As China’s economy continues to expand, the amount of discretional spending and demand for consumer products ramps higher. Acorn International (ATV) has been meeting this demand through its TV shopping business which is aired on the country’s four national channels as well as 40 smaller regional channels.

The company is somewhat similar to Focus Media in that it generates revenue through advertising to the general population, but ATV actually covers more of the process by not only delivering the advertising to the consumer, but also delivering the product to the consumer and collecting payment for the merchandise.

CIBC estimates that the market for TV shopping is roughly $1.4b in 2007 and sees the entire market growing by 20% through at least 2010. One of the reasons this market is so healthy is that China continues to struggle with its infrastructure. Since freight and transportation issues abound, it is easier for a consumer to purchase something over this television network than try to get to a city store that may or may not have been able to secure sufficient inventory of the desired item.

Retail sales in China are increasing at a robust rate due to the ever expanding GDP growth. While monetary policy is trying to put somewhat of a damper on this growth to keep the expansion sustainable and keep it from overheating, the Chinese economy should continue to grow and consumers are not likely to pull back their newfound demand for goods and services anytime soon. TV sales represent 0.1% of retail sales and that compares to 7.5% in the US. If this were to increase to just a small fraction of the US demographics one can imagine the increase in demand for ATV’s business.

One of the issues that has the potential to impede ATV’s growth is the working capital that is necessary to maintain the business. Currently, the company has to pay for the ad spots ahead of time on the television networks. It also keeps an inventory of the items it sells. When consumers purchase the products, the company usually delivers the product and receives cash on delivery (COD) which takes more time for the ATV to actually receive the revenue. If China begins to use more credit cards for these type purchases, ATV will receive its revenue much more quickly allowing it to reinvest that capital in larger marketing campaigns.

While the stock is not cheap, I believe the EPS growth justifies a premium multiple and would expect the stock to trade higher from here. There was a warm reception to the IPO back in May as the stock priced at $16 but hasn’t traded below $22 since the first day of trading. The stock has pulled back over the last month as some of the hype from the IPO was likely digested. This pullback likely offers a good chance to pick up shares and I will be considering a purchase shortly.

FD: Author does not have a position in ATV