China Cable and Communication, Inc.
(OTC: BB: CCCI)

Current Price: $ 0.30                                         Common Shares Out: 73,606,760
52-Week Range: $ 0.26 – 3.60                            Market Cap: $24,000,000

Company Description:  China Cable and Communication, Inc. is the first foreign company to own and operate a cable television network in China. Located 85 miles south of Beijing, the network currently offers 39 channels within the Baoding city limits, and eight additional channels to outer areas in the Baoding metropolitan area. It transmits in both analog and digital signals over its fiber optic network, which includes 22 substations. Through its fiber optic technology, the Baoding network is capable of transmitting 37 analog television programs, six digital signals, and one FM music program. In addition to its cable television transmission services, Baoding network offers Internet access and value added services, such as broadband Internet access and on- demand services through its proprietary set-top boxes.

Investment Rationale:  In our opinion, China Cable and Communication (CCCI) is uniquely well positioned to capitalize on the growing market for cable and telecommunication offerings in China. As the only U.S. publicly traded company approved by the Chinese central government to own interests in Chinese cable systems, CCCI is committed to pursuing an aggressive business strategy, including acquisitions of new properties. Recently, CCCI announced a new agreement to acquire a fiber optic backbone network throughout China, which would establish the company as a major player in telecommunications as well as cable TV in that country.  The Chinese economy is among the fastest growing in the world. Our research suggests that CCCI will benefit in that growth as demand for the type of communication services provided by it expands.  The company has an experienced and well-connected management team, and CCCI recently has begun reporting consolidated financial statements that will assist in obtaining new recognition in the financial community. During the past few years, there has been substantial investor interest in Chinese related equities, but in recent months the group has cooled.  However, we believe that world economic trends are still working very much in China’s favor, and investors will want to consider having investments in their portfolio that can benefit from that trend.  To that extent, we believe that the CCCI shares represent an opportunity for high-risk tolerant investors to own a company that is well positioned to exploit a growing niche within a dynamic economy. Accordingly, we are initiating coverage of CCCI with a STRONG BUY rating. 

 Key Considerations

·     China Cable and Communication, Inc. (CCCI) is China’s fastest growing cable TV company. Through its British Virgin Island subsidiary, CCCI is the first foreign company to own and operate a cable television network in China. The company owns a 49% interest in Baoding Pascali Cable Television Network through a license that allows CCCI to make additional investments in People’s Republic of China (PRC) networks.

·     In addition to its favorable advantage in access to foreign capital, China Cable and Communication is well positioned as a foreign investor approved by China's national regulatory authority for the broadcasting industry, The State Administration of Radio, Film and Television (SARFT), to own interests in, and provide operational management support to, cable television networks in the PRC.

·     CCCI is the first and still the only foreign investor approved by the Chinese National Authority for Broadcasting.

·     The company is emerging as a major player in the Chinese communication market by offering the convergence of telecommunications, digital cable TV, and the Internet -- all supported by a state-of-the-art fiber optic network.

·     CCCI plans on strategically consolidating an existing universe of 1,800 CATV operators in China to become a leading cable operator in the country.

·     In March 2003, CCCI announced that its 49%-owned Baoding Network had entered into a joint venture agreement with a major Chinese telecom company for the providing of Internet Protocol Telephony Services (IP Telephony) in Baoding City, located approximately 85 miles south of Beijing. The company currently operates a cable television system in Baoding City, through its 49% interest in Baoding Pascali Cable Television Network that has more than 200,000 subscribers.

·     In a very recent and significant development, the company announced on June 14^th that it entered into an agreement to acquire a two-core fiber backbone network covering 410 Chinese cities, with a total length of nearly 20,000 miles.

·     The above mentioned backbone network covers all 23 provinces in China. The completion of this transaction is subject to due diligence and third party determination of the values upon which the purchase price will be based.

·     CCCI possesses a strong and capable cross cultural and cross discipline management team with extensive connections in China.

·     We anticipate that, over the next several quarters, investors will begin to see a steady stream of revenue developing for the company with full year 2004 revenues anticipated to be approximately $6 million.

