NINE revisited

**lzhang** Wed Sep 13, 2006 4:28 pm

NINE revisited
The Ninetowns Digital World Trade Holdings Limited, (NINE),
through its subsidiaries, provides enterprise solutions
for the processing of import/export declaration over the Internet
in the People's Republic of China.
It was founded in 1995 by Mr Shuang Wang, its current CEO.
It grew from a small start-up selling computer hardwares,
to a leading software and service company in China's
import/export declaration process.

NINE went public on NASDAQ in Dec 2004. Its major business
was greatly hurt in 2005 by PRC Inspections Administration's
import/export e-filing software, free to end users, and with certain basic
functionalities similar to those of the Company's existing products
iDeclare and iProcess.
The company won the bid to develop the software, though.

This event hit the stock price of NINE even harder.
NINE IPOed at $11 (which might be over-priced as usual),
but with $3.37 cash per share, and traded around its book value, $4.56,
NINE creates a lot of value right now. It has a strong brand-name
in the import/export processes. Its management team is quite capable
and working hard to find ways to improve the profitability of
the company and creating values for shareholders.

Current difficulties are basically short-term, IMHO.
And the company is trying to find other value-add revenues
from its massive user bases. Furthermore, the user base itself is rapidly
increasing year after year as China's import and export business
is continuing to grow and more and more
enterprises are using on-line processing services.

NINE has substantial insider holdings, as of 6/29/06:

Min Dong(1) 6,211,514 17.68%
Xiaoguang Ren 564,235 1.61%
Kin Fai Ng 655,084 1.87%
Bolin Wu 452,670 1.29%
Tommy Siu Lun Fork 501,612 1.43%
Eric Chen Yu Ho 4,419 <1%
Xiaomin Sun 4,419 <1%
Mark Ming Hsun Lee 4,419 <1%
John Yan Wang 4,419 <1%
Dachun Zhang 2,009 <1%
Fushan Chen 2,009 <1%

All directors and executive officers as a group (12 persons)
8,406,809 23.62%

And it has other investors holding a major part of the company,
including Mr. Duan being the second largest holder.

5% and above shareholders

Yong Ping Duan 4,221,226 12.06%
Gerry Ka Cheung Wai 2,474,383 7.07%
Value Chain International Limited(2) 2,002,312 5.72%
Cross China Developments Limited 1,766,822 5.05%

(1) spouse of Shuang Wang, shares combined
(2) wholly owned by Dong and Wang

So Mr. Wang and Ms. Dong control about 23.40% of the company.
Other executive insiders holdings are insignificant compared to them.
Mr. Duan controls about 12.06% of the company and is the second
largest share holder.

The company is rather shareholder friendly for obvious reason,
and it is really cautious in using its cash. Recently it just made
a strategic investment in B2B Trade Facilitator,
Global Market Group Limited (Global Market),
with an acquirement of 16.25% equity interest for $5M.
The strategy is to expand its services to its customers
by offering B2B trade services in addition to the cost savings
achievable through its business-to-government (B2G) e-filing services.

This is a rather bold move for them. Even without this, NINE can still
make pretty good profit by expanding its current B2G e-filing services.
By judging the management team from their past success,
I believe they have a good chance to be very successful this time.

Furthermore, I trust Mr. Duan, aka, fastisslow, his business vision,
his ability to find trustworthy managements, and most importantly,
his value investment method.

So NINE would be a good-buy here around or below the book value,
$4.6, and it can be traded as high as $10~20 in 2~3 years.

**lzhang** Fri Sep 15, 2006 7:13 pm

Mr. Duan is buying Re: NINE revisited
According to sec filing as of 9/13/06, Mr. Duan increased his holding on NINE to 4,641,212, which is 13.26% of the company

http://www.sec.gov/Archives/edgar/data/1265354/000114420406038203/v052724_sc-13g.txt

:lol:

lzhang wrote:
And it has other investors holding a major part of the company,
including Mr. Duan being the second largest holder.

