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CCME article
http://china.fixyou.co.uk/2010/05/growth-and-shareholder-dilution.html
Growth and Shareholder Dilution
posted by The Traveller on Sunday, May 30, 2010
In the China Small Caps space we find very many companies that grow net income by 30% and more year-over-year, so we can safely categorize them as 'Growth Stocks' by definition. However, it isn't actually net income growth that matters for valuation, it is EPS growth -- and here the picture can look quite different if we go into detail. Shareholder dilution is a common problem amongst US-listed Chinese stocks and while I do fully understand the need to raise money to fund growth, we have to look if the significant increase of the share count does actually translate into EPS growth for shareholders.
Let's have a look at seven randomly selected names in the China space, seven stocks that cover a variety of industries. All are traded on senior US exchanges.
OT Steeledge
Are you still holding CYDI ? Im down pretty big on a very small holding.Worth holding on to ?
Great point Fernando.I think you are right.Its amazing though the shares were scooped up, must have been an institutional investor who bought.I believe with that large of a sell imbalance and a low float stock it could have been a lot uglier.All in all CCME performed well.
I believe sentiment is changing back for China.First it starts in the press and then the talking heads on tv and finally investors.One week ago every single China article written was negative.Now the articles are more evenly balanced and actually thought provoking.I am heavily invested in China stocks and believe that we will manage through this period but i am not a blind long who sees no risk.Here are two well written articles on the China economy.One is negative to cautious and the other is neutral to positive.I believe both are objective and well written.More importantly we are starting to see balance in the western news.
http://news.xinhuanet.com/english2010/indepth/2010-05/26/c_13317099.htm
http://www.nytimes.com/2010/05/26/world/asia/26beijing.html
Forget Europe, eye China: I see fast-growing companies selling cheaply
Peter Siris
http://www.nydailynews.com/money/2010/05/24/2010-05-24_forget_europe_eye_china_i_see_fastgrowing_companies_selling_cheaply_.html
Forget Europe, eye China: I see fast-growing companies selling cheaply
Peter Siris
Monday, May 24th 2010, 4:00 AM
Favre/BloombergShoppers walk in a street lit up electronic billboards and neon signs in the shopping district of Mong Kok in Hong Kong. Related NewsAt the arthouse: 'Holy Rollers' meet 'Wave'Toyota recalls Lexus cars in Japan, US to followDalai Lama trashes China for censorship, propagandaGOP wins House seat in Obama's home stateWhite House: Obama fully supports S. Korean president's response to N. Korea attackI do not try to time the stock market because I don’t know where momentum will take it. Instead, I focus on valuations of individual stocks. When a stock looks cheap, I buy. When it gets expensive, I sell.
I am usually early, dumping when markets are making new highs and jumping in when others are frightened. In short periods, my picks may underperform, but over time my discipline works well.
A few weeks ago, I wrote about how stocks had become expensive as complacency ruled. I did not expect the market to come down as fast as it did, but now complacency has been replaced by an ocean of worry and many stocks have gotten cheap.
The best way to tell is to look at smaller companies that usually lead bull markets up and bear markets down. To tune out the noise, I focus on companies that have little to do with the current economic problems confronting the world.
I began writing this before heading once again to China, so I decided to look at some of my favorite U.S.-listed Chinese stocks that I’ve bought for my fund. As always, if you’re thinking of investing, you’d be wise to do additional research.
Understand that these stocks are much more volatile than the big-caps. A profit disappointment can send one of these stocks reeling.
I have excluded those with exposure to Europe and Chinese real estate. I found a lot of bargains.
For example: food companies that sell their products in China. These companies have nothing to do with Greece, and the Chinese have to eat, so they should not have been impacted the past few weeks. These firms are growing rapidly but their stock prices have been trashed.
Yuhe, which sells chickens, is selling at low valuations, as is American Lorain, a packaged food company.
