We've made mention on VELA being worse call in 2013.....Mabye it's time to give them a nibble....eh....Most seem to be forgetting their CM Mobile acquisition last year / rapid growth...

Ongoing support at .001 ......

By Tobin Smith | January 16, 2014, 1:36pm GMT 2 seconds ago

Headline: VelaTel (VELA) and CM Mobile—A NEVER Expire $1000 Call Option With 50X+ Upside…Really

Post: The NBTER research team is always looking for major turnaround opportunities…and this opportunity with an old sponsored research client is now too attractive to pass-up. $1000 of speculative money (i.e., money you would never miss) has the potential to become $50,000 or more if our forecast and analysis is largely correct.

As such, buying VELA shares today is like getting a call option on a stock that NEVER expires…with up to 50X upside or $50,000 to gain and $1200-$1500 downside risk to lose for buying one million shares at current valuation.

Not many times does an investor gets a risk/reward opportunity like that…here is the turnaround and upside story.

DAVID—this is the rest of post.

The VELA/CM Mobile Turnaround Opportunity

Velatel—the name strikes fear and loathing into our old ChangWave Research subscribers…ah the nightmare.

VELA (then ChinaTel or CHTL) was UP 15X for us is six months 2009-2010…subscribers earned tens of $millions in profit…well those who sold at $2 from our .28 cents entry point.

Then VELA crashed 99.9% DOWN after they invested $220 million+ over the last four years in search of an insurgent mobile network carrier strategy and business model to capitalize on the 5000% growth rate of 4G LTE/broadband wireless technology in China/Hong Kong and Southeast Asia (according to Jupiter Research 2014-2020).

That was then…this is now. We now believe Velatel Global Communications, Inc. (VELA) has actually executed on a significant value creation engine for the company and its long suffering shareholders.

Here is the story…judge for yourself. (Disclosure: entities NBT controls own 25 million VELA shares and have previously been engaged in investor relations and financing engagements for the company).

The Compelling Upside Potential: 40-to-60X Appreciation over 18-36 Months.

It is simple math: for approximately US $6.5 million VELA recently acquired 100% of CM Mobile, a 13-year old licensed mobile virtual network operator or MVNO located in Hong Kong. Over 125,000 prepaid and post-paid customers (mostly frequent business travelers from China who travel to Hong Kong/Taiwan/Macau) use CM Mobile to save 75% OFF roaming charges from their local mobile network operator.

With over US $14 million+ in forecast 2014 revenues and $1.6 million pro-forma 2014 cash flow, VELA recently refinanced CM Mobile at a $10 million valuation or approximately $80 per CM Mobile subscriber (80% of which are pre-paid subscribers)… and VELA still owns 100% of the company.

We will cover the massive 10X-20X CM Mobile growth strategy in a moment…but bear-in-mind…

Currently, the ENTIRE market cap value of VELA is around $1.2 million…yes that is right. As a 100% consolidating subsidiary of Velatel Global, 100% of CM Mobile's revenue and EBITDA cash flow will be reported by VELA in 2014.

That is upward of $1.4 million in EBITDA based on their disclosed financials.

CM Mobile's 2013 cash flow now exceeds VELA market cap…amazing. MVNO companies are valued at 4-8 times EBITA...VELA is now valued at .8X estimated 2014 EBITDA for CM Mobile or less than 1X earnings before interest, depreciation and amortization expense.

Even assuming VELA's equity ownership stake of CM Mobile is reduced to 60% from additional equity capital (and a 25% investment option held by a major $billion mobile network operator is exercised) there is currently @$5 million mispricing of VELA stock valuation vs. CM Mobile or 5-to-1 upside at current valuations.

Again…CM Mobile's current $10 million private market value ($80 per subscriber) and its very real

> $400,000 per quarter cash flow vs. VELA the publicly traded holding company $1.1 million market cap is a massive disconnect in valuation.

The mispricing is primarily due to a set of disastrously dilutive equity financing transactions for VELA over the last 36 months. We will go over how THAT dilution disaster has been largely solved too…at the end of this report.

KEY POINT: With $10M of real value in its 100% owned subsidiary CM Mobile, and $1.2M market cap for VELA…new shareholders get an enormous discount to real private market value of VELA assets. THAT means very limited downside and enormous upside potential as the CM Mobile growth story goes main stream.