5% and above shareholders

Yong Ping Duan 4,221,226 12.06%

**lzhang** Fri Sep 22, 2006 2:59 am

Mr. Duan and CEO of NTES made $40M donation to Zhejiang U.
http://news.163.com/06/0921/20/2RIOE0KD0001124J.html

Mr. Duan $30M and Mr. Ding $10M

two thumbs up to them

**lzhang** Fri Mar 23, 2007 2:29 pm

Ding Lei acquired 3M shares of NINE
According to the latest SEC filing, Mr Lei Ding, founder and CEO of NTES, has acquired 3M share of NINE.

I do not know if NINE can reach to its cash level due to short term negative news and B2B R&D expenditure. If it does, it will be a great opportunity.

http://www.sec.gov/Archives/edgar/data/1285735/000119312507061466/dsc13g.htm

**zhang242463** Mon Aug 20, 2007 8:17 pm

Re: Ding Lei acquired 3M shares of NINE
almost down 40% since it is posted.

lzhang wrote: According to the latest SEC filing, Mr Lei Ding, founder and CEO of NTES, has acquired 3M share of NINE.

I do not know if NINE can reach to its cash level due to short term negative news and B2B R&D expenditure. If it does, it will be a great opportunity.

http://www.sec.gov/Archives/edgar/data/1285735/000119312507061466/dsc13g.htm

**xuedong_zhang** Mon Aug 20, 2007 9:20 pm

Re: Ding Lei acquired 3M shares of NINE
Looks the the cash is more than the market value. :(
Seems the market don't trust the management team at all.

zhang242463 wrote: almost down 40% since it is posted.

lzhang wrote: According to the latest SEC filing, Mr Lei Ding, founder and CEO of NTES, has acquired 3M share of NINE.

I do not know if NINE can reach to its cash level due to short term negative news and B2B R&D expenditure. If it does, it will be a great opportunity.

http://www.sec.gov/Archives/edgar/data/1285735/000119312507061466/dsc13g.htm

**zhang242463** Mon Aug 20, 2007 10:44 pm

Re: Ding Lei acquired 3M shares of NINE
Any tracking record of those management?

xuedong_zhang wrote: Looks the the cash is more than the market value. :(
Seems the market don't trust the management team at all.

zhang242463 wrote: almost down 40% since it is posted.

lzhang wrote: According to the latest SEC filing, Mr Lei Ding, founder and CEO of NTES, has acquired 3M share of NINE.

I do not know if NINE can reach to its cash level due to short term negative news and B2B R&D expenditure. If it does, it will be a great opportunity.

http://www.sec.gov/Archives/edgar/data/1285735/000119312507061466/dsc13g.htm

**lzhang** Mon Aug 20, 2007 11:51 pm

Re: Ding Lei acquired 3M shares of NINE
Hi xuedong_zhang,

That is not true. The cash level is about $2.5/share. See my Update as of 07/26/2007 below. Unless it can drop below the cash level, it is not very attractive at this level, considering the uncertainty of its business, and the cheapness of other stocks available right now due to recent market sell-off.

xuedong_zhang wrote: Looks the the cash is more than the market value. :(
Seems the market don't trust the management team at all.

Ninetowns Internet Technology Group Company Limited (NINE) today announced its Q1 2007 results. It was not an exciting one. There were ($0.02)/share loss for Q1 2007 (ending 03/31/2007). The cash as of 03/31/2007 was about $114.3M, but there was an M&A with respect to Ample Spring for about $27M as of 04/09/2007, so the cash as of now is about $87.3M, or $2.50/share. The company has two businesses right now, the B2G business and B2B business.

For the B2G business, the company generated about $4.22M net profit in fiscal year 2006 ($17.5M gross profit, –$(1.7+8.4)M SGA, –$(3.8/3)M R&D (assuming 2/3 R&D for B2B), with 30% tax). If we assume its net profits for this year and so on are about 70% of last year per year and give PE=7, we will have about $20M as the value of this B2G business. We give $10M as the uncertainty on the valuation.