I think earnings will accelerate in 2012. China Marine, a seafood company, is another, as is Zhongpin, a fast-growing pork company, and Yongye, a fast-growing fertilizer company.
The problems in Greece will not cause the Chinese to eat less chicken or pork. Restrictions on real estate in Beijing will not impact how much fertilizer a peasant in Inner Mongolia uses, and financial regulation in the U.S. will not cause a slowdown in the purchases of packaged foods in China. In other words, these stocks have declined for irrational reasons and are now selling at prices that I don’t think will last.
Health care is also a very stable business that should not be impacted by the problems frightening investors, and China is ramping up health care spending. China Pharma, a fast-growing company with a strong drug pipeline and a great management team, is selling at a low valuation, as is China Sky One.
China Yida, a dynamic tourism and entertainment company regarded as the Disney of China, is also cheap. Do you think Chinese are going to give up their modest vacations because of economic problems in Europe?
Unrest in Europe and in China should be bullish for companies that provide security services, yet two of the leading players in China have gotten very inexpensive compared with the profits they generate. They are China Security and Surveillance and China Information Security.
Other companies like Wonder Auto, Puda Coal, Gulf Resources, Fushi Copperweld, Harbin Electric, Soko Fitness and QKL Stores are all selling at prices that don’t reflect their growth rates.
These stocks can go down further if people panic. But when I see fast-growing companies selling so cheaply, I know that it’s time to start buying. So I’m on my way to China to find more bargains.
Your Money columnist Peter Siris is an investment manager at Guerrilla Capital in Manhattan.
I am afraid NOT ?
Could you elaborate .
Could you post what you are afraid not ?
I know its not going into the Russell 2000 .
But is it going into the Russell Global Index instead ?
Based on a post on CGS looks like CCME will go into the Russell Global Index. I wonder what the volume of share purchase that funds must buy is any where near the Russell 2000.I know the Russell 2000 is usually good for a pop at re balancing because of funds buying.
Dont know
But shares traded on most liquid excange is Amex .I think the other two parameters fall in china so you may be right.I think you saw the write up that had them going to the Russ 2000.So i am confused.
http://china.fixyou.co.uk/2010/05/russell-2000-reconstitution-preview.html
China MediaExpress: Q1 Results Confirm Strong Fundamentals
http://seekingalpha.com/article/206026-china-mediaexpress-q1-results-confirm-strong-fundamentals
Recently I presented a long thesis on China MediaExpress (CCME), a China outdoor media company that broadcasts commercials on long distance express buses.
On May 14, 2010, the company issued 2010 Quarter one earning report and held a conference call.
The Conference Call
Revenue increased by 137% to $44.5 million as compared to $18.8 million last year; Gross margin for the first quarter was 60%; Net income increased by 143% to $18.1 million as compared to $7.5 million.
As a reminder, For 2009 Q4, CME made $32 million revenue, with gross margin 69%. Net income $14 million. At that time, the company guided a slightly weaker Q1 compare to Q4. They over-achieved in Q1, which was due to several reasons. Compare to 2009 Q4, the CEO quoted that there is an increase in advertising time sold, higher average advertising rates, the expansion in geographic coverage and client base, higher proportion of direct versus agency sales, more embedded soft commercials and, more importantly, they generated $7m by separately packaging airport express buses.
Excluding the airport bus business, CME's revenue keeps growing. It is interesting to note that the typical Chinese spring festival slowdown did not affect CME. Chinese New Year is like Christmas in the States, people travel a lot to reunion with family. Hundreds of millions people get moved in a short period of time. It is not a good time for outdoor media companies like Focus Media (FMCN) which has a strong presence in office buildings, but it is a prime time for an inter-city express bus media company like CME. Instead of giving up two weeks' revenue as seen in Focus Media, CME collects the full revenue, then some. CME must have felt a weak season in 2009 due to the global recession and guided accordingly, but this year it actually increased advertising time sold this quarter versus last quarter, a seasonally strong quarter.