OLD shareholders crushed should, in my opinion, throw a few $thousand into VELA from cash lying around in an IRA and NOT LOOK at the stock for a few years…just for the helluva it!

If you have any original shares, you should sell them in late 2014 for tax loss (if they are held in a taxable account).

The Massive CM Mobile Growth Story

A very significant million+ subscriber sharing deal with $billion Singapore mobile network operator StarHub is the main growth catalyst for CM Mobile over the next 12-24 months (which we will address later in this report).

But it's the infrastructure upgrade for CM Mobile that makes massive subscriber growth possible for its superior value proposition for Asian business travelers.

400X Capacity Expansion: CM Mobile's wireless network capacity is currently under a 400X expansion to 5 million subscriber capacity (up from just 125,000) with a system upgrade from ancient 2G technology to a state-of-the-art 4G-LTE wireless broadband network. The network expansion is schedule for completion in late March/April and is FULLY paid for via a third party equipment financing.

Ancient 2G to State-of-the Art 4G-LTE Broadband Upgrade: Most of us cannot even remember what a 2G wireless service is—but even with their dinosaur network CM Mobile has sold out 100% of its 125,000 user capacity for years. With a state-of-the-art 4G-LTE network upgrade and 5 million subscriber capacity improvement, CM Mobile will be able to vastly expand its subscriber base AND charge a premium for 4G-LTE service.

The reason?

CM Mobile's Killer Value Proposition: Savings of 75%+ On Voice and Data Roaming for Chinese/Asian business travelers to Southeast Asia AND a local phone number in up to 9 countries means NO long distance rates. Anyone who travels with a mobile device knows the egregious price gouging your mobile network operators (MNOs) tries to hit you with. Similarly we are well acquainted with the huge long distance premium charges our local phone company charges us for calling Europe/Asia or anywhere outside of North America.

Not surprisingly (if you know China business ethics) China-based MNOs like China Mobile/China Telecom etc. are some of the worst offenders on both roaming and long distance charges to their customers. With more than half of the 130 million Chinese travelers outside of China in 2013 business travelers (an estimated 75 million in 2013) to Southeast Asia or gamblers going to Macau, solving this price gouging issue makes business sense AND is cultural—Chinese HATE to pay too much for anything.

The Unique CM Mobile Solution: Up to NINE Local Mobile Phone Numbers & 75%+ Discount on Voice/Data Roaming Charges. Traditionally for travelers to avoid heinous voice and data roaming surcharges, they have been forced to carry multiple phones, use a multi-SIM card phone, swap their SIM cards as they travel, or some other inconvenience to facilitate local communication with low cost roaming.

CMMobile's customers desire local numbers where they travel most (called an IMSI in telco speak for International Mobile Subscriber Identification number), usually in multiple countries, and they want this functionality ALL from a single phone.

In addition, for many business people operating in multiple countries, having a local number links them to the culture of that particular country…very important in Asia.

The unique/proprietary CM Mobile solution to price-gouging roaming charges is a multi-number (multi-IMSI) service operating on a single handset (smart phone or traditional phone). Unlike other mobile virtual network operators who simply buy mobile minutes at a wholesale rate from mobile network operators and resell them at a discount, CM Mobile has substantial in-house expertise, proven operational infrastructure and its unique to Asia multi-IMSI, multi-phone number, multi carrier integrated core network that supports its unique service offering.

Operating a multi-IMSI/multi-phone number telecom business is quite complex. Unlike traditional MNOs and MVNOs, CM Mobile currently maintains three blocks of IMSIs and phone numbers from multiple countries/regions. The operate their own network operations center (NOC) with its own telecom switch, billing support systems, customer service, 24/7 call center and direct sales personnel.

As a licensed Hong Kong MVNO, CMMobile has its own IMSI and block of Hong Kong phone numbers. CM Mobile also owns/shares IMSIs and holds connectivity sharing agreements in:

Mainland PRC China (through China Mobile and its 700 million mobile subs)
Hong Kong via CSL (CMMobile is CSL's largest MVNO partner)
Taiwan (through FarEastTone)
Macau (through Smartone)
Singapore (via a roaming & IMSI sharing agreement with StarHub).

CM Mobile just added a Singapore IMSI sharing deal with Singaporean mobile network operator StarHub…but there is a LOT more to the StarHub relationship.

