Tobin Smith on ChinaTel Group (CHTL)

Tobin Smith, formerly of ChangeWave Research, now of NBT Equity Research has a new reseach piece on ChinaTel Group (CHTL). Full disclosure: I own 1,000 shares of CHTL:
Strong Buy $7-$8 target 2011 (with new deployment schedule/pro-forma TBD)
PIPE Funding: $3.01 price per share, $640M total, $1.33 billion private market value
Tobin Smith, Chief Research Officer
With no indication from ANY of the funding parties or CHTL of a change in the equity funding schedule, I want to change the focus of the CHTL discussion to the POST-funding scenario.
I can report my conversations with The Isaac Organization that indicate a willingness on their part to accelerate their equity contribution amount prior to March 30/$10M schedule.
Reports from those close to the Excel Era group indicate ZERO funding issues or delays. Minor correction: the founder and Chairman of Excel Era and its holding company is Charles WANG, not Li. The Wang family is a very old, very prosperous and very private group. I will have the pleasure of interviewing Mr. Wang in the very near future and will bring what I can to light about their company and its relationship with ChinaTel Group, Inc.
The Isaac Group move is important in that WITH the $240M of new stock purchased by Excel Era and say $40-$50M from the Isaac Group before March 30, CHTL (by OUR estimates) will have MORE than enough capital in the bank to complete up to a 15 city simultaneous deployment over the next 12-18 months.

With capital to spare. Our new model for capex and opex for 12 cities (using $8k capex/opex per point of presence aka POPS) is $160M of capital net of cash flow from Beijing and Shanghai operations (currently over $5M a month from our research.) The ownership dilution of selling 49% of the company at a $1.3 billion value is ACCRETIVE to the stockholders equity account and of course the book value of CHTL.
By our count we anticipate a dozen or more material announcements POST-funding from CHTL and/or Cect-Chinacomm over the next 90-120 days including:
1) updated city deployment schedule (putting a number on the accelerated schedule they announced in early November)
2) updated Capex/Opex pro-forma cash flow models
3) Network equipment vendor specs, pricing and delivery schedules
4) Head count and deployment operation specifics
5) Up-to-date Beijing and Shanghai subscriber counts and ARPU revenues
6) New PRC ministry VPN contracts
7) Handset and customer premise equipment vendor appointments
8) Network specs and capacity forecasts
9) ARPU forecasts for consumer, MVNO, commercial and ministry contracts and service provisioning
10) Outstanding invoice payment and revenue recognition schedules from 2008-2009 (in excess of $75M already billed and expensed)
11) Deployment, reseller and equipment partnerships
12) Executive and management additions
In short the PIPE fundings transforms CHTL from a developmental stage enterprise to an operating company with
a) cash to spare in the bank
b) hundreds of millions in deployment revenues (at @30% margins)
c) positive balance sheet, book value and stockholder equity account
d) FULLY reporting operations from their 49% JV with Cect-Chinacomm Ltd aka The ChinaComm Network
e) OPERATING revenues and gross margin from deployment services TO the Chinacomm Network AND 49% share of distributable EBITDA from Beijing/Shanghai operations
f) A business model and operating economics VASTLY superior to its most direct comparable company Clearwire CLWR. Vastly as is 80-90% LOWER deployment costs and 50-60% LOWER operating costs per POP
March 2010-March 2011
The technology and telecom world will rapidly come to the understanding that the Chinacomm Network will be deploying the LARGEST 4G mobile Wi-Max broadband network in the world. A network that addresses over 300 million people and >50% of mainland China’s GDP producing regions.
Virtually NO industry research firms are including the 29 city deployment in their world Wi-Max deployment forecasts.
This virtual invisibility on the world’s tele/tech stage will change immediately. This deployment ALSO puts the Wi-max technology on a significantly faster ramp and deployment schedule than the competing GSM technology LTE. This makes the Wi-Max story eminently more interesting to the technology and telecom press.
This combination of true game changing industry and corporate events we surmise will change the equity and industry research profile for BOTH ChinaTel Group, Inc. and CECT-ChinaComm in a substantial way.
This higher profile from
• Sell-side telecom/ISP analysts
• Buy-side telecom/ISP analysts
• Telecom/ISP industry research groups
Will bring a much higher profile to CHTL, the ChinaComm Network and to mobile Wi-Max wireless broadband in the business and industry media.
In turn this vastly higher Wall Street, industry and technology profile should rapidly reduce and eliminate the disparity between private and public market value of ChinaTel Group, Inc. ($440M public value vs. $1.3Billion private market value).
Key Corporate Issues
CHTL’s two wholly owned foreign enterprise subsidiaries (WOFE’s pronounced “woofies”) will, from an accounting and operating standpoint, become operational. They will be injected with $100mm each. As mentioned it means CHTL will start to report its 49% share of Chinacomm revenues, cash flow and operating metrics like customer counts in its Q3 financials.
This will once and for all lift the veil surrounding its operations with Chinacomm.
CHTL gets to invoice Chinacomm and get paid around $75+ MILLION of outstanding invoices. The private sponsor of CHTL TrussGroup had been fronting the equipment and services for the first part of the Chinacomm network in Beijing.
IF you look at the 2008-2009 financials you will notice that CHTL expensed all the work it did for Chinacomm in 2008 and 2009. Virtually ALL the bills paid will at full net gross profit to CHTL.
That means for Q1 2010 CHTL for the first time will get to report its deployment revenues for its Chinacomm contract AND its 49% share of Chinacomm’s Beijing operations.
Key Message Points for The Mobile Internet (With acknowledgment to Mary Meeker and Morgan Stanley Internet research reports on the Mobile Internet
We are at the right time: the Mobile Internet Growth Tsunami is ON—and this 5th mega cycle of the technology age wealth building is just starting.
• If history repeats wealth creation / destruction in THIS cycle should surpass earlier computing cycles
• Technology Cycles Tend to Last Ten Years
• History proves that massive technology changes shift dynamics between incumbents /attackers creating winners and losers
• Winners in each cycle often create more market capitalization than in the last
• China #1 Internet market now…it becomes ground zero for the Mobile Internet by 2012

