Linktone Ltd. (LTON, Financial) is my next stop in searching for cheap stocks in the investment wasteland – Ben Graham Net-Net companies.
The Company
Linktone commenced operations as a business division of Intrinsic China Technology Ltd., which was incorporated in the Cayman Islands in November 1999. In April 2001, Linktone was spun off to form a newly established holding company in the Cayman Islands, Intrinsic Technology (Holdings) Ltd., and the company was renamed as Linktone Ltd.
In March 2004, The completed the initial public offering of ADSs, representing the company’s ordinary shares, and listed those securities on the Nasdaq National Market (now the Nasdaq Global Market).
With its headquarters in Beijing, regional offices in Shanghai and 25 local offices in strategic provinces, Linktone had approximately 300 employees in year 2010.
Linktone’s Business
Currently Linktone conducts business in China and Indonesia, mostly in China. According to the company, these are the services provided by the company and how they provide it:
It Was A Marginal Net-Net Company
GuruFocus Benjamin Grham Net Current Asset Value Screener lists LTON as traded below its Net Current Asset Value. The company’s balance sheet as of September 30, 2010 shows it has $80.5 million in cash, $8.66 million in short term investments, $22.77 million in A/R, and $2.78 in inventory. On the liability side, its short and long liabilities of all kinds amounts to a total of $42 million.
If you do the math like Ben Graham did, you will reach a Net-Net value of $66 million.
The company has 42 million shares and traded at $1.48 per share, giving it a market cap of $63.
By a small margin, the company remains a net-net company.
Management Changes
It appears that there have been quite a bit of change at the very top of the company’s management team.
Most recently, on January 13, 2011, the company announced the resignation of Mr. Colin Sung, Deputy Chief Executive Officer and Chief Financial Officer and appointment of Ms. Peck Joo (PJ) Tan to replace Mr. Sung as its Chief Financial Officer, effective March 1, 2011. In the same announcement, the company also announced that its board had appointed Mr. Billy Hsieh as an independent director and member of the audit committee, effective February 1, 2011, replacing Mr. Thomas Hubbs who was resigning to pursue other professional commitments.
On July 13, 2009, the company announced the appointments of Mr. Oerianto Guyandi as a member of the Company’s Board of Directors and Dr. Agus Mulyanto as an advisor to the Board, effective immediately. Mr. Oerianto Guyandi replaced Mr. Felix Ali Chendra who recently resigned from the board of directors due to personal reasons.
A major earthquake at the top happened on May 29, 2009, when the company announced the resignation of three key members of the management team:
The current CEO, Mr. Hary Tanoesoedibjo has been in the position since May 29, 2009. And already, he is having his second CFO as of this month.
One Major Shareholder
On April 3, 2008, MNC International, a Cayman Island entity, acquired control of Linktone through the acquisition of approximately 57.1% of Linktone’s total outstanding Ordinary Shares by means of the Tender Offer and the Subscription. The price MNC paid for its shares was $3.8 per ADS.
MNC International is an entity formed for the exclusive purpose of acquiring a majority share in Linkton Ltd; it has its roots in Indonesia.
Later, on May 6, 2010, MNC International announced that it purchased 500,000 ADSs (equivalent to 5,000,000 Ordinary Shares) from a third party through a privately negotiated transaction for a consideration of US$1,000,000 (US$2 per ADS). The purchase increased MNC’s stake in the company to 58.2%.
MNC International gained full grip on the company in 2008, hence the major earthquake in May of 2009.
Business Is Turning Around
Despite my inability to understand LTON’s business model, its financial results appears to be turning around since the new management took over. In 2009, the company turned in a small profit of $0.11 million, after hefty loss of more than $16 million in each year of 2007 and 2008.
On November 30, 2010, the company announced the result for the third quarter of 2010 ended on September 30, 2010. Highlights:
It appears thought the business has turned around under the new management team. Will the company actually turn into a growth company? It really depends on the market dynamics of the wireless value added service market that the company operates in. It is beyond my circle of competence, and I do not want to speculate. The trend appears to be on the positive side.
Cash Was Deployed
Now, before you plunge in and buy the stock based on the net-net valuation and the turnaround story, here is a development on December 10, 2010:
Understand the cash on the balance sheet of LTON came from MNC in the tender offer, now Mr. Tanoesoedibjo is deploying some of it back to a MNC affiliated company. Only that shareholders of LTON is getting a pretty healthy interest.