Cable Television in China

In China, the role of television has been traditionally tied to national development. China, however, has held tight to its reins of control on a mass medium like television to spread its political ideology and to reinforce its central government control. Until just recently, there have not been many viewing choices for the Chinese audience, since television was first brought to China as a form of technical support from the former Soviet Union in the late 1950s. 

In the 1960s and 1970s, an embryonic cable television system in China was started in some apartment buildings, where cables were wired throughout the buildings and linked to a master antenna on the rooftop so as to improve reception of the nation's television - China Central Television (CCTV) - broadcast signals.

Since the late 1970s, when China's leaders began to adopt modernization policies that were basically economically centered, China's television industry has been changed greatly. With the emphasis on technological modernization, China Central Television (CCTV) became the national television network, broadcasting programs to people all around the country.

In 1991, the launch of satellite television, and specifically STAR TV, marked a significant moment in the broadcasting history of China. With STAR TV, the Chinese were now able to receive more foreign programming which heretofore had been restricted. Further, it also challenged the traditional notions of television in China, and many other Asian countries as well. Hence, over the past several years, television has become an important entertainment medium in China, with cable television driving both the growth and interest in this emerging lifestyle change.

 In May 1992, China started its first official cable television network - Beijing Cable. At present, there are more than 3,000 cable stations in China, and that number is likely to double by the end of this decade.  Residents of the Chinese mainland now receive more than 20 outside television channels by satellite, including Chinese-language services of CNN, Star TV, and the United States Information Agency. In the southern province of Guangdong, 97 percent of the households have television sets, and all--except those in a few parts of the city of Guangzhou where reception is poor--have access to Hong Kong television through cable networks.  Our research indicates the inclusion of China in the World Trade Organization will accelerate further the growth of cable television in China.

Though television continues to be a pro-government tool in China, it is beginning to be seen more and more as a medium for entertainment. This can be shown by the great increase in the number of television sets. Ownership has increased from 160 million in 1990 to an estimated 400 million in 2002. This is an extremely impressive number, especially when compared with the country where television is the most watched in the world – the United States -- where there are today an estimated 250 million television sets. By any measure, the cable television industry is growing rapidly in China.

Along with the U.S., China has the largest viewer group. However, although China has the largest potential audience in the world, cable penetration in Chinese homes is less than 20%, as compared to the U.S., where the number is 70%. The change in the Chinese people's perception of television as a medium for entertainment has greatly helped in promoting the growth of cable television because of an outburst of demand for more entertaining programming.

This development of television in China must be viewed within the context of the overall development of a national communications infrastructure.  With telephone penetration still relatively low, the central government is most likely looking to cable as one part of a modernization plan.  To this extent, the Chinese government has encouraged the laying of broadband hybrid fiber-coaxial networks. 

With its nationwide backbone fiber optic network, CCCI is well positioned to provide the world’s fastest growing telephone service – Voice over Internet (VoIP).  Indeed, Voice over Internet technology has been garnering much attention over the last year, and is currently one of the hottest segments of the industry. The technology allows voice traffic to be routed over the Internet or corporate intranet--which means virtually no billing at all for some long-distance calls and just local charges for others. More importantly, it all happens behind the scenes, and is transparent to users, who simply pick up the phone and dial. The products available today can do this with no apparent loss in quality, and companies and individuals are rapidly embracing this technology and saving large sums of money in the process.  

The Telecommunication Industry Association's latest forecast for technology growth says that unified messaging markets will surge in the remainder of 2004 and 2005 as Voice-over-Internet-protocol (VoIP) replacements of legacy PBX systems accelerate. In their 2002 Telecommunications Market Review and Forecast, the TIA predicts that spending on unified messaging systems will rise to $3.5 billion in 2005, virtually triple the $1.2 billion spent in 2001, growing at a 32.1% compound annual growth rate.

CCCI senior management believes that with it nationwide backbone network in place, as the trend toward Voice IP accelerates, it will be able to provide very affordable long-distance telephone services to both corporate and retail customers in China as a cost-effective alternative to large existing telecom companies. 

As mentioned earlier in this analysis, investor interest in Chinese stocks has cooled in recent months after a strong run in 2003.  Concern has emerged during the first half of 2004 that the growth in China is slowing down, and that other areas of Asia, most notably Japan, will be the new hot area. 

