Tuesday, February 16, 2010

Setting The Linktone

Linktone (LTON) is a Ben Graham net-net, with current assets of $125 million, total liabilities of just $11 million, and a market cap of $70 million. Most of the current assets are in the form of cash, which is the result of a share offering at a significantly higher price. The stock price has shown itself to be quite volatile, which is a good thing for value investors (and keeps other investors away). The company's market cap has ranged from $45 million last year to over $100 million a few short months ago. While it is not losing money hand-over-fist as many other net-nets are, there are some risks of which investors should be aware.

Linktone not only operates in a very competitive arena, offering value-added applications to mobile phone users in China, but is also subject to severe market pressure from its customers, the three state-run Chinese telecom operators. These large players dominate the market and use their market power to extract high and escalating fees on Linktone and it's competitors. Furthermore, these companies have been making progress in vertically integrating, offering popular applications to their user-base, thereby taking away Linktone's share of the market.

Linktone is extremely dependent on one of these operators in particular, with 70% of its revenue coming from China Mobile. While there are contracts in place to secure Linktone's position temporarily, these contracts are short-term in nature and as discussed in the previous paragraph, all the power lies with the customer. Finally, the company is controlled by a single shareholder, which makes it more difficult for shareholders to encourage activities that may result in price and value convergence (a very different situation than the one we saw with Acorn a couple of months ago).

The earnings situation for this company may be grim due to the weak market position in which Linktone sits. However, from a liquid asset and cash perspective this company is very attractive. The question investors will have to watch for going forward is whether the new management team is able to mitigate the risks (mentioned above) facing this company so that they may conserve the company's strong balance sheet position.

Disclosure: None

3 comments:

akwon said...

Hey Saj, how safe and secure are these companies from China? I've noticed a lot of value companies are from China. However, I always felt China had a very loose regulatory system in order to stimulate or feign growth and GDP. Also with a communist government, the government can nationalize any company they wish, if they wanted to. They can also become large benefactor of other companies for whatever reasons they chose to do so whether political, fiscal, etc.

Saj Karsan said...

Hi Akwon,

I agree that there are some additional risks, as you mention. The best way to protect yourself might be to limit only a portion of your portfolio to these kinds of investments, and to make sure you diversify within that portion as well.

Mike said...

Hi Saj,

I was also looking at LinkTone a while back as a value investment, however it seems like most of the cash was injected by the current management team when they bought a controlling share in LinkTone, with this in mind, it is highly doubtful that the management team will return any cash to shareholders anytime soon.

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