A "Focus" on China...

01/27/2006 12:00 am EST


James Oberweis

President, Oberweis Asset Management, Inc.

Jim Oberweis has just expanded his role from advisor to manager, with the recent launch of his new fund, the Oberweis Chinese Opportunities. Here, along with Jeff Papp, he looks at one favorite stock which, in line with his new fund, focuses on an opportunity in China.

"Focus Media Holdings (FMCN NASDAQ), based in Shanghai, is a speculative stock and our top pick for 2006. The company derives its revenues from operating a network of flat panel televisions throughout the highest foot traffic areas in China. It runs continuous advertisements on TV's in office buildings and retail stores. While the company's business may seem difficult to comprehend for US investors, the business is very profitable and common practice throughout China.

"Focus Media was an IPO at $17 last July. While the stock has risen 100% since then, we feel optimistic that continued growth will lead the stock even higher. So what will be the growth catalysts to propel FMCN even higher? First, the company has a commanding market share position within the commercial segment of its business. Currently, it has over 70% of the market for TVs located in office buildings in the major top tiered Chinese cities. While growth may seem limited due to the already high penetration rate in top tiered cities, the company has been aggressively expanding into China's second and third tier cities.

"In addition, the company has been targeting other areas for television advertisements including grocery stores, hypermarkets, and other retail venues. Finally, as Chinese consumption growth increases, with a corresponding increase in wage growth, companies are likely to beef up spending on advertising. This should play right into the hands of FMCN and could allow for potential price wars between advertisers battling for space on FMCN's TV's.

"FMCN has executed well so far in taking advantage of its favorable market position, as evidenced by its latest reported quarterly financial numbers. In FMCN's latest reported third quarter, FMCN's revenues leaped 146% from the corresponding year ago period. Equally impressive was the company's bottom line, which saw the company produce earnings per diluted American depository share of $.19, which compares very favorably to a loss in the year ago period.

"But what could potentially go wrong on our thesis for FMCN? First, government regulation risk is always a major concern when dealing with companies outside the US. For example, the Chinese Government could impose a restriction on the number of advertising displays to alleviate consumers from being bombarded with ads. This potential action could restrict future growth opportunities for FMCN, given its largely penetrated top tiered city base.

"Secondly, competition is always a concern, even despite FMCN having such a large market share advantage. FMCN's major competitor commands much of the remaining market share in the commercial business and could provide resistance to FMCN's future growth. While we remain very positive on the growth prospects for FMCN for the next year we remain cognizant of the risks that are involved that could impact FMCN's growth and stock performance. However, taking into account the risk/reward equation, we feel that the potential upside for FMCN is much greater than the downside risk and look forward to watching this relatively unknown small cap company grow. We consider the stock a strong buy."

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