China Tracker - Details for China MediaExpress (CCME)

 China MediaExpress
 Analyst Coverage
2011-03-21Global HunterDowngradeTerminatedn/a
 

We are discontinuing coverage of these companies due to the departure of our analyst and due to a shift in our resources to other areas in the China space.

2011-03-17Northland SecuritiesDowngradeTerminatedn/a
2011-03-15Global HunterDowngradeSuspendedn/a
2011-02-01Global HunterReiterationBuy$26.00
 

In the last few days, we talked to a number of CCME’s customers and bus operators. The advertiser customers we spoke to confirmed their 2010 revenues with CCME, and stated that they continued working with CCME in 2011. Among the customers, Shanghai Apollo, a company owned by Shanghai People’s Fine Arts Publishing House, a state-owned company with 50+ years history and strong industry relationships, confirmed that they bought approximately 7 minutes (~RMB50MM revenue) in 2010 and expect to buy similar amount of advertising time from CCME in 2011. These advertisers and bus operators confirmed that CCME is the only inter-city bus media company with a national coverage and quality services.

2010-12-17Global HunterReiterationBuy$26.00
2010-12-06Global HunterUpgradeBuy$24.00
 

CCME shares dropped significantly last week, which we believe was unrelated to the fundamentals of the company. CCME recently added 2,000+ buses to its inter-city and airport bus network and we expect continued expansion going forward. The company's strong balance sheet should support its growth strategies, through network expansion and other value-added services. Shares are currently trading at 5.2x our FY10 EPS, and only 3.7x if backing out the $170MM net cash ($4.40/share). We believe the valuation has become more attractive and therefore upgrade our rating from Accumulate to Buy and maintain our $24 price target.

Share drop not related to fundamentals. Shares dropped 16% during the past week. We believe this was unrelated to any change in the fundamentals of the company. The only news during the week was that the company’s largest institutional shareholder, Starr International, sold 150k shares to its employees at cost of $9 per share, giving them opportunity to invest in the company. Ying Dorothy Dong, a CCME director and a Starr executive, filed Form 4 this morning disclosing purchase of 25k shares with total value of $225k. We believe this should only be interpreted as the fund's continued confidence in the company.

Continued network expansion. In the past month, CCME has added 2,067 buses into the network: 635 buses in Henan and 1,432 in Hunan province. The company now has over 26,400 buses in its inter-city and airport bus network. We expect more buses to be added in the following months and continued network expansion in FY11. We believe the company is working on other strategic initiatives as well. The strong balance sheet (with net cash of over $170MM at end of Q3) should be able to support its growth strategies.

Q4 outlook. We expect the new buses to contribute earnings in 1Q11, since it usually takes 1-2 months for the advertising business to ramp up in a new region. Still, we expect revenue to continue growing in Q4 as the advertising industry enters its high season. We are increasing our Q4 revenue slightly from $58.3MM to $59MM, net income from $25.5MM to $26.6MM, resulting in FY10 net income estimate of $104.4MM, just above the high end of the company’s net income guidance of $100MM-$104MM. We believe these estimates are conservative.

Share count and estimates adjustment. CCME went public through a SPAC transaction in October 2009. According to the earn-out agreement with SPAC, once CCME reached an $83.5MM net income target for FY10, CCME is allowed to issue 7MM new shares to management after the annual report is audited (which should be March 2011). We included those shares in 4Q10 in our previous estimates to be conservative. To be more in-line with projected GAAP reporting numbers, we moved the 7MM shares to 1Q11 when they are expected to be issued. As a result, the weighted average diluted share count in Q4 is lowered from 47.5MM to 39.3MM shares, and our Q4 EPS estimate is increased from $0.55 to $0.68. Our FY10 EPS is increased from $2.67 to $2.83. Since the company is allowed to issue another 7MM shares in March 2012 once it meets the $130MM FY11 net income target, we are moving the 7MM new shares from 4Q11 estimate to 1Q12 for the same reason. Our FY11 EPS is increased from $2.69 to $2.84. We also have established our FY12 estimate, projecting $339MM in revenue (16% YoY growth) and $2.85 in EPS. Progress in the company’s other initiatives could bring upside to the estimates.

Upgrading from Accumulate to Buy. Our outlook remains unchanged. CCME continues to be a niche player in the inter-city and airport bus market. With its strong balance sheet, we believe the company can execute its growth strategies, through both network expansion and other value added services. After the recent decline, the shares are now trading at 5.2x our FY10 EPS estimate. Backing out $170MM net cash ($4.40 per share), shares are trading at 3.7x our FY10 EPS. We believe the valuation has become more attractive. We therefore upgrade our rating from Accumulate to Buy and maintain our $24 price target, which is 8.5x our FY10 EPS estimate.