Conclusion
With the cash on the balance sheet deployed in less liquid investment vehicle, LTON no longer qualifies a net-net company, as it did based on the quarter end financials of 3Q10, even though it is still selling at a discount to it book values.
The value of the company may have increased because of the investment. Still one needs to make an investment decision based on the new information available during the quarter.
The Company
Linktone commenced operations as a business division of Intrinsic China Technology Ltd., which was incorporated in the Cayman Islands in November 1999. In April 2001, Linktone was spun off to form a newly established holding company in the Cayman Islands, Intrinsic Technology (Holdings) Ltd., and the company was renamed as Linktone Ltd.
In March 2004, The completed the initial public offering of ADSs, representing the company’s ordinary shares, and listed those securities on the Nasdaq National Market (now the Nasdaq Global Market).
With its headquarters in Beijing, regional offices in Shanghai and 25 local offices in strategic provinces, Linktone had approximately 300 employees in year 2010.
Linktone’s Business
Currently Linktone conducts business in China and Indonesia, mostly in China. According to the company, these are the services provided by the company and how they provide it:
Linktone Ltd. is one of the leading providers of wireless interactive entertainment services to consumers in China and Southeast Asian. Linktone provides a diverse portfolio of services to wireless consumers and corporate customers, with a particular focus on media, entertainment, communications and edutainment. These services are promoted through the Company's strong distribution network, integrated service platform and multiple marketing sales channels, as well as through the networks of the mobile operators in China and Indonesia. Through in-house development and alliances with international and local branded content partners, the Company develops, aggregates, and distributes innovative and engaging products to maximize the breadth, quality and diversity of its offeringsI have to confess this description does not tell me how the company makes money. Living in a different part of the world, I have no clue why people will buy services from this company and how the company makes money.
It Was A Marginal Net-Net Company
GuruFocus Benjamin Grham Net Current Asset Value Screener lists LTON as traded below its Net Current Asset Value. The company’s balance sheet as of September 30, 2010 shows it has $80.5 million in cash, $8.66 million in short term investments, $22.77 million in A/R, and $2.78 in inventory. On the liability side, its short and long liabilities of all kinds amounts to a total of $42 million.
If you do the math like Ben Graham did, you will reach a Net-Net value of $66 million.
The company has 42 million shares and traded at $1.48 per share, giving it a market cap of $63.
By a small margin, the company remains a net-net company.
Management Changes
It appears that there have been quite a bit of change at the very top of the company’s management team.
Most recently, on January 13, 2011, the company announced the resignation of Mr. Colin Sung, Deputy Chief Executive Officer and Chief Financial Officer and appointment of Ms. Peck Joo (PJ) Tan to replace Mr. Sung as its Chief Financial Officer, effective March 1, 2011. In the same announcement, the company also announced that its board had appointed Mr. Billy Hsieh as an independent director and member of the audit committee, effective February 1, 2011, replacing Mr. Thomas Hubbs who was resigning to pursue other professional commitments.
On July 13, 2009, the company announced the appointments of Mr. Oerianto Guyandi as a member of the Company’s Board of Directors and Dr. Agus Mulyanto as an advisor to the Board, effective immediately. Mr. Oerianto Guyandi replaced Mr. Felix Ali Chendra who recently resigned from the board of directors due to personal reasons.
A major earthquake at the top happened on May 29, 2009, when the company announced the resignation of three key members of the management team:
Beijing, China, May 29, 2009-- Linktone Ltd. (Nasdaq: LTON), a leading provider of wireless interactive entertainment services to consumers in China, today announced that Hary Tanoesoedibjo, currently chairman of the Company’s board, has also been appointed as its Chief Executive Officer and Colin Sung has been appointed as its Deputy Chief Executive Officer and Chief Financial Officer. The Company also announced the resignations of Chief Executive Officer, Michael Guangxin Li, Chief Financial Officer, Jimmy Lai, and Chief Operating Officer, Anthony Chia, effective May 31, 2009. Messrs. Li, Lai and Chia each resigned due to personal reasons and other professional commitments. In addition, Jun Wu and Michael Guangxin Li have resigned as members of the Company’s board of directors due to personal reasons. Mr. Li will continue to serve as an adviser to the Company. The nominating and compensation committee of the Company’s board is committed to identifying qualified individuals to replace Mr. Wu as an independent director of the board
The current CEO, Mr. Hary Tanoesoedibjo has been in the position since May 29, 2009. And already, he is having his second CFO as of this month.