40-60X Upside Potential over the next 18-36 Months. With the massive 400X expansion of CM Mobile due for completion in April, and a major customer sharing agreement signed with StarHub (details in a second), we can project from 40 to 60-to-1 UPSIDE for VELA shares over the next 18-36 months as a massive expansion of CM Mobile's service rolls out to frequent business travelers in China/Hong Kong/Singapore/Taiwan.

Again simple math: $80 value per subscriber (each current subscriber generates on average $84 a year in network usage fees) each additional million subscribers adds $80 million in network value. For a number of key reasons we will go over in our VELA investment case, we can forecast 1-2 million additional CM Mobile customers over the next 18-36 months at $7 monthly average revenue per user (in telco jargon ARPU).

In addition, as a full blown MVNO wireless telco analysts will HAVE to start to cover CM Mobile at the very least…and soon thereafter VELA the owner. THAT in itself will get the story out to institutional investors in the mobile telco space.

In short, the CM Mobile/VELA story will go from invisible to highly visible as the high value CM Mobile story unfolds.

The 40-60X VELA Upside Investment Case

We believe that because of VelaTel's:

Extremely opportunistic $6.5M acquisition price of CM Mobile and its recent $80 per subscriber valuation of $10 million
2014 estimated $1.6 million EBITDA on existing CM Mobile subscribers or .8 x EBITDA valuation (CM Mobile revenue and EBITDA 100% consolidates to VELA income statement)
$3 million/400X expansion of the CM Mobile network from 125,000 simultaneous user 2G wireless capacity to 5 million 4G-LTE user capacity (already financed and under deployment for early second quarter 2014 completion)
A major roaming agreement recently signed with $billion Singapore mobile network operator (MNO) StarHub which immediately allows CM Mobile's customers to (Phase 1) roam on StarHub's global network including Singapore and later in phase 2 (post network upgrade) shares prepaid and post-paid customers
The new 2014 telco regulation in Singapore which requires Singaporean ID for prepaid phone card buyers. Based on the Phase 2 part of the StarHub agreement (when CM Mobile's capacity expansion/4G-LTE network is in operation), we assume that many of the millions of StarHub prepaid phone card owners without Singapore ID currently on the StarHub network will likely migrate to CM Mobile when they "top-off" their cards to add more minutes/data.

Otherwise these customers…and $165 million in unearned revenues (source: 2012 StarHub annual report)…will be LOST to StarHub since they cannot renew these phone cards on their Singapore based network. NOTE: We assume most StarHub prepaid phone card holders are NOT Singaporean…according to Wikipedia the entire city/state of Singapore has only 5.3 million population but over 6.4 million mobile subscribers with Singapore mobile network operators StarHub/SingTel/M1 with @80% of those subscribers postpaid—i.e., billed for their wireless service as opposed to buying prepaid service plans. StarHub sells prepaid phone cards in dozens of Southeast Asia countries via regional/local distributors and reportedly has over 4 million outstanding prepaid phone cards. Telco companies only count phone cards that are active and account for these phone card sales as "unearned revenue" until the presold minutes are consumed. StarHub reports $164 million (Singapore dollars are 80% of US) on their latest annual report. (Source: fiscal 2012 StarHub annual report calendar year ending 2013).

In short…prepaid phone cards are a MAJOR part of StarHub's $1 billion in mobile revenues—they HAVE to have a strategy to retain effective control of non-Singaporean phone card customers.

Significant CM Mobile revenue growth at @US$7 a month average revenue per user (ARPU) from 5 million user upgrade and shared/migrated StarHub prepaid phone card holders (note: from StarHub fiscal 2012 income statement of $164 million in unearned revenue for their active prepaid phone card network comes to 1.95 million active prepaid phone cards based on our estimate of $7 ARPU per month).
Significant positive EBITDA growth and value creation to CM Mobile from the StarHub prepaid phone card owner migration relationship at $80 annual ARPU per pre- paid phone card (i.e., StarHub prepaid card holders without Singapore ID who renew/top-up their prepaid cards on the CM Mobile platform).
High gross margins retained by CM Mobile from organic growth and StarHub IMSI sharing creates significant growth in CM Mobile cash flow and business value 2014-2016.
StarHub's option to acquire 25% of CM Mobile at the THEN market value determined by 3rd party valuation (which with StarHub's 20% revenue share on all shared/ migrated subscribers and elimination of StarHub customer service expense now borne by CM Mobile gives StarHub a majority of the consolidated gross margin from the CM Mobile business). We assume this conversion most likely occurs at a relisting/IPO for CM Mobile in 2016 where a public valuation will be made according to fairness opinion from the 3rd party underwriters. CM Mobile was previously part of a Hong Kong exchange listed holding company…as such re-listing on the Hong Kong Exchange should not be a problem because their financial statements and audits were publicly disclosed for years and will continue as a subsidiary of VELA.
VELA's completion of their Croatia/Montenegro 4G-LTE network upgrade (already financed with equipment giant ZTE) and sale of those networks/spectrum to larger incumbent 4G-LTE mobile network operators with a minimum of $2 million net cash back to VELA available for stock repurchase/warrant/note redemption (this is NBT's projection NOT VELA)