However, in our opinion, China is still too big to be ignored for any length of time, and there are still some very attractive investment opportunities in Chinese stocks.  Readers should consider the following:

-         Although for many years skeptics have been predicting China’s collapse, its economy has been growing at an average annualized rate of more than 9% since 1990. 

-         China is the sixth largest economy in the world in terms of GDP, and some economists believe that China’s economy is about half the size of the U.S. economy. But its contribution to the world’s economic growth in the past several years has been the greatest. According to the World Economic Prospect report published last September by the International Monetary Fund (IMF), if calculation is made in accordance with PPP (purchasing power parity), in the eight years between 1995 and 2002, the percentage of the value of U.S. increased GDP in global economic growth was 20 percent, the European Union 15 percent,  Japan 2 percent, and that of China as high as 25 percent.  

-         In 2003, China accounted for 7% of global crude oil consumption, 27% of the steel used in the world, 31% of the coal, and 40% of the cement, and it is now the world's biggest consumer of copper, after passing the United States in 2002. Its rapidly growing demand for energy and base metal was a significant force behind the price hikes in the world commodity markets last year. 

-         China's total import and export trade value ranked eighth in the world in 2000. In 2002, it placed fifth, and in 2003, it was third, ahead of France and Japan and just behind US and Germany. 

-         China is currently the fastest-growing export market for many countries around the world, particularly the Asian economies. Last year, China accounted for 68% of export growth in Taiwan, and 36% of export growth in South Korea. Even Japan should thank China for giving it a big lift to its recent economic recovery, because China’s boom has provided strong demands for Japanese products, at a time when exports to the U.S., Japan’s largest single market, have been declining.

We view the company as having a very focused corporate strategy, which is rooted in the convergence of the many technologies supported by a strong fiber optic cable network.   The company has a set-top box system for cable TV signals, which will be important in the delivery of content to a Chinese population hungry for new programming. Once the company’s backbone network is fully in place, CCCI will be able to transmit video and audio content, including music video and on-line games, directly to its customers. Additionally, home shopping will turn into a reality for the world’s largest population.  The building out of a state-of-the-art fiber network will also permit the leasing of excess bandwidth. Currently, only China Telecom and China Netcom provide bandwidth leasing because of current telecom policies.  However, China Telecom and China Netcom do not have nationwide truck lines. CCCI’s nationwide backbone network could thus lease bandwidth to existing telecom companies. 

Moreover, with China’s entry into the World Trade Organization (WTO) and the possibility of future liberalization of the Chinese telecom industry, the backbone network created by CCCI could be in a good position to work with foreign telecoms.  

Finally, voice over IP will provide CCCI with the opportunity to provide very affordable long-distance telephone services to both corporate and retail customers in China.  With this strategy in place, CCCI hopes to become the largest broadband fiber network operator in China.

When we make a new recommendation to our readers, we always consider the quality of management as one of the most important factors in formulating our opinion about the investment merits of a stock.  In the case of CCCI, our due diligence suggests that management is a very capable and well-connected group of executives equipped to guide the company to an expected period of rapid growth. Brief biographies of key management personnel follow:

Kai-Jun Yang joined the Board of Directors in October 2003 as Chairman, and has more than 25 years of experience in finance and corporate management. Since December 2002, Mr. Yang has served as financial controller and executive director of Beijing Tung Wah Investment Company Limited. From January 2001 to December 2002, Mr. Yang served as executive director and financial controller of Beijing Jing Long Chang Trading Company Limited. From 1997 to 2000, Mr. Yang served as financial controller of Hong Kong Yu Gang Group Company Limited. He has held various senior management positions in various enterprises with different industries in the PRC. He is a certified public accountant in the PRC, and is the financial controller of Beijing Tung Wah Investment Company Limited, a company established in Beijing. He is also a member of the Board of Directors of China Convergent Corporation Limited (CCCL), a Bermuda corporation listed on the Australian Stock Exchange.

Da-Xiang Zhang joined the Board of Directors in October 2003 as Deputy Chairman of the Board. Since 1999, Mr. Zhang has served as Executive Director of CCCI, and in January 2002 became the Executive Chairman. Prior to that, Mr. Zhang served as Deputy General Manager of Beijing Da You Group Company Limited and China Great Wall Real Estate Group Company.  He has more than 20 years of experience in business administration in the PRC.