One Major Shareholder
On April 3, 2008, MNC International, a Cayman Island entity, acquired control of Linktone through the acquisition of approximately 57.1% of Linktone’s total outstanding Ordinary Shares by means of the Tender Offer and the Subscription. The price MNC paid for its shares was $3.8 per ADS.
MNC International is an entity formed for the exclusive purpose of acquiring a majority share in Linkton Ltd; it has its roots in Indonesia.
Later, on May 6, 2010, MNC International announced that it purchased 500,000 ADSs (equivalent to 5,000,000 Ordinary Shares) from a third party through a privately negotiated transaction for a consideration of US$1,000,000 (US$2 per ADS). The purchase increased MNC’s stake in the company to 58.2%.
MNC International gained full grip on the company in 2008, hence the major earthquake in May of 2009.
Business Is Turning Around
Despite my inability to understand LTON’s business model, its financial results appears to be turning around since the new management took over. In 2009, the company turned in a small profit of $0.11 million, after hefty loss of more than $16 million in each year of 2007 and 2008.
On November 30, 2010, the company announced the result for the third quarter of 2010 ended on September 30, 2010. Highlights:
Gross revenues of $19.8 million, representing 17% sequential increase compared with $16.9 million in the second quarter of 2010, and 43% year-over-year growth compared with $13.8 million in the third quarter of 2009.GAAP net income from continuing operations of $0.6 million, compared with $0.1 million in the second quarter of 2010 and $0.6 million in the third quarter of 2009.The company also forecast a 4Q10 revenue of about $20 million, essentially flat with 3Q10.
It appears thought the business has turned around under the new management team. Will the company actually turn into a growth company? It really depends on the market dynamics of the wireless value added service market that the company operates in. It is beyond my circle of competence, and I do not want to speculate. The trend appears to be on the positive side.
Cash Was Deployed
Now, before you plunge in and buy the stock based on the net-net valuation and the turnaround story, here is a development on December 10, 2010:
BEIJING, China, December 20, 2010 — Linktone Ltd. (NASDAQ: LTON), a leading provider of interactive media and entertainment products and services to consumers in China and Southeast Asia, today announced it will purchase, through the secondary market, a portion of the senior secured guaranteed notes offering by Aerospace Satellite Corporation Holding B.V. (“Aerospace Satellite”), a wholly-owned subsidiary of PT MNC Sky Vision, which is the largest pay television operator in Indonesia and an affiliate of PT Media Nusantara Citra Tbk, the indirect majority shareholder of Linktone. Linktone purchased $20 million of these notes, due November 16, 2015, which bear interest at a rate of 12.75% per annum, payable semi-annually in arrears. The notes are rated B2 by Moody’s and B by S&P, and guaranteed by PT MNC Sky Vision, with HSBC and Standard Chartered Bank acting as the joint lead managers and joint bookrunners for the offering. Mr. Hary Tanoesoedibjo, Linktone’s Executive Chairman and Chief Executive Officer, also serves as President Commissioner of PT MNC Sky Vision. This investment was approved by Linktone’s independent director.
Mr. Tanoesoedibjo stated, "Given our strong balance sheet, with $80.5 million in cash as of September 30, 2010, we believe this represents a prudent investment for Linktone, given the terms of the notes and strong reputation and growth potential of the issuer. We believe Aerospace Satellite is well positioned for robust organic growth over the medium to long term, given the strength of its brand and significant under-penetration of pay TV in Indonesia.”
Understand the cash on the balance sheet of LTON came from MNC in the tender offer, now Mr. Tanoesoedibjo is deploying some of it back to a MNC affiliated company. Only that shareholders of LTON is getting a pretty healthy interest.
Conclusion
With the cash on the balance sheet deployed in less liquid investment vehicle, LTON no longer qualifies a net-net company, as it did based on the quarter end financials of 3Q10, even though it is still selling at a discount to it book values.
The value of the company may have increased because of the investment. Still one needs to make an investment decision based on the new information available during the quarter.
