Thursday, January 26, 2006

Telestone Tech.--The Peoples' Investment for 3G Wireless in China.

Telestone Technologies Corp. (TST:AMEX - $4.01), is a leading provider of wireless communications coverage to major telecommunication firms in the People’s Republic of China (PRC)—one of the fastest growing wireless markets in the world. According to research conducted by Nokia China, by 2007, the number of mobile phone users in China is expected to reach more than 500 million users, a 49.7% growth in users in less than three years!

The Company’s wireless coverage solutions are designed to enhance the quality of reception over wireless networks, while simultaneously reducing operating costs for the client carriers—a competitive advantage over competitors. Telestone is a small-cap company off the radar screen of most Wall Street telecom analysts. For investors--Telestone represents a pure play on the future of the Chiness wireless market, for 100% of sales originate in the PRC.
The catalyst for a sustainable upward move in the share price is the highly-anticipated rollout of the 3G (Third Generation)-related technologies for the PRC, for which Telestone is one of only four principal companies that are licensed and capable of delivering on 3G wireless technology and equipment to China’s two largest wireless phone companies, which are China Mobile and China Unicom.

The Chinese authorities are expected to award 3G licenses to service providers later this year, as the country readies its high-speed network in time for the 2008 Olympics in Beijing. China's future 3G mobile network will use a home-grown TD-SCDMA standard co-developed by Siemens.
The subsequent rollout of 3G cell-phones will open up a market with a projected value of $25 Billion per annum. Of this market, Telestone’s wireless coverage solutions’ opportunities is approximately $2.5 billion per annum over the next three-to-five-years. Currently, the Company owns 2.7% of this market. Given that Telestone has a strong domestic presence in the PRC, we are being conservative in our belief that the Company can grow the top-line from existing businesses and the expected new 3G opportunities to easily hit approximately $100 million in top-line growth—dependent upon the release date of the 3G licenses.

Telestone recently landed an OEM contract with China Ericcson, which has a potential value of approximately $50 million over three-to-five years. More importantly, this deal positions Telestone to deepen its market penetration and to develop and market a series of 3G products for use on Ericsson’s wireless network platforms in the PRC, other Southeast Asian nations, and India.

Telestone is financially sound, with a current ratio better than 2:1, and no long-term debt.

Even without the inclusion of revenue generated from the upcoming 3-G deployment in China, management still expects top-line growth and share-net EPS in the order of 20%-to-30% year-over-year. We do, however, expect a big impact on revenues and profitability, assuming a 2H:06 deployment of the 3G technologies in the PRC. Our early estimates call for Telestone to show top-line of approximately $55 million, throwing of share-net of $0.50 [assuming 10 million shares, fully-diluted]. For aggressive investors willing to assume the inherent risk of owning a small-cap company, we recommend dialing up your broker and buying some shares.
Our initial target price for Telestone is $12.50 per share. This valuation assumes a multiple expansion to 25x forward 12-month earnings.

5 comments:

Crazy Dan said...

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Anonymous said...

Thank you--an interesting analysis.

How would you address the following concern?

Accounts receivable as an extraordinarily high percentage of current assets (a situation which you take care to note in the case of Convergys), with the increasing ability of the company's concentrated customer base of wireless telecom majors to dictate payment terms [per 3Q05 10Q]

David J. Phillips said...

REPLY TO: How would you address the following concern?

Accounts receivable as an extraordinarily high percentage of current assets (a situation which you take care to note in the case of Convergys), with the increasing ability of the company's concentrated customer base of wireless telecom majors to dictate payment terms [per 3Q05 10Q]

Keep an eye on days sales outstanding--how long it takes the company to collect on receivables from customers. IF DSO is rising--a sign that company is losing account payable terms to customers. eg. extending easier credit to earn business. BIG RED FLAG!

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