Raymond Kwan joined the Board of Directors in February 2003, and assumed the post of Chief Executive Officer shortly thereafter. Since 2002, Mr. Kwan has served as Chairman and Chief Executive Officer of Solar City Ltd. From 2001 to 2002, Mr. Kwan served as General Manager of INTEGER Hong Kong Pavilion Ltd. and, from 1997-2001, he served in various executive posts in CIL Holdings Ltd., a company listed on The Stock Exchange of Hong Kong Limited. Mr. Kwan has more than 17 years of experience in strategic planning, product marketing and management. He is a Magna Cum Laude graduate of Regis University in Denver, Colorado, with degrees in accounting and mathematics. He is also a non-executive director of CCCL.

Gareth Tang joined the Board of Directors in February 2003, and assumed the post of Chief Financial Officer and Chairman of the Board of Directors shortly thereafter. Mr. Tang served as Chairman of the Board until October 2003, when he assumed the position of President of the company. Since January 2002, Mr. Tang has served as Chief Executive Officer and Executive Director of CCCL. Since November 2000, Mr. Tang has served as Managing Director of GC Alliance Limited, a Certified Public Accountants firm in Hong Kong. Prior to that, Mr. Tang served as Deputy Chairman and Chief Executive Officer of Prosper eVision Limited (Stock Number 979), a company listed on The Stock Exchange of Hong Kong Limited, and CCCL. Mr. Tang has more than 18 years of experience in accounting, finance, corporate finance and management, especially management of listed companies in Hong Kong, Australia and companies listed on NASDAQ. He is a fellow member of both the Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants, and holds a Bachelor Degree in Social Sciences, with a major in Management Studies, from the University of Hong Kong. He is also the Chief Executive Officer and Executive Director of CCCL.

Hong-Tao Li joined the Board of Directors and was appointed Chief Operating Officer and Vice President of Project Development in October 2003, and has more than 12 years of experience in direct investment and corporate management. Since 1997, Mr. Li has served as the general manager of Beijing Tung Wah Investment Company Limited. He is the general manager of Beijing Tung Wah Investment Corporation Limited, and a member of the Board of Directors of CCCL. He is the beneficial owner of approximately 50% of the outstanding common stock of CCCL that, through its wholly owned subsidiary, is the beneficial owner of a majority of outstanding shares of common stock of the Company.

George Raney joined the Board of Directors in February 2003 and became Senior Vice President of Corporate Development in October 2003. From 2000 until 2003, Mr. Raney served as Vice President of China Convergent Corporation Limited. Prior to that, Mr. Raney provided corporate development consulting through Raney & Associates. Mr. Raney has more than 10 years of experience in corporate finance and corporate development in the United States. He previously worked in Beverly Hills, California, for Millennium Capital Partners, where he specialized in originating, structuring and executing private placements and sourcing strategic U.S. acquisitions for PRC clients. He received his B.A. in economics from The Ohio State University, and his M.B.A. in finance and international business from the University of Michigan.

Yong-Xiang Chen joined the Board of Directors in October 2003 and has more than 13 years of experience in corporate management. Since 1997, Mr. Chen has served as the general manager of Beijing Zhi Wo Zhong Cheng Technology Company Limited.

Prior year’s results

The company is a holding company, and its business is carried on through its Baoding joint venture. CCCI had no revenue for the fiscal year ended December 31, 2003.

For the fiscal year ended December 31, 2003, the company had a loss from operations of $5,991,968, as compared with a loss from operations of $0 for the fiscal year ended December 31, 2002.  CCCI recorded a net loss of $9,074,761 for the year ended December 31, 2003, as compared with a net profit of $601,412 for the year ended December 31, 2002.

Recent results

Three months ended June 30, 2004 and June 30, 2003

CCCI posted revenue of $1,109,160 for the three months ended June 30, 2004 representing the installation and subscription fees of the Baoding joint venture. The company reported no revenue for the three months ended June 30, 2003 because Baoding was accounted for using the equity method of accounting in 2003.  Net loss available for common stockholders increased to $2,137,485 for the three months ended June 30, 2004 from $1,035,129 for the corresponding period in 2003, representing an increase of $1,102,356 or 106%.  The increase is primarily attributable to the loss of extinguishment of debts of $1,174,183.

