Acorn International Inc. ADRATV

Morningstar Rating

Stock Research and Analysis

by Iris Tan

Acorn International is the largest TV direct sales company in China by revenue. The company is seeing a rebound in sales after the setback in 2008. However, we're still not optimistic about its long-term prospects, given its unfavorable position in airtime purchases, uncertainties surrounding its product offerings, and regulatory control in this evolving industry. Read more

Bulls Say

After the setback in 2008, Acorn recently saw a sales rebound in its English-learning products and healthy growth in its new cosmetic product line and an acquired mobile handset division.

Currently Acorn and HappiGo (a company founded by Hunan Satellite TV) are the largest players in the Chinese TV shopping market, with each holding about 17% market share in 2008.

As of the end of June 2009, Acorn has about $4.3 net cash per ADR, and net book value per ADR is about $7.70.

The ongoing industry consolidation should help squeeze away weaker players and thus prevent irrational competition for non-prime-time advertising inventory.

Compared with TV shopping channel owners, Acorn has light-asset bases and more flexibility in establishing the nationwide TV shopping network by purchasing non-prime-time slots from different channels. Read more

Bears Say

Although Acorn has spent a lot in promoting its proprietary-branded products, the company's brand recognition is weak, as it doesn't advertise its own brand.

The Chinese TV direct sales industry has weak credibility, and we've seen several cases and lawsuits filed against Acorn's mainstay products.

Acorn's weak customer loyalty is evidenced by a low customer repeat-purchases rate of only 13%.

Acorn signs airtime purchase contracts on an annual basis. Inflating media costs would squeeze its profitability. Read more

Strategy

Before April 2006 when Acorn started to sell third-party-branded cell phones, most of Acorn's revenue was derived from its proprietary brands, which had much higher margins. After the sharp setback caused by the government's tightening controls on the TV home shopping industry, Acorn started to look to third-party-branded products and joint-marketing services for top-line growth. Read more

Management

Chairman and CEO James Yujun Hu owns about 4% of Acorn's outstanding shares. Softbank Asia Investment Fund and Acorn Composite, a Japan-based TV home shopping firm, are two of the largest shareholders, with 24% and 16% shares of Acorn, respectively. Read more

Profile

Acorn is the largest TV home shopping company in terms of revenue and TV airtime purchases in China. The company generates its revenue from sales of proprietary-branded products, joint sales of third-party products, and joint-marketing arrangements. Read more

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