For the B2B business, it is still in its development stage, so it is very hard to predict if it could be successful. The strategy, per CC, is to use some kind of search engine technique to organize its main website, www.tootoo.com, and the revenues are derived from sellers who want to list their products on the website with some kind of preference, or priority. The company is going to launch full campaign to promote the website and services from 4th quarter of 2007. Considering the future cash-burning rates and capitals already invested, we want to give this part of the business a valuation of $20M, with uncertainty of ±$30M.

So the full valuation of the company is $87.3M cash + $20M B2G business + $20M B2B business = $127.3M, or $3.6/share, with uncertainty of $31.6M, or $0.90/share. It would be very attractive if it can fall to its cash level, or about $2.5/share. Right now, it is fair valued at about $3.7/share.

We need to remind ourselves that this estimation is very rough. If its B2B business is very successful as the management team have expected, its valuation will be changed dramatically.

FD and Disclaimer

The author has a long position in NINE. The position can be changed without further notice.

This is not an investment recommendation to buy or sell any of the securities mentioned therein. All materials presented here are for information purposes only.

References

http://hepinvestor.blogspot.com/2007/07/nine-update-as-of-07262007.html

http://biz.yahoo.com/prnews/070726/lnth506.html?.v=1

http://www.ninetowns.com/english/infocus/NINE%20Q1%2707%20Analyst%20Presentation.pdf

http://www.sec.gov/Archives/edgar/data/1285735/000111667907001362/ex99-1.htm

**lzhang** Tue Aug 21, 2007 12:01 am

Re: Ding Lei acquired 3M shares of NINE
Hi zhang242463,

Its management should be at least OK. Mr. DUAN Yongping and Mr. DING Lei are its largest shareholders. I do not think they would buy companies with management they do not trust. But any management is subject to failures, etc. Nobody can guarantee 100% success.

zhang242463 wrote: Any tracking record of those management?

**lzhang** Tue Aug 21, 2007 12:54 am

Re: Ding Lei acquired 3M shares of NINE
Hi zhang242463,

That does not matter. What matters is what was missing in the original assessment. I could not find any real business estimation in the original post. It does not matter who has bought the stock. What matters is your own understanding and estimation.

zhang242463 wrote: almost down 40% since it is posted.

**xuedong_zhang** Tue Aug 21, 2007 11:27 am

Re: Ding Lei acquired 3M shares of NINE
Anyone tell me more about this 27M thing. Though it is announced it use 27M to buy ample spring, I guess most of the money is still there (but need to burn for next couple of years), the real money to pay the investors on these announced deal in China is very tricky.

Does NINE need to show SEC the detail of this deal?

lzhang wrote: Hi xuedong_zhang,

That is not true. The cash level is about $2.5/share. See my Update as of 07/26/2007 below. Unless it can drop below the cash level, it is not very attractive at this level, considering the uncertainty of its business, and the cheapness of other stocks available right now due to recent market sell-off.

xuedong_zhang wrote: Looks the the cash is more than the market value. :(
Seems the market don't trust the management team at all.

Ninetowns Internet Technology Group Company Limited (NINE) today announced its Q1 2007 results. It was not an exciting one. There were ($0.02)/share loss for Q1 2007 (ending 03/31/2007). The cash as of 03/31/2007 was about $114.3M, but there was an M&A with respect to Ample Spring for about $27M as of 04/09/2007, so the cash as of now is about $87.3M, or $2.50/share. The company has two businesses right now, the B2G business and B2B business.

For the B2G business, the company generated about $4.22M net profit in fiscal year 2006 ($17.5M gross profit, –$(1.7+8.4)M SGA, –$(3.8/3)M R&D (assuming 2/3 R&D for B2B), with 30% tax). If we assume its net profits for this year and so on are about 70% of last year per year and give PE=7, we will have about $20M as the value of this B2G business. We give $10M as the uncertainty on the valuation.