Six months ended June 30, 2004 and June 30, 2003

CCCI recorded revenue of $2,042,911 for the six months ended June 30, 2004 representing the installation and subscription fees of the Baoding joint venture received and to be received, net of service tax whereas the company had no revenue for the six months ended June 30, 2003 because Baoding was accounted for using the equity method of accounting in 2003. Net loss decreased to $3,818,867 for the six months ended June 30, 2004 from $5,020,623 for the corresponding period in 2003, representing a decrease of $1,201,756 or 23.9%.  The decrease is primarily due to the combined effect of the increase in profit attributable to the Baoding joint venture, other income and the decrease in merger costs, increase in expenses and the loss on extinguishment of debt.

Financial condition, liquidity, capital resources

As of June 30, 2004, the company has cash and cash equivalents of $109,051.  Current assets were $4,130,291 and current liabilities were $8,893,576, which resulted in a current ratio of 0.46.  The company has no capital expenditure commitments outstanding as of June 30, 2004.

Readers are urged to study all of the company’s financial statements filed with the SEC.  These documents are readily available on the Internet thru links provided on this site.

Future Financial Prospects

The company has announced that for full year 2004, revenues are expected to exceed $6 million. This revenue is expected to flow from sales of set-top cable boxes by the Baoding joint venture, additional installation fee for set-top cable boxes and additional subscription fee from added value services like program-on-demand and digital TV services.  Lending credibility to this estimated is the fact that sales of set top cable boxes for the first three months of 2004 totaled more than 20,000 units.

Leveraging from the successful launching of digital broadband cable services in Baoding by using the proprietary set-top boxes; head-end equipment and systems, the Company will market its digital broadband cable solution to other cable operates outside Baoding city.  The company expects to generate additional revenue of $20 million from this new line of business starting from 2005.

With planned capital injection and completion of acquisition of nationwide backbone fiber optic network in 2005, the company will become a major player in the Chinese communication market by offering the convergence of telecommunications, digital cable TV, and the Internet.  On one hand, the company could lease part of bandwidth to the existing telecom companies like China Telecom and China Netcom and on another hand, will provide affordable voice over IP services to both corporate and retail customers in China.  The company expects to generate additional revenue of $10 million from this nationwide backbone fiber optic network.

Together with the existing business, the company forecasts that revenues for the fiscal year ending December 31, 2005 will be not less than $35 million.  With such revenue level, the CCCI will likely achieve a small profit for the year of 2005.

As is the case with every equity investment, there are certain risks that are associated with a commitment to CCCI.  Foremost among these risks is the obvious “country” risk that is associated with CCCI.  Although China has made significant strides in becoming a more open society, it’s still a communist country, with strong central control.  Although the Chinese economy has been among the fastest growing major country economies in the world, recent signs of economic softness have led some investors to adopt a cautious attitude.  If economic conditions soften further in China, this would have an adverse impact on the company.  CCCI trades on the OTC Bulletin Board, and is subject to the risks associated with that status.  Until the time that CCCI can achieve a level of full listing on the Amex or Nasdaq, trading could be volatile given the nature of the Bulletin Board market.  Accordingly, we believe that only investors that can accept a high degree of risk should currently consider the stock.

A prime objective of CCCI management is to become the largest broadband optical fiber network operator in China and, by consolidating the existing 1,800 CATV operators, to become a leading cable TV operator in China.  As such, investors have the opportunity to get in on the ground floor in a company that is poised to take advantage of the greatest potential communications market in the world with a convergence of high technology services.  Accordingly, for high-risk oriented investors, we rate the CCCI shares as a STRONG BUY.

Regulation Analyst Certification:  I, John D. Attalienti, am the research analyst who wrote this report and I certify that the views expressed in this research report accurately reflect my personal view of the subject company.  As the sole owner of Barrow Street Research, Inc., I have benefited from this research report in the amount of $5,000.  Such compensation may influence the recommendation in this report. Dated September 13, 2004

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