Once infatuated, the world now suffers from China stock phobia. A combination of over saturation and investor skepticism has knocked the wind out of Chinese stocks. Trunkbow International has not escaped this turmoil. The mobile phone services company raised $18.1 million in an IPO on February 8, offering 4 million shares at $5.00 a piece, listing on NASDAQ under the symbol TBOW. Since then it has dropped 40%, currently trading around $3.10 – though this is well off the 52 week low of $1.96.
As a result of fraud committed by a handful of Chinese companies, an entire sector has been tarnished. Furthermore, allegations of inadequate financial controls and concern over business models have recently contributed to a negative perception of Chinese operations. Through mid-June, U.S. IPOs of Chinese companies since 2008 have averaged a 24% loss compared to a 25% gain among non-Chinese IPOs. Well-run businesses such as Trunkbow were not spared.
Trunkbow is an interesting story, although based in China, it was founded in 2001 by former Silicon Valley engineers. The company began by developing and marketing a color ring-back tone, which allows users to customize what the calling party hears or sees with video, music, sound clips, or voices while waiting for the call to be answered. Additional services were added over the years, generating a significant and growing revenue stream; all were designed to promote mobile phone usage, together forming the company’s Mobile Value Added Services (MVAS) business. Trunkbow makes money on these services through revenue sharing with telecom providers or one-time fees.
In the third quarter 2009, Trunkbow moved into China’s nascent mobile payments industry by marketing its Mobile Payment Solutions enabled phones in partnership with telecom operators. The move gained momentum when U.S. based VeriFone entered a strategic contract with Trunkbow for the supply mobile payment point of sales (POS) systems a month later. On February 14, 2010, VeriFone co-lead a $22.5 million financing in Trunkbow and took an 8.6% stake in the firm.
Mobile Payment Solutions (MPS) is now the key driver of revenue growth. Trunkbow generates non-recurring revenues through sales of mobile payment systems and revenue share on MPS compatible SIM cards. Recurring revenue is generated through the company’s share of fees charged by telecom providers, transaction fees on purchases made through the mobile payment application, and monthly rental fees on point of sales equipment.
Revenue for the first quarter increased 26.6% year-over-year to $5.1 million from $4.0 million in 2010. Of that, sales from MPS grew more than 20 fold from $61,000 to $1.4 million. Sales from Mobile Value Added Services meanwhile, declined 7.5% from $4.0 million to $3.7 million. The decrease was attributed to a temporary slowdown in MVAS demand. Net income rose 26.9% from $2.6 million to $3.4 million. The company sees brisk growth, projecting second quarter revenue of $9.5 million and net income of $4.3 million. This represents an 86% sequential and 138% year-over-year top-line growth.
Management expects mobile payments to continue its quick ramp surpassing 50% of total revenue in the near future. The payment platform was introduced to one new province in the first quarter; it will be launched in a total of ten by the end of this year. As quickly as the company is growing today, its largest province served is mostly rural Inner Mongolia. Expansion into more affluent regions is expected to boost growth further.
On April 29, Trunkbow entered an agreement with Icafe to provide mobile payment solutions at 90,000 internet café locations. Icafe has a footprint covering 50% of China’s internet café desktops with a user base of 50 million customers. The collaboration allows Icafe to enable POS transactions at these desktops, providing users the ability to make transactions with their mobile phones.
While focused on growth within China, Trunkbow also sees opportunity through international expansion. The company intends to leverage its relationship with VeriFone to enter the large U.S. market. It is starting slowing with an R&D center. Like China, the U.S. is still in the early stages of developing a mobile payments market, although the landscape is highly competitive. Other geographies of interest include Europe and fast-growing India.
One of the difficulties in developing a mobile payments systems is the need for close collaboration between multiple vested parties. Phones must be enabled with either special radio frequency SIM (RF-SIM) cards or other near-field communications abilities; POS equipment needs to be rolled out broadly among retailers, and providers (often banks) need to participate in processing payment transactions.
Trunkbow has the advantage of offering end-to-end solutions consisting of hardware, software, and services, making it easier to tie together all the required components for mobile payments. Even operating only in China, the market is very large with over 800 million mobile phone users. A 2010 report from Arthur D. Little estimates there will be 6.9 billion mobile transactions worth some $23 billion by 2015 at which time users of mobile payment made through RF-SIM enabled phones are expected to top 400 million.
It is clear mobile payments will become an increasingly viable alternative to other options such as cash and credit cards. The technology will allow users to consolidate numerous cards onto a single device. Japan has embraced mobile payments. It is likely China will do the same, due in particular to the poor penetration of credit/debit cards. Implementation of 3G networks by China’s three incumbent carriers, China Mobile, China Telecom, and China Unicom will also facilitate adoption of the payment system.
Trunkbow finds itself in the perfect spot at the perfect time now that mobile payments in China are set to take off. 2011 looks to be a banner year for the company and the industry.
Source:cn-c114