Creative’s US$1bln technology bet Zii could show up in TV set-top boxes, digital signage systems and mobile phones from other manufacturers next year. Zii is a low-powered & low-cost computing platform aimed at a broad range of manufacturers as building blocks for mobile phones and other electronic devices. It features ready made tech that can be put together like a Lego set, allowing manufacturers to get new products to the market as fast as possible.

Future Zii-powered devices could include those that run on internet search giant Google’s upcoming Chrome computer operating system which could bring Zii into the realm of netbooks.

A Zii set top box could cost about US$50, making it significantly cheaper than existing products in the marketplace today, which should appeal to producers of digital signage systems found in shopping mails which typically comprise big screen TVs displaying advertisements.

Creative launched a Zii mobile phone last month which runs on the Google mobile phone operating system Android.

With Zii, Creative is trying to emulate the business model of Intel Corp which not only produce chips but also designs chipsets as well as work with software vendors to ensure their applications run well on their hardware. Creative is going one step further in making near complete products which manufacturers can use to churn out their own finished products faster.

The time savings for companies who adopt the Zii platform is estimated to be as much as 1 year.

Management expects this new platform to be able to earn significant revenues in future but declined to provide forecasts.

Management targets China as the near term target market given the willingness of manufacturers there to try new technologies.

As noted in the Hock Lock Siew (HLS) column in Business Times today, Creative’s new tech idea Zii coincided with a revival in the company’s share price. Indeed, the huge addressable market, positive initial reviews from tech blogs as well as encouraging tieups with famous tech giants such as Google makes the new tech idea sound promising.

However, we agree with the HLS columnist that a promising start does not equate to top and bottomline success, as finally the key to success is getting the idea into mass adoption by end users. And in this regard, Creative again faces a very steep uphill tasks as it again faces very established and deeppocket giants such as Nokia, Apple, Sony just to name a few. We understand that even Google’s attempts to penetrate into the mobile phone area is facing huge resistance from end users who are used to existing platforms.

And it is again useful to be reminded of Creative’s numerous failed past ventures with their only known success to be the Sound Card business which is obsolete today. Last year’s promising inPerson video conferencing product which was supposed to takeoff has yet to show results.

Creative’s 4Q ended June ’09 sales fell 38% to US$86mln while bottom-line swung to a loss of US$14mln, dragging full year loss to US$139mln. Management warned in their outlook statement that the market for their core products remain difficult and unpredictable and expenses will rise as they market their new Zii platform. This suggests that they will continue to remain in the red in the near term.

Fortunately for them, financial position remains sound with net cash of US$250.55mln against zero debts while shareholders funds total US$322mln.

With the price surge on the back of the excitement of the new tech platform, the stock is now trading at 1.1x price to book despite its continued loss making position and management’s warning of the downbeat near-term outlook. We maintain SELL.