The airport express bus business is a good move. The CFO commented that its margin in this quarter is low, which I estimate to be about 30%, but will be "much" higher than their usual business in the future, which would put it into 70%+. The currently low margin is due to higher setup costs. My understanding is that the cost will probably stay since it is mainly the concession cost but the rates on these routes will increase much faster in the future.
The gross margin of Q1, 60%, is much lower than the gross margin in Q4, 68%, and that raised some concern. The cost jumped from $10 million in Q4 to $18 million in Q1. My understanding out of the conference call agrees with my earlier guesses. The existing express bus market has already been occupied by various players, with CME controlling 50% of it. To get new buses, CME can no longer go through the old ways by signing up bus operators directly with little signup fee. Many smaller media firms already have agreements with bus operators. CME has two options to acquire them, either through assets acquisition or through equity acquisition. CME chose the former because it did not want to buy the management of those smaller firms. So they bought off the assets from the media firms and paid high concession fees up front to break the lease between the previous media firms and the bus operators. The upfront concession fee is now typically between 50,000 RMB, or $7,400, and 100,000 RMB, or $15,000. It is amortized for the whole lease period, typically 5 years to 8 years. Moving forward, this should be the business norm.
Note that the concession fee is on the scale of one year revenue, which is amortized evenly on the entire contract duration. This means a difference of about 20% gross margins between new buses and old buses. This cost structure is much easier to understand than if they do acquisition by equity.
Now let us look at some numbers on the bus count. At the end of November 2009, CME's bus count was 20,000, and it acquired 1,000 new buses in December. It acquired an additional 500 buses in the first quarter. Its compressed margin is out of concession adjustment year of year, which I assume to be probably 15%, the addition of higher cost assets, and the addition of new assets which have lower margins to start with. In the future, if we assume that the economy does not have a major correction, and the company's revenues continue to pick up, we should see two forces working on the gross margin: Organic growth will expand the margin; The addition of new bus routes will compress it. For 2010, I expect the gross margin to expand from quarter to quarter.
In Q4, CME was expecting to convert 35% of revenues to direct sales by end of 2010, but they've already achieved this goal in the first quarter. Now they are expecting 50%. The CFO acknowledged that there is potentially a conflict of interest between its ad agency and its direct sales efforts since this will hurt the ad agencies. He shrugged it off, explaining that so far, no big deal. My take is that it is a tricky situation. It depends on CME's market position. It is possible that if CME had enough market power it could afford hurting ad agencies.
The expected one-time charge on Starr International preferred shares was $9.2m , which can be totally ignored. It is a non-cash item and only affects the book value calculation. For a company like CME which has very high ROIC and P/B at 4, book value does not mean much. A more pertinent impact is the share dilution, which is accounted for in the EPS calculation.
The CFO also mentioned that he is meeting with more institutional investors and sell-side analysts to promote the stock.
Other points to take away from the question and answer sessions:
There seem to be rumors that CME may choose to be listed on Nasdaq instead of AMEX. When asked, the CFO said something pretty much to the effect that it was one of their options, but they had no commitment and the whole thing is confidential. I personally don't see much benefit out of the move, but I assume that AMEX traditionally has been linked to low quality firms, so that there is some motivation to link the name with Nasdaq or the NYSE main board. If the stock does move, it may help the stock to gain full recognition.
The management confirmed that they are doing acquisitions but they are just getting the assets. A follow-on question asked about their acquisition P/E since CME only acquires the assets and shares the SG&A, this question seems a little out of the context.
New expansion ideas. CME is onto something. The CFO repeated some ideas that they are pursuing, the old ones being commercials in the bus station and etc. A newer idea he presented is to garner revenue from the travelers, as well as from the advertisers. Materials similar to "SKy Mall" on planes could be offered to passengers to promote products and services. The CFO also hinted that they have a relatively large project in the making, which is related to 'transportation media' and which requires signing contracts. No other hints were given. The only thing that rings a bell to me is to have media on trains. I know some companies are already in the market. But there could be many other possibilities, which I have no knowledge of.
