A Chinese Bargain on Display

07/30/2008 12:00 am EST

Focus: GLOBAL

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor-in-chief of China Stock Digest, sees potential in this beaten-down Chinese company.

Focus Media Holding Limited (Nasdaq: FMCN) endured a 10% hit to its revenue stream when Beijing clamped down on so-called SMS (short messaging service) advertising. Focus Media used these text messages for advertising, which Beijing regarded as spam and imposed a ban.

The company was further beaten down when earthquakes ravaged Sichuan province, destroying some advertising facilities and disrupting revenue streams. These two shocks cut anticipated revenues for 2008 from more than $900 million to less than $880 million. We believe the bad news has now been priced in, and the stock is positioned to resume its rise to previous highs.

Founded only four years ago, Focus Media now calls itself China's largest "out-of-home media company". In practice that means the company has blanketed China's first- and second-tier cities with tens of thousands of display ads in variety of vivid advertising platforms.

Through rapid acquisition of competing or complementary companies throughout China, Focus Media has grown explosively to become a dominant player in a few short years. With more than 200,000 display venues and a presence in movie theaters and shopping malls, Focus Media continues on a growth trajectory.

Although competitors are emerging, Focus Media continues to stake out new territory with a presence in all but one mainland province, 90 cities, and operations in the special economic zone of Hong Kong. Focus Media appears to be well positioned to resume growing its earnings in tandem with the burgeoning middle and upper class that the company has targeted in China. The firm has indicated it may also pursue expansion in other emerging Asian nations.

Although the company posted a rare loss in the first quarter of 2008, for the second quarter, it said it expected to return to a profit, excluding option expenses and acquisition-related costs, of 40 cents to 41 cents per diluted ADS. Analysts had expected a 46-cent-per-share profit. For 2008, the company has forecast a profit, excluding stock option costs and one-time items, of $1.76 to $1.91 per diluted ADS.

With the exception of its recent setbacks, Focus Media has a track record of exceeding expectations and expanding aggressively into new areas. Total first-quarter revenues grew by an impressive 214.7% [over last year] to $161.6 million.

Focus is delivering an unprecedented growth trajectory, justifying the company's relatively high P/E multiple. We believe the shares currently trade at a significant discount to the company's trailing and projected revenue growth rate. We're targeting a sell price of $60.00 a share as it recovers from the shakeup in its mobile phone business and from earthquake disruptions. (The ADRs closed at $TK Thursday-Editor.)

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