About The Company
Trunkbow International Holdings (
) is a leading developer of Mobile Value Added Solution ("MVAS")
and Mobile Payment Solutions ("MPS"), used in Chinese smartphones.
These platforms are deployed by the three major Chinese carriers to
offer their subscribers enhanced smartphone features that increase
average revenue per user and reduce churn. Trunkbow provides both
hardware and software solutions that are integrated into clients'
existing IT infrastructure. It also offers technical support and
system maintenance for clients.
Trunkbow stands in a highly coveted position because it is an
approved vendor to each of the "Big Three" Chinese mobile vendors:
China Mobile (
), China Telecom (
) and China Unicom (
). Together, these three firms operate a colossal oligopoly in the
world's largest telecommunications market. Between them, they have
800 million customers
. Being government agencies, the Big Three vendors have a strong
preference for continuity and compatibility in their various
systems, which fortifies Trunkbow's competitive standing.
Trunkbow's platform solutions are highly integrated with the Big
Threes' existing IT and networking infrastructure, making it very
difficult for them to switch. Trunkbow has a first mover advantage
and is the undisputed leader in the Chinese Mobile Payment
industry. It was the first firm to commercialize Mobile Payment
Solutions for in-store POS and Mobile E-commerce in China.
Trunkbow is also uniquely positioned to benefit from growth in
one of the largest and most rapidly growing industries in the
world: mobile applications for Chinese smartphones. Booming growth
in this sector is supported by increased smartphone usage among
China's aspirational middle class, the largest and fastest growing
middle class demographic in the world. Rapidly expanding per capita
GDP and an increasing trend towards consumerism is further
propelling this growth. China's telecom sector is already the
largest in the world, as measured by population.
Within the growing telecom market, China has undergone a mobile
revolution in recent years, driven by a shift in e-commence under
which end users are seeking instant gratification through a broader
range of purchasing options such as mobile purchasing. The
e-commence opportunity in China is massive. There are an
485 million internet users. This is more than double the number of
users in the US. And penetration is only 36%, compared to 78% in
the US, creating tremendous opportunity for further growth.
Trunkbow mobile applications are specifically positioned to benefit
from this growth.
Within the mobile e-commerce market, these growth trends are
highly encouraging for Trunkbow:
- Online transactions doubled year-over- year to RMB170 billion
in the first quarter of 2011
- There were around 300 million mobile Internet users in China
at the end of 2010; this number is projected to grow to 750
million by 2014.
The value of Trunkbow's platforms to its Big Three customers
increases with the average revenue per user of its subscribers and
decreases with subscriber churn. In order to support its
competitiveness, Trunkbow invests continuously in R&D to
develop innovative technology solutions. It works extensively with
customers and technology partners to develop cutting edge
technology solutions that are relevant to consumer trends and
market demand. 100 R&D professionals at the firm have filed 164
filed patents applications over the years, of which 50 have been
approved by the National Intellectual Property Administration in
China. The firm has also have begun the filing for international
and U.S. patents in order to protect its intellectual property
globally. The fact that Trunkbow's platforms and services have been
relied upon by the Big Three continuously over the past ten years
is a testament to its standing as a well managed, trusted provider
of technology solutions.
The R&D division is led by three highly experienced industry
veterans, Dr. Hou Wan Chun, Dr. An Chun Ming and Mr. Wang Xin. Dr.
An Chun Ming pioneered Next Generation Network ("NGN"). Prior to
joining Trunkbow he led multiple development efforts at Bell Labs
Fellow during his 30 year tenure. Dr. Hou Wan Chun previously
worked as an engineer for leading U.S. telecom companies, including
Lucent, where he was involved in developing new intelligent network
Tremendous Value Opportunity
Trunkbow is currently trading at 3.4x trailing twelve month
earnings, a phenomenal discount to intrinsic value by any measure.
When one factors in earnings growth, this multiple becomes even
more attractive. The company has recorded tremendous compounded
annual growth of 47% over the past 4 years (based on annualized YTD
Q3 2011 earnings since Q4 results have not yet been released). As
shown below, if earnings can be sustained -as I have described
previously, they can be - then this discount gets even deeper over
Click to enlarge images
Taking a look at net margins, the numbers are eye-popping. These
margins are a function of the value Trunkbow adds to its telecom
vendor customer base as well as their willingness to pay for
Trunkbow's lucrative proprietary technology. Trunkbow's strong IP
portfolio and proprietary technology are central to customer
captivity and the high margins.
In summary, value opportunities like these are almost
exclusively found in the realm of small market cap stocks like
Trunkbow. Given that there is no dearth of small cap names, it does
take some digging to identify opportunities like this. When they
are found, these opportunities represent a tremendous opportunity
for capital appreciation. As a final note, management is heavily
vested - management ownership at 9/30/2011 was 46.9%, a very
I am long TBOW.
Look To Mid Caps For Market-Beating Returns