Beijing. Mr. Pearson graduated magna cum laude with a degree in finance from the University of Southern California and studied Mandarin for six years. He has frequently lived, worked and traveled in China since 1992.