The CFO commented that their original plan to reach 84 million net income in 2010 included expansion of the bus network to 30,000 buses, which will cost $20 to $30 million cash. It is unclear if this is still management's plan. I also doubt if that is management's best choice. CME already has the best routes in their market. Acquiring the rest will be of less and less efficient use of capital. The 500 bus acquisition for the whole first quarter certainly does not make it look like they are going to acquire 8,500 buses in the next three quarters. If I had to guess, I'd say the CEO has a new plan.
An analyst went to great lengths to have the CFO confess that they are low-balling the full year estimation, which currently stands at $73 million, but a linear extrapolation of the current quarter earnings puts the whole year's earnings at $72 million. I believe that transparency is universally liked on Wall Street. The management should learn to make conservative, but not overly conservative, estimations.
I called in to ask some questions. My questions were very lame. I asked two house-keeping questions. One was to make sure that they don't have legacy assets from their previous Focus Media joint venture. The other was to get to the calculation of deemed dividend. The answers came back within my expectation. The third question was on the option offering. The CFO clarified that it won't be significant since the founder is already incentivized with earn-outs. Those options are going to be for the lower employees.
As a conclusion of the conference call, CME proves itself to be a very well run company. I expect it to over-achieve the bonus share benchmark, $83.5 million in net income, this year since it already made $18 in the first quarter and it has other cards under its sleeves.
Post Conference Call Events
Soon after the conference call, two significant events were announced by the company.
On Monday, the company signed up 816 buses in Inner Mongolia with the same acquisition method I mentioned above. It showed the commitment of management to continue its expansion plan by acquiring assets. The concession fee was not stated in the press release. However, I expect that the rate comes below 50,000 RMB per bus it paid in Guangdong.
On Wednesday, the company announced that it will move its stock listing to the Nasdaq Global Select market starting June 3rd, confirming the rumor. This move is very significant. AMEX has historically been linked with low quality companies, but Nasdaq Global Select Market has been developed for the highest quality companies in the Nasdaq, above Global Market and Capital Market. Market Cap is not what makes the Global Select Market, but the financial standards and corporate governance is.
NASDAQ developed the initial listing standards for the NASDAQ Global Select Market to be the highest financial standards in the world. In addition, NASDAQ Global Select Market companies have to satisfy all of NASDAQ’s corporate governance requirements, which we believe are already superior for investors and for companies. NASDAQ is continuously looking for ways to enhance our market and bring more transparency to investors." -- from Nasdaq FAQ.
I received quite a bit of feedback since I wrote my long thesis, many comments related to concerns about the stellar numbers. I hope the Nasdaq approval is another endorsement on their book besides many other endorsements I mentioned in my previous writeup.
Looking forward, the stock will have more liquidity due to future inclusion in many indexes, such as the Russell 2000. Its market cap is already more than $500 million, which I expect to move north of $1 billion soon. Sell-side coverage seems to be coming sometime soon.
Based on all these facts and some of my reasonable guesstimates, I advocate going long on this name.
Disclosure: Long CCME
China Economy: Short-Term Volatility, Long-Term Stability
http://seekingalpha.com/article/205761-china-economy-short-term-volatility-long-term-stability
Nevertheless, a 20-year prediction of growth on the mainland from a non-Chinese government authority is a notable indication that Chinese stocks may be undervalued in the short-run, considering the economy’s long-term prospects.
up to 22,300 buses
Wow
I missed the wow on the CC.
So WoW .
Excellente news
Can you get to the part to chose your media player ? Try the other media player i.e real player.
http://investor.shareholder.com/media/eventdetail.cfm?eventid=80732&CompanyID=ABEA-3WTP6Z&e=1&mediaKey=761A92FA0816E8EB83B4B0EA40CA8AAC
Ryan
The link works fine for me.I just opened it again.Did you register at the beginning ? Otherwise it could be a browser issue.Try clearing your browser and see if that works.
