Profit from China’s Ad Bonanza

05/11/2011 2:19 pm EST


Robert Hsu

Editor, China Strategy and Asia Edge

Chinese advertising leader Focus Media is up to new tricks in its hunt for fresh eyeballs even as sales and profits boom, writes Robert Hsu, editor of China Strategy.

In just about any Shanghai high-end office building, visitors and employees will see screens just a little above eye level in all the elevators, showing ads of major brands. And most of these flat screens belong to Focus Media (FMCN), the largest outdoor media company in China.

Founded in 2003, Focus Media is China's leading multi-platform digital media company, with a network made up of 36,000 flat-panel displays in 52 Chinese cities. Focus Media runs advertising from more than 900 brands, including most of the major domestic and international brands that advertise in China.

And the company has been a strong performer as of late, for four main reasons:

  • Strong consumer spending trends in China
  • Bigger advertising budgets, given fast-growing ad rates
  • Entry into the transportation advertising market by way of cooperation with VisionChina Media (VISN)
  • Network optimization, which should benefit both billing rates and utilization rates

On the back of this support, the company reported strong fourth-quarter revenues of $159.7 million, up 16.3% from the previous quarter and 10.6% year-over-year—and sharply higher than analyst consensus of $142 million.

Non-GAAP earnings of 38 cents per share were also ahead of the Street forecast for 37 cents per share. Gross margins climbed to 59.2% in the fourth quarter, from 49.5% in the previous year, while fourth-quarter operating and net margins came in at 38.2% and 36.6%, up big from 22.8% and 20.8% in 2009.

I was impressed not just with the numbers, but also by the company's new moves and CEO Jason Jiang's discussion on the earnings conference call regarding Focus Media's new growth strategy. For one, the company plans to upgrade its LCD network to incorporate interactive features.

In fact, the big reason behind my not recommending FMCN earlier was because I worried that fewer and fewer Chinese were actually watching its advertisements in traditional office-building screens, mostly because of short time spans and the lack of interactive content. I was afraid that eventually this would discourage advertisers to put ads on the network.

Management recently hinted that new interactive features will be installed in its ad displays to enhance the experience and increase the number of eyes drawn to the screens.

Few details were given, but the company did tell us that it will combine the most advanced location-based services with advertisements, allowing viewers to use their mobile phones to respond to the ads. The new initiative could make ads more constructive, and it also reduces the risk facing the company's network.

Although it may suggest significant capital expenditure in 2012 (the second half of 2011 is just a trial period, so no material spending is expected), I am very positive on this move, and believe this small change will help Focus Media add new customers and charge higher ad rates.

Another plus is the strong recent spending on outdoor advertising by ecommerce companies. So far, four Groupon-like companies have been buying advertisement slots on the FMCN network.

In addition, Focus Media recently acquired a 15% stake in VisionChina Media, the leading media company in the transportation advertising field, and has agreed to buy top Chinese online advertising firm Allyes Information Technology.

These acquisitions gave Focus Media new channels to target China's high-end urban consumers in areas where Focus Media didn't already have a presence.

I am bullish on the company’s growth outlook, and particularly interested in the new initiatives. Given new features, emerging new customers, and several new advertising fields, Focus Media remains in the early stages of growth.

Currently, this stock is trading at 23 times earnings, below its historical high, and I believe that it still has tremendous value.

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