2010-11-09Northland SecuritiesReiterationBuy$32.00
2010-11-09Global HunterDowngradeAccumulate$24.00
 

China MediaExpress (CCME) reported strong Q3 results that beat our/consensus estimates, driven by continued network expansion and favorable margin mix. The company generated strong operating cash flow and further strengthened its balance sheet with $170MM in net cash by quarter end. Management raised its FY10 net income guidance. We are increasing our FY10 and FY11 estimates. Shares are trading at 8x our FY11 EPS estimate, which we still consider as inexpensive. However, shares have rallied 180% from its bottom since September, and exceeded our previous price target of $21. We expect some profit taking after this substantial rally. We wait for further indication from management on the use of cash, including a potential dividend policy. We believe a dividend distribution would certainly help unlock the remaining value for shareholders and could serve as the next catalyst for the stock. However, given the appreciation in shares, we are lowering our rating from Buy to Accumulate while raising our 12-month price target from $21 to $24, representing 9x our updated FY11 EPS estimate.

Q3 beat. CCME reported Q3 revenue of $57.0MM, slightly ahead of our/consensus estimates of $55.6MM/$56MM. This represented 118% YoY growth and 6.4% QoQ increase, primarily driven by continued expansion in network coverage. Net income of $31.1MM or $0.81/share exceeded our estimate of $27.6MM or $0.76/share. The company generated strong operating cash flow of $31MM for Q3 and $69MM for the first three quarters. At the end of Q3, CCME had $170MM in cash and no debt, up from $139MM net cash at Q2 end.

Network expansion continued. The company increased the number of bus operators and number of buses from 59 and 22,775 at the end of Q2 to 63 and 24,400 at the end of Q3, respectively. The network now covers 18 regions in China. The company plans to add another 1,000-2,000 buses before year end. During Q3, CCME expanded its airport bus network to include Changsha and Chongqing airports in addition to the airports in Guangzhou, Fuzhou, Beijing, and Qingdao.

Gross margins maintained at high levels. Q3 gross margin was 76.8%, which was relatively stable from 78.7% in Q2 and compared to 67.0% in 3Q09. The YoY improvement was primarily due to increased contribution from its higher-margin airport bus segment, which contributed $15MM, or 26% of Q3 revenue, up from $13.1MM (or 24%) in Q2 and $7MM (or 16%) in Q1. In addition, increased contribution from embedded advertising and sales to direct advertisers which carry higher margins also contributed to margin improvement. Management expects gross margins to stay above 65% in the next 2-3 years as increasing concession costs are expected to be partially offset by ASP increases and the potential launch of new higher-margin services.

FY10 guidance raised. Management raised its FY10 net income guidance from the prior $82MM-$85MM to $100MM-$104MM, driven primarily by network expansion. The guidance indicated Q4 net income expectations of $22MM-$26MM. Although management expected additional expenses in Q4 related to new projects such as tour buses, and some marketing costs to promote the company's brand name, we view the new guidance as conservative because Q4 is typically a peak season for adversing business.

Raising estimates. For FY10, we are increasing revenue estimate slightly from $211MM to $213MM, net income from $100MM to $104MM, and EPS from $2.61 to $2.67. For FY11, we are increasing revenue from $288MM to $291MM (37% YoY), net income from $131MM to $133MM, and EPS from $2.65 to $2.69. We expect the growth during the next year to be driven by continued network expansion and higher ASP's. The company plans to increase ASP's by roughly 15% in January given fairly full utilization. In addition to network expansion, the company also considers increasing advertising time slots available from the current 20 minutes to 30 minutes to add capacity.

Raising price target but lowering rating from Buy to Accumulate after the recent rally. We expect the company to continue growing driven by market demand, network expansion, and increasing ASPs. We believe shares are still inexpensive at current levels, trading at 8x our FY11 EPS, or 6.3x if backing out net cash of $4.40 per share. However, shares have climbed 180% from its bottom in September and exceeded our previous $21 price target. We expect some profit taking by investors after the substantial rally. Therefore we are lowering our rating from Buy to Accumulate, although we are raising our price target from $21 to $24, which is 9x our increased FY11 EPS estimate. We wait for further indication from management on the use of cash, either for new projects or for a dividend. We believe a dividend policy would help unlock the remaining value for shareholders and could serve as the next catalyst for the stock.