We are at the right place: Mobile Internet is ramping faster than desktop Internet did, and we believe more users may connect to the Internet via mobile devices than desktop PCs within 5 years. Five IP-based products / services are growing / converging and providing the underpinnings for dramatic growth in mobile Internet usage
• 3G/4G adoption + social networking + video + VoIP + impressive mobile devices is driving the tsunami of data consumption
• Apple + Facebook platforms serving to raise the bar for how users connect / communicate – their respective ramps in user and developer engagement may be unprecedented. Iphone/Itouch ramp is fastest growth in digital history.
• Rising demand for Smartphones drives 200%+ CAGR wireless data demand. ChangeWave Research predicts Smartphones will out-ship the global notebook+netbook market by 2010 and out ship the global PC market (notebook+netbook+desktop) by 2012.
• Mobile Internet is much more than Smartphones: Kindles, Skypephone, Netbooks, Magic Jack All-you-can eat VOIP, IP television, gaming, GPS, Streaming Music and Video service (i.e. LaLa purchase by Apple), RFID, Stationary Digital devices ie. Flat screen TV, gaming devices
• Cloud-based Content/Application Services converging to create a unified “digital locker for EACH consumer and ecommerce opportunity based on GPS/RFID/3G and 4G connectivity and speed
Which brings me to the Chinacomm Network and ChinaTel Group, Inc.
There is NO QUESTION in my mind that one of the most PROFITABLE ways to ride the Mobile Internet wave is with ChinaTel Group, Inc.
The Chinacomm Network is in the
1) Right Place (Wireless broadband and Mobile internet growth ground zero: China)
2) With the right technology (high speed mobile broadband Wi-Max 802.16m by 2012)
3) At the right time (the emergence of the 5th Great Technology Cycle: the Mobile Internet Wave)
4) At the right price (multi-tiered broadband ISP starting @ $8-$12 a month)
5) With the right commercial/governmental VPN/application development product (“Cloud-based” applications delivered over .99999 QOS wireless and mobile broadband Virtual Private networks).
The Chinacomm Network is competitively advantaged to gain 8-12% market share of the $50 billion China wireless broadband ISP and application service provider market by 2015
The Chinacomm Network will be best positioned to win significant market share in BOTH lucrative commercial and consumer/MVNO markets.
China continues to have the MOST potential for mobile Internet user growth.
• Low penetration/high cost of fixed-line DSL in China and an already vibrant mobile value-added services mean that for many consumers, the Internet will be mobile or wireless.
• Global mobile IP traffic likely to grow 66X by 2013 (130% CAGR) per Cisco. China’s CAGR will double or triple that rate. And VOIP will erode traditional voice revenues from Tier 1 BTS carriers…to Chinacomm Network’s advantage.
• When China allows THEIR versions of Facebook, YouTube and Twitter to come online, WATCH out!
• Having the PRC as a main partner in the Chinacomm Network smoothes the way to rapid high speed wireless broadband deployment in top 29 cities unlike developed markets.
Tobin Smith
Disclosure: I personally own >1% of outstanding CHTL shares.

Posted by on February 28th, 2010 at 10:46 pm

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.