Thanks again i thought they did a solid job and are building tremendous credibility.Here is why i think organic growth is short term ( next year or so ) a much bigger bang for the buck.Acquisitions are much more delicate and riskier.So i would have liked to get more definitive answers on why so few announcements lately and when will this pick up to reach that goal,. Sometimes management can go in too many different directions.Someone asked Jackie about upsetting his current advertisers by him selling to the customer and he admitted that this is possible.I know that they are adding internally and i hope that we will see organic growth ramp up in this quarter.I was just disappointed with so many questions being on accounting or other issues.I am thinking organic growth ( contracts ) is the key for the next year.
I listened to the CC an thought everything was solid.I think Fernando asked the question about reaching the 30000 bus count total at the end of the year but i wasn't clear about his answer.I wish more questions were asked about that because we have 5 months in the bag and at this rate they wont hit that target.I loved Jackie answering the man with the French accent who kept pressing on guidance.He kept doing the math comparing slow to fast quarter saying you are going to hit this no matter what.He was telling Jacie you basically already have that number baked in.Finally Jackie gave in.He did express being conservative about being cautious and i have to believe people are concerned about the government hitting the brakes to hard on the China economy.Thats exactly why a lot of China stocks traded here are getting such low PE ratios along with dilution worries which CCME does not have right now.I also thought i might have heard him say he couldn't talk about acquisition right now like he may have one and cant say.I was just reading into his comments but it is really hard to know if it is because of his not being proficient in english or he was not able to be more clear because something is in the works.I really wish we got more of a definitive answer and questions on bus additions and will they hit 30000.Maybe he said it but it wasn't clear to me.
CCME
CC
Replay link
Was on a field trip to the Miami Seaquarium with my daughters 4Th grade class so i missed today.I sort of expected the stock to sell off.Still the best long term play in this world.Ill listen to CC tomorrow.
http://investor.shareholder.com/media/eventdetail.cfm?eventid=80732&CompanyID=ABEA-3WTP6Z&e=1&mediaKey=761A92FA0816E8EB83B4B0EA40CA8AAC
CME Has Plenty Room to Grow
I will try to answer another question in this section: Will this company be able to grow as fast as the management planned to be? While I am being conservative in downplaying the management’s estimation, I believe that it is quite likely that they make the projection, because the management has quite a few cards under their sleeves that they can play as they stated in their prospectus.
Expand its coverage. Since CME only controls 50% of the market, it is signing up new buses. So far CME has chosen to buy assets or sign new contracts, the expansion is organic and we do not see any hard-to-justify goodwill on its balance sheet.
Raise advertising rates. The economic recovery and the New Media as a secular trend work together to increase the business spend in outdoor advertising. With its CPM advantage, there is ample room for the company to increase the rates. I estimate that we should see at least 15% increase in advertising rate this year. The company is also going to price the first minutes in the advertising slots at a premium because those minutes are generally considered more effective.
Sign up direct customers to increase the gross margin. The company is using ad agencies to sign up customers mostly, but it is now moving to sign up more direct customers. In 2009, direct customer’s revenue composes 21% of the total revenue. The company is targeting 35% in 2010. The margin difference between the two is 10 to 15 points.
Sell special package and rates for its airport shuttles and other types of buses with more defined audience.
Generate revenue from soft commercials embedded in regular entertainment programs.
Establish stationary advertising media.
Offer travel related services through broadcasting to travelers.
M&A.
The majority of those strategies are well within the company’s easy reach. The beauty of them is that they can be implemented within the market CME dominates. This probably explains why the management was so bullish in projecting their growth to begin with.
