Saturday, May 17, 2008

UTStarcom, Softbank, and Alibaba

Before I do the weekly recap and a more detailed look at the Q1 earnings/call, there was a WSJ article regarding Softbank and Alibaba that I just read that brings to light another reason why "tangible book value" is not a good measure of UTs "value". Interestingly, a fellow shareholder Tigre had a good discussion on tangible book value and a good discussion on the history between UTStarcom, Softbank, and Alibaba.

On Friday, Tigre notes that UTs book value remains close to $4.8 and that the "discount" has been erased and proceeds to outline the future catalysts in order for the shareprice to move higher.

I've actually gotten quite a few comments on why Tigre would sell out at $4.4. I am surprised as well due to his knowledge in the company and belief that things are turning around. Add to that his current view now that the stock can hit $10 by the end of 2009. Selling trading shares when the stock has had a good run and you believe technically it might pullback or the markets might pull back is one thing but selling all your core holdings after almost 2 years is a bit surprising.

Anyway, on Thursday, May 15, 2008, there was news that Softbank will purchase a 65% stake in Alibaba Japan for around $20m. Here is a link to a previous post I devoted to UT investments and Tigre's very detailed summary of the history between Softbank, UT, and Alibaba.

A quick summary shows UTs investments in Softbank China could have been worth over $570m to over a billion!

UT has benefited from the Softbank relationship and investments in Softbank China, gemdale, and others but nowhere near what it could be. It is interesting to note that Tigre cited Barton as pushing for the sale of Softbank China. Its amazing in one respect how conservative Barton has been and yet the expenses have been maintained very high. Up to this day, I consider Barton a very likable person but in terms of performance have not been impressed. In terms of management situation, Lu has had difficulties managing the PAS decline the last few years and the international expansion but he is the founder so I give him a lot of respect for that. Also, the current situation with Blackmore taking over and Lu staying on as Chairman and maintaining client relationships is ideal.

From the Q4 earnings call regarding a question on future Japan contracts, Lu responded

Well, we are talking about many, many different projects with our customers predominantly in Japan is SoftBank and they have many different projects.
And if you are saying that it is a continuation with our first order, if there is any opportunity we are extremely pleased because they are very happy with our performance so far. And predominantly we are the only bidder, so not only bidder we are the only supplier in the past. So, and so I think if they have any order out there we are in a very good position.

Softbank and Japan will continue to be key markets for UT and that is another major potential market if it ramps up again. These kind of relationships are not reflected in tangible book value as Tigre himself knows so in effect paying tangible book value when the company is turning around and their core businesses at the very beginning of the cycle is a gift right now. When I invested back in 2004, it was for these reasons (market potential in emerging/mass markets and the companies unique technology/position as a US company/China manufacturing). For a few years, the $5 level provide a "low" for the shareprice. Market turmoil and perceptions of liquidity issues drove the stock to very low levels and have only started to recoup the losses. It is not even at the $5 level and the turnaround or opening up of markets are at very early stages. This is actually the time to be building positions and not selling.

I'll have a couple more posts regarding the Q1 earnings and the weekly recap but it should be no surprise to see the stock rebound signficantly when it is clear the company is back to operational growth and fine tuning the different business units/opportunities rather than dealing with quarterly financials, investigations, and debt.

One final note on the shareprice before I go for lunch. UT is a stock that the street will not give fluff valuation. It is simply hated for its previous performance, Its not going to go up on some questionable PR like a lot of other "China or solar plays". When you see long term shareholders selling out at $2.8 or $4.4, you know how pessimistic the attitude towards the stock is. While the stock won't go straight up, it should steadily move higher as the market reorients their thinking (whoever is left out there that is).

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