Comtech Group (Nasdaq: COGO) has been reporting stellar growth as a
provider of module design solutions for the booming electronic, telecom, and
mobile phone industries in China. With an established presence in China and
excellent technology and products, the company has developed a solid platform to
grow its business opportunities in the largest electronic manufacturing market
in the world.
We like the company’s diversified revenue stream and its focus on innovation in
a market that is constantly evolving. Comtech operates in four distinct business
segments:
-selling module components for mobile handsets
-telecom equipment
-digital consumer electronics
-providing business and engineering services
The company’s core business is the customization of electronic module designs
for mobile telephones, telecom equipment and digital electronics to original
equipment manufacturers (OEM). Comtech works closely with over 30 suppliers to
customize technology components to meet the specialized individual needs of its
200 plus customers. The company also generates recurring revenue from
engineering services, an area that is demonstrating strong growth and high
margins. After acquiring a 51% stake in Huameng Engineering in 2006, Comtech
established a new subsidiary in Malaysia called COGO Engineering Services
Malaysia, in which Comtech is the controlling shareholder. The new venture will
focus on expanding its engineering services business to outside of the core
China market.
But what makes us excited regarding Comtech is the expected strong growth of 3G
mobile technologies in China. The Chinese government is expected to approve 3G
licenses in the near future and Comtech is already preparing for this after
winning a 3G phone design for a Vodaphone project.
Comtech saw strong demand for its products and significant growth in 2006. For
2006, revenue was $169.6 million, an increase of 58% from $107.4 million the
previous year. Net income was $15.8 million, or $0.47 per diluted share, an
increase of 46% from $10.8 million, or $0.38, in 2005.
For the first quarter 2007, revenue grew 32% to a record $44.6 million from
$33.9 million in the year-ago quarter. The company posted a net income figure of
$3.7 million, or $0.11 per diluted share, up 13% from $3.3 million, or $0.10 per
share, in the prior-year period.
Chairman, President and CEO Mr. Jeffrey Kang, commented, “Our business
experienced robust growth in all our targeted end markets over the first
quarter, including telecommunication equipment, mobile handset and, in
particular, digital media, which posted a yearon- year increase of 82.1%. We
have strengthened our commitment to developing our business in these markets,
particularly in the digital media market, which we believe will continue to see
high-speed growth as a result of the 2008 Beijing Olympics. We have obtained a
series of new contracts in the first quarter, including the ZTE USD 10 million
annual contract, which exemplify the visibility of our business in 2007.”
Guidance & Outlook
Management offered guidance after a strong first quarter of 2007, projecting
revenue between $215 and $218 million, an increase from earlier guidance of $210
to $215 million, and non-GAAP EPS Diluted of $0.68, up a penny from earlier
guidance of $0.67 provided in March 2007.
Analysts also expect Comtech to earn $0.69 per share on $216.2 million of
revenue in 2007. In 2008, the Street expects Comtech to earn $0.87 per share on
$262.3 million in revenue.
Comtech stands to reap great benefits from the growing telecom industry in
China, specifically in the areas of mobile phones and 3G technologies. The
company has a diversified module component customer base and does not show a
large amount of dependence on one customer. With over 200 customers in its core
business, Comtech does not have any significant revenue threats with regard to
customer relationships.
Through Comtech, investors are gaining access to a company that has innovative
products in a growing market, strong revenue, robust research and development,
good partnerships, and long-term potential. Comtech has exceptional long-term
growth potential for an investor seeking exposure to the Asian telecom market.
We feel the company’s shares warrant a pricing multiple of 29X the current year
estimate and 23X the forward year estimate, or $20.00.