The Thesis
So here is my thesis. I believe CME is built on a solid ground and is fast growing in a dominated market. For historical reasons, it is selling at half the price I think it should fetch NOW. Even after the price doubles, I believe the stock is still cheap given the opportunities available to CME.
The Catalysts
Two catalysts are out there. First is the usual earning reports, which I expect to prove to more investors CME's unique position and value. The company pre-announced its first quarter report, and you can read the analysis from fellow Seeking Alpha author Super Trades. Second is sell side analyst coverage. After Pali Capital went out of business, its star Chinese stock analyst, Tian Hou, and her team went to join Auriga USA. She has started covering the companies she covered in Pali, expecting to gain businesses from those companies. I believe that she has good knowledge of CME and will start cover it, with the same expectation.
Why Is It So Cheap Then?
Well, you might now wonder why such a cheap stock exists in the market and why someone did not push the price higher. I believe that there are five reasons.
This is a relatively new company in the market through reverse merger, which does not typically get good attention.
Pali Capital, a decent boutique investment bank who was involved in the reverse merger, went bankrupt, and thus this stock does not have good sell side coverage.
Chinese companies, especially those through reverse merger, are often “too good to be true”, and do not have enough respect from the buy side.
The companies in its sector each had or is having some problems, which casts the long term value of outdoor media in doubt.
The recent resignations of two directors, who were original management of TM, raised some doubts.
For the first issue, CME did try to do a proper IPO back in 2008 but withdrew due to the very poor market condition. It later on entered a binding reverse merger with TM. On one side I wish it came in the market with a proper IPO; on the other side I would not get this stock cheap if they had.
For the second issue, it was unfortunate for Pali Capital to go under. I liked research reports prepared by Pali and had tremendous respect for its business. Pali Capital went bankrupt due to its internal management problem. CME lost the only possible analyst coverage due to Pali’s demise. The lack of coverage suppressed the current price, so I hope my writing-up will help this company to a degree.
For the third issue, it is true that many Chinese companies have accounting issues. I have written articles discussing various accounting or business issues I found with US listed Chinese companies, such as Lihua International (LIWA), Rino International (RINO), VisionChina (VISN) and Fuqi International (FUQI). In a way, I have a nose for fraud. I do look at various metrics and evaluate their trends in the context of the business model. I did the same thing on CME.
I have also been a longtime investor of Focus Media and VisionChina, and developed quite good understanding of China outdoor media business through their successes and failures. I cannot find alarming problems of CME either qualitatively or quantitatively. There are also three external parties endorsing CME's book. TM negotiated the deal, and we can tell that TM performed extensive due diligence and set up favorable terms for the TM investors. Starr International’s background is also a strong endorsement. Its terms with the CME management, while protect itself, protect external investors as well. Finally Deloitte has signed off 10-K for 2009. If CME were a fraud, it would really have to be a "perfect" fraud.
For the fourth issue, the issue was rather with very competitive environment, which is not the case for CME. Focus Media had a powerful competitor and was pretty much forced to adopt very aggressive acquisition strategy to gain market share. Its acquisition practice became more reckless under the pressure and caused huge write-offs when tides turned. Vision China had the same issue. AirMedia suffered from the lack of negotiation power with its supplies.
CME has no equivalent competitors in its dominated market, and its suppliers, the bus operators, are much less concentrated and sophisticated than airports. It is unlikely that CME is going to repeat the same problems its peers had. With the very observable value it creates for its customers and its monopoly position, I believe that this company is producing long term value for both its customers and its investors.
For the fifth issue, I looked up the company history again. It appears that before the resignations, four independent directors were added to the board after the two original board members. It is not untypical for a foreign company to have only three independent directors, the minimum required to meet the listing requirement. So it seems that adding four new independent directors and then removing the two existing ones was a planned action.
So I believe that the reasons suppressing the stock price are non-issues.
