China Digital TV Holding Company (NYSE:STV) is a small cap company (367 M) based in Beijing and they are the leading provider of Conditional Access (CA) systems in the fast-growing digital television market in China.

Conditional Access Systems

CA systems allow networks to control distribution of content and value added services to their subscribers. These systems are comprised of three components: head-end software for the network operators, terminal-end software for set top box manufacturers, and securely encoded smart cards. As of September 2008, 184 networks and 115 set top box manufacturers utilize STV’s CA system. Of note, STV derives a majority of its revenue in smart cards. It has shipped in excess of 20 million smart cards and third party sources report that STV has captured approximately 50% of the smart card market in China.

Additional Products and Services

STV also provides Subscriber Management System (SMS) software that maintains a database of subscribers, handles billing, processes orders for new services, etc. Most importantly, whereas this product is easily integrated with STV’s CA system, it is an independent product. It is compatible with, and may be sold separately to, clients using other CA vendors. Approximately 30% of the network operators using STV’s CA system also integrate their SMS. Further, STV also licenses set top box designs to manufacturers that are not surprisingly engineered for easy integration with STV’s CA and SMS systems.

Summary

STV is a solid company because they do not have a single point of failure. As their products and services are highly adaptable to other systems and independent of each other, they are poised to deal with major issues better than most companies. Further, their list of clients is highly diversified and not dependent on a few networks, content providers, and manufacturers – so if a few of those companies fail, STV will be virtually unaffected.

Currently, the Chinese government is looking to expedite the digitalization process in China with mandates for business tax waivers on subscription fees and complete digital roll-out by 2010 and discontinuation of analog signal by 2015. With their nearest competitor holding 17.8% of the CA system market share, as compared to STV’s 50%, they are positioned to dominate this market moving forward and their stock is likely to reflect in kind as China embraces the digital revolution over the coming years.