2010-10-15Global HunterReiterationBuy$21.00
 

CCME works with ~30 ad agencies who contribute ~70% of total revenue, with the remaining 30% from direct advertisers. We interviewed a number of ad agencies and direct advertisers, including agencies which purchase advertising time in Beijing and Guangzhou airports. The revenue amount these agencies disclosed to us matched that in the sales contracts and the customer list and revenue breakdown presented by CCME. These customers represent annual contract value of approximately RMB400MM ($60MM), or ~30% of our estimated ‘10 revenue. The agencies receive business either directly from brands or from 4As or other large advertising agencies. These advertisers stated that CCME’s large network and quality customer service make it the top choice in the inter-city bus market.

CCME’s network currently covers over 60 bus operators and close to 25,000 buses. The bus operators we interviewed ran a total of 4,000 buses. They receive concession fees ranging between RMB600 and RMB1,500 per bus per month, which we view as considerably low as compared to its peers in other outdoor media markets. We believe the low cost is due to a lack of major competitors in this niche market as well as weak bargaining power from bus operators who operate in a highly fragmented market. Concession fees typically account for 70%+ of COGS of a media company. Continuing to control concession fees is a key task for a media company. We believe this low level of concession charges explains CCME’s high margin profile.

We took CCME’s buses in Beijing, Fuzhou and Guangzhou to view its operation and programs. The programs were rotated with 30 minutes of entertainment content and 10 minutes of advertisements. We saw brands including multinational names such as Pepsi-Cola, P&G, Coca-Cola, Siemens, and Samsung, and well-known domestic brands such as China Mobile, China Post, Wanglaoji Beverage, Tongyi Green Tea, Huangjin Dadang Nutrition and Yili Dairy, among others. Bus operators expressed favorable feedback from passengers; we believe the availability of various entertainment content makes passengers more receptive to advertising programs.

We met with regional managers in charge of sales and customer service in Beijing, Guangdong, Sichuan, Jiangsu, Hubei and Fujian. We cross checked with them the number of buses, top agency customers and total revenues in each region. Currently there are ~30 people in each region who provide customer service to existing customers and develop new local customers (esp. direct advertisers) in the region.

We visited Starr’s Shanghai office and met with directors who stated they have done a thorough due diligence before their $30MM investment in January, including hiring ACNielsen to conduct due diligence and market research, and Deloitte to audit CCME’s financials. They indicated that they monitored CCME’s operation and financial results on a monthly basis and continued to believe in its fundamentals, which is further evidenced by Starr’s additional investment of $13.5MM announced earlier this week to purchase 1.5MM common shares from early investors of the company.

We have spent substantial time and effort in our ongoing due diligence over the last three months, the results of which reinforced our thesis. Shares are currently trading at just 6x our ’10 EPS (or 4x after backing out $139MM or $3.89/share in net cash). We expect more positive catalysts in the near term as the company continues to expand its network. As such, we reiterate our Buy rating and $21 price target, which is 9x our ’10 EPS of $2.38.

2010-09-16Global HunterReiterationBuy$21.00
 

At yesterday’s closing price of $7.83, the shares are trading at 3.3x our ’10 EPS estimate. If we back out the $139MM net cash, the shares are trading at 1.7x our ’10 EPS, which represents an unwarranted discount to the double-digit levels in the peer group, in our opinion. We view the recent stock volatility as a buying opportunity. We reiterate our Buy rating and 12- month price target of $21, which is 8.8x our ’10 EPS estimate.

2010-08-16Global HunterReiterationBuy$21.00
2010-08-13Northland SecuritiesReiterationOutperform$25.00
2010-07-28Northland SecuritiesInitiationOutperform$22.00
2010-07-01Global HunterInitiationBuy$18.00
CCME
Media & Advertising

COVERAGE SUSPENDED OR TERMINATED
 
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Current Price:  n/a
F10k Day (2009-10-20): -100.00%$9.20
2009 Close: -100.00%$10.60
2010 Close: -100.00%$15.84
2011 Close: -100.00%$0.02
High (2011-08-03): -100.00%$1.50
Low (2011-11-30): -100.00%$0.01
Exchange: N/A
Market Capitalization: n/a
Total Shares: 38.43 mill
Float: n/a
Avg Volume: n/a
Last Quarter: 2010-09-30
Revenue (MRQ): 56.96 mill
Net Income (MRQ): 31.13 mill
Op. Cash Flow (MRQ): 30.75 mill
all financial data provided without warranty