Our operating assumptions for VELA over the next 18-36 months with CM Mobile include:

CM Mobile is on-track to organically and via the StarHub IMSI sharing relationship grow rapidly to 1-2 million subscribers (including 250,000 unshared 4G-LTE CM Mobile subscribers primarily in China) at US$7 average revenue per user (ARPU) over the next 18-36 months.
With the upgrade to a full blown 4G-LTE network (from the ancient existing 2G network), CM Mobile will upgrade a significant number (>20%) of its existing and new subscribers to a 30-50% higher priced subscription for broadband 4G-LTE service connectivity.
>One million+ eventual shared prepaid phone card customers with StarHub, a dramatic increase in monthly prepaid and postpaid CMMobile subscribers and higher monthly ARPU revenues is a virtual certainty based on the new Singapore ID requirements for prepaid phone card marketing.
@$150 million business valuation for CM Mobile is reasonable upon a Hong Kong Exchange listing at 2016 annual run-rate $60 million of recurring subscription revenues (as mentioned CM Mobile was a subsidiary of a HK listed company and will most likely re-list with a HK equity underwriting).
In the case of a HK public listing any difference between the HK valuation of China Mobile and the holding company Velatel would be arbitraged OUT by arbitrage hedge funds going long VELA and short CM Mobile (similar to buying Yahoo shares to reflect the embedded value of their soon-to-be public affiliate 24% Alibaba).
VELA will use a significant portion of its vast increase in 2014-2016 cash flow to repurchase a majority of its outstanding Class A common shares while at >80-90% discount to private market value (including shares held by dilutive equity line shareholders).
A $75 million market cap for VELA (which values its eventual post IPO 51% equity stake in a publicly traded CMMobile at 90% of CM Mobile public market value) would take the share price (assuming no further NET dilution at VELA level) to 7.5 cents a share from the current .0012 share price…60X the current value of shares today.
An end to the VELA Shareholder dilution disaster is near…read on.

The VELA Shareholder Dilution Disaster Solution: While we expect SOME additional dilution from conversion of some outstanding VELA warrants, NBT assumes that VELA will repurchase a significant amount of any additional dilution from its CM Mobile cash flow and other asset sales (namely its valuable Balkan 4G wireless operations/spectrum) to OFFSET any further NET dilution to VELA shareholders.

The main cause of the disastrous VELA dilution has been a "deal with the devil" type of accounts payable financing with Ironridge Capital (IR). According to our review of the deal, VELA has paid off this heinous financing and is in fact OVER paid according to the payment terms of the contract.

We assume that in the worst case IR is now an "affiliated/control shareowner of VELA because of amount of shares it currently owns in VELA and thus is severely limited in its ability to sell those shares as they become tradable. According to sec.gov, "If you are an affiliate, the number of equity securities you may sell during any three-month period cannot exceed the greater of 1% of the outstanding shares of the same class being sold, or if the class is listed on a stock exchange, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144. Over-the-counter stocks, including those quoted on the OTC Bulletin Board and the Pink Sheets, can only be sold using the 1% measurement."

IN addition, with the $400k of cash flow from CM Mobile, we assume that VELA will finally have the financial wherewithal to repay ANY outstanding fees/payments to IR in CASH.

In addition, as VELA completes the upgrade of its two mobile networks in Croatia and Montenegro late this year, management tells NBT the plan is to SELL them to the incumbent wireless network operators (who desperately need VELA's wireless spectrum to growth their own 4G-LTE networks).

