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Focusing on a Chinese Media Play
12/06/2007 12:00 am EST
James Trippon, editor-in-chief of China Stock Digest, finds a rapidly growing Chinese advertising company whose growth is strong but whose share price has tumbled.
Focus Media Holding (NASDAQ: FMCN) is back in our sights with a Buy Up To price of $51 a share. The China-based advertising company recently reported that third-quarter earnings rose 73% as revenue more than doubled. Remarkably, that result disappointed some analysts, knocking the stock down in value and creating a potential buying opportunity.
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.
The company’s best-known medium is a network of flat-panel LCD television displays in high-traffic office areas, including elevator banks, targeting business professionals with higher-than-average income. Going into 2007, Focus Media had placed approximately 85,300 flat-panel displays in more than 90 cities in China.
Other forms of advertising media can be found at entertainment and social venues, shopping districts, on mobile phones, and in residential complexes. The company transmits six unique advertising channels, including two Premier Office Building Channels, The Elite Channel, as well as a Fashion Channel, Travel Channel, and Health Care Channel. More than 3,000 domestic and international brands, including Nokia, Toyota, P&G, China Telecom, Hennessy Cognac, Fujifilm, TAG Heuer watches, China Netcom, and Motorola, advertise through Focus Media.
The company’s in-store network has approximately 38,700 flat panel displays targeting shoppers in supermarkets, so-called “hypermarkets”, and convenience stores with eye-level messages at the point of purchase. Other media include framed posters and light-emitting diode (LED) billboards.
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.
The company is pushing forward with an aggressive expansion program, acquiring other media firms, most recently Allyes Information Technology Company. With the acquisition of Allyes, Focus Media raised its total 2007 revenue estimates to $390-$400 million, a substantial boost from the previously announced range of $350-$360 million. Allyes was acquired with a combination of cash and shares. In its most recent report, Focus Media said it expects profit margins to rebound as it digests recent purchases and splits off its wireless services division.
Although competitors are emerging, Focus Media continues to stake out new territory with a presence in 90 cities, operations in the special administrative zone of Hong Kong, and all but one mainland province. Focus Media appears to be well positioned to continue growing earnings in tandem with the growing middle and upper class that the company has targeted in China. The company has indicated it may also pursue expansion in other emerging Asian nations.
With a market capitalization above $6 billion and a one-year revenue growth rate above 200%, Focus Media has earned a high valuation with a P/E above 48x. (The stock closed near $55 Wednesday—Editor.)
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