For the B2B business, it is still in its development stage, so it is very hard to predict if it could be successful. The strategy, per CC, is to use some kind of search engine technique to organize its main website, www.tootoo.com, and the revenues are derived from sellers who want to list their products on the website with some kind of preference, or priority. The company is going to launch full campaign to promote the website and services from 4th quarter of 2007. Considering the future cash-burning rates and capitals already invested, we want to give this part of the business a valuation of $20M, with uncertainty of ±$30M.

So the full valuation of the company is $87.3M cash + $20M B2G business + $20M B2B business = $127.3M, or $3.6/share, with uncertainty of $31.6M, or $0.90/share. It would be very attractive if it can fall to its cash level, or about $2.5/share. Right now, it is fair valued at about $3.7/share.

We need to remind ourselves that this estimation is very rough. If its B2B business is very successful as the management team have expected, its valuation will be changed dramatically.

FD and Disclaimer

The author has a long position in NINE. The position can be changed without further notice.

This is not an investment recommendation to buy or sell any of the securities mentioned therein. All materials presented here are for information purposes only.

References

http://hepinvestor.blogspot.com/2007/07/nine-update-as-of-07262007.html

http://biz.yahoo.com/prnews/070726/lnth506.html?.v=1

http://www.ninetowns.com/english/infocus/NINE%20Q1%2707%20Analyst%20Presentation.pdf

http://www.sec.gov/Archives/edgar/data/1285735/000111667907001362/ex99-1.htm

**lzhang** Tue Aug 21, 2007 11:30 am

Re: Ding Lei acquired 3M shares of NINE
Hi xuedong_zhang,
Didn't I give you the reference link?

xuedong_zhang wrote: Anyone tell me more about this 27M thing. Though it is announced it use 27M to buy ample spring, I guess most of the money is still there (but need to burn for next couple of years), the real money to pay the investors on these announced deal in China is very tricky.

Does NINE need to show SEC the detail of this deal?

lzhang wrote:
http://www.sec.gov/Archives/edgar/data/1285735/000111667907001362/ex99-1.htm

**lzhang** Tue Aug 21, 2007 11:50 am

Re: Ding Lei acquired 3M shares of NINE
Hi xuedong_zhang,

I guess there is no much detail. The following is another (earlier) filing

http://www.sec.gov/Archives/edgar/data/1285735/000111667907001159/ex99-3.htm

To be conservative, I'd rather believe those $27M commitments are gone for B2B development. Whether it can pay off in the future is the key. For now, we'd better assume it can not pay off, and NINE is going to burn more cash into this area for marketing, etc.

So this B2B investment from NINE is something like VC. We need to do more research on this issue to understand its future success. It is more likely going to compete with both Baidu.com and Alibaba.com for the B2B market share, not to mention numerous other sites.

xuedong_zhang wrote: Anyone tell me more about this 27M thing. Though it is announced it use 27M to buy ample spring, I guess most of the money is still there (but need to burn for next couple of years), the real money to pay the investors on these announced deal in China is very tricky.

Does NINE need to show SEC the detail of this deal?

**lzhang** Wed Oct 24, 2007 3:28 am

NINE Update as of 10/12/2007
According to SEC filing as of 10/09/2007, Mr. Duan has increased his holding on NINE to 5,267,689, or 15.05% of the Company, as of 10/02/2007.

Disclosure and Disclaimer

The author has a long position in NINE. The position can be changed without further notice.

This is not an investment recommendation to buy or sell any of the securities mentioned therein. All materials presented here are for information purposes only.

References

http://www.sec.gov/Archives/edgar/data/1265354/000114420407053447/v089831_sc-13g.txt

**zqin** Wed Nov 14, 2007 5:07 pm

lzhang,

what do you think of this stock now? I trust Mr. Duan. But the stock has been falling everyday. And the earning report is nowhere. Now it's approaching is cash value. So I guess now it's safe to buy..