THIS cash…we assume $2 million+ in net proceeds (again a NBT estimate, not VELA's)…will add to the VELA stock repurchase war chest. Today these valuable 4G wireless spectrum assets are valued at ZERO…again another consequence of the dilution disaster.

Similarly, from their latest 10Q, we assume that outstanding warrants on 300M shares are mostly underwater as only 150M are exercisable under one penny. Outstanding promissory notes are payable in cash as well with most warrants WAY underwater.

Bottom-line: relative to the disastrous dilution over the past 24 months, the VELA dilution spigot is now manageable and with REAL cash flow the end of the dilution disaster for VELA shareholders is at least in sight.

For long suffering VELA shareholders it now appears to be the time to add enough shares to get a cost basis under .002 cents for new VELA shares…let it RIDE for a few years…and sell the few post reverse split shares you own (if any) late in 2014 to harvest tax loses if they are held in a taxable account.

The CM Mobile Story

CM Mobile is the leading mobile virtual network operator (MVNO) in Hong Kong, with more than 125,000 customers. CM Mobile was the first company in Hong Kong to offer customers a single SIM chip with dual number capability for use in either Hong Kong or China, and is the longest running MVNO in Hong Kong, operating since 2001.

In China their mobile carrier partner is China Mobile, the world's largest mobile carrier with over 700 million customers.

As an MVNO, CMMobile partners with leading mobile carriers in the Asia Pacific region to provide mobile wireless network services to retail customers. CMMobile is a "thick"MVNO which means the company uses its own Network Operations Center (NOC), billing support systems, customer service, 24/7 call center and direct sales personnel.

CMMobile's business model focuses on frequent travelers who conduct cross-border business between Hong Kong, Taiwan, Macau, Singapore and mainland China. This allows CMMobile's customers to have a point of presence in these areas; the added benefit of having a local number in each desired country allows local contacts to reach to CMMobile's customers without making high priced long distance calls.

CMMobile offers both prepaid and post-paid plans, which provides customers incredible savings whether they travel once or several times in a year. CMMobile also offers Incoming Prepaid SIM Chips that give customers traveling to the Asia Pacific region from other parts of the world the ability to save up to 75% off typical international roaming charges while keeping their same number (where available).

The core competence of CMMobile is the company's ability to offer a great service with very useful Value Added Services, all while slashing typical international roaming rates.

Value Added Services

Multiple IMSI's and numbers on single SIM chip.
All numbers are able to receive calls even though one number is active at a given time.
SMS texting from multiple numbers.
Long distance calls at local rates.
Vast distribution networks for easy purchasing and recharging.
Business and family bundling on Post Paid Plans.
In house 24/7 Customer Care in 4 languages.
Concierge and Answering services.

Risk Factors

NBT has withheld research of VELA for a long time. We have followed and reported on the company as a courtesy to the shareholders we introduced to the company who got completely wiped out…our worst outcome in a stock recommendation in 30 years by a country mile.

At this point, with positive cash flow and network expansion funded, the biggest risk we see to VELA is the SAME management team that BLEW $220 million is now leading the turnaround. We have been highly critical of CEO George Alvarez and COO Colin Tay for entering into a haphazard portfolio of wireless ventures ALL that required consumer marketing expertise—of which their team had ZERO consumer marketing expertise.

So too it's fair to say that their ambition for building 4G-LTE wireless networks out of orphaned spectrum in developing countries was ultimately RIGHT but without sufficient capital to finance their vision VELA has been mostly a very efficient capital destruction vehicle.

But the ONE thing this management team has IS tenacity…I literally cannot conceive of sticking with this vision considering the horrendous experiences they have lived through over the last 4 years (which includes being swindled out of $200 million by a PRC telco company et al).

At this value…shares are simple a call option on VELA simply executing on its CM Mobile business plan…a call option that NEVER expires. In short…at such a mispriced value the downside is virtually nil…and the upside could be as amazing as our first 10X ride on VELA in late 2009.

If you have some fun money to play with, this is a much better upside than going to the blackjack table…really. Give it a look…buy some shares at this is insane value…and let it ride!

Tobin Smith

Founder & CEO| NBT Capital Markets LLC

Washington D.C. | Los Angeles | New York | Palo Alto

301-412-8622 (mobile: text = best bet) |240-483-4629 (office) |tsmith@nbtgroupinc.com