China MediaExpress: China's Hidden Gem, Part 1
http://seekingalpha.com/article/205019-china-mediaexpress-china-s-hidden-gem-part-1
China MediaExpress’s (CCME) business has a wide moat and untapped pricing power but its stock is currently priced less than half of its closest peers' stocks, providing a significant margin of safety.
It will announce earnings report for 2010 Q1 Friday morning, which it already pre-announced a couple of days ago. I expect that instead the typical 'sell on news,' this stock will go up on old news since it is very undervalued and under-recognized now.
New Media as the Secular Trend
China MediaExpress falls into a sector that I am most familiar with: the New Media in China. In the past, I have followed quite a few stocks in this sector, such as Sina (SINA), Sohu (SOHU), Focus Media (FMCN), AirMedia (AMCN) and VisionChina (VISN), and invested in several.
The New Media is a very attractive sector for several reasons. First, it is a natural monopoly/oligopoly business. Once a media company dominates a particular type of media channel, the same channel can hardly survive a second competitor. Second, the old media -- newspaper, magazine, radio and TV -- is on a secular down trend. The emergence of Internet has permanently changed the world we live in. People now can now pick and choose the media they read, watch or listen. Advertisement industry, accordingly, is adapting to this secular trend. Businesses allocate more budgets to Internet and outdoor media, where China MediaExpress has a strong position.
Hereafter I will mention China MediaExpress by CME and its stock ticker by CCME.
CME’s Business Is Incredibly Lucrative
CME’s business model is to have on-bus LCDs to show travelers a combination of entertainment program and commercials on long distance express buses in China. Their revenue comes from advertising spend, either indirectly from advertising agencies or directly from end companies. Their cost is mainly on the leases they sign with the bus operators. The high fixed cost in its cost structure provides high operating leverage to the company.
Before CME listed on AMEX, three China outdoor media companies listed on Nasdaq. They are: Focus Media, AirMedia and VisionChina. Focus Media started this business sector by placing commercial-playing LCDs in front of elevators in commercial buildings. It became hugely successful and continued its success by acquiring other media companies before mired in the troubles caused by its reckless expansion.
AirMedia differentiated itself by focusing on the media in airport and on airplane, but it almost has never made money for its investors due to its inefficient cost structure. VisionChina runs TV programs and commercials on city buses, and it followed Focus Media’s example to expand by acquisitions, and that practice soon proved unwise.
CME, by comparison, is a much better run business. The company’s inter-city express bus LCD business does not overlap with any of the public companies mentioned above (reminder: FMCN – indoor LCD business, AMCN – Airport commercials, VISN – City bus LCD), and it is the dominant firm in the niche market it occupies by controlling about 50% of it.
All the other players in the niche market have inferior routes and are much smaller in size. The company has been growing by the organic way only and is thus free from the acquisition problems Focus Media and VisionChina messed up, and its income statement shows that it is very profitable, unlike AirMedia.
CME has been quite lucky, or smart, in its early development. It has done several things right in retrospect. First, it entered a market without too much competition and signed long term contracts with the bus operators. Second, it expanded with organic growth, instead of acquisitions. Third, its media channel is more effective than companies like Focus Media and VisionChina. The audience is committed to stay with the media for the whole long-distance journey.
As the following financials reveal, CME runs an incredibly lucrative business. It has fast growing revenue, expanding margins, low capex and fast growing free cash flow. Its ROE for 2009 was a jaw-dropping 87%. Such an ROE is almost impossible in other industries, but CME monopolized its niche market.
USD (million)
2009
2008
2007
2006
Revenue
96
63
26
4
COGS
33
25
13
2
Gross Profit
63
38
13
3
Selling
4
1
1
0
G&A
3
2
1
1
Op Profit
57
35
11
2
Net Income
42
26
7
1
Gross Margin
65.63%
60.16%
49.22%
62.50%
Op Margin
58.96%
55.71%
42.64%
40.00%
Net Margin
43.44%
41.75%
27.13%
22.50%
Depreciation
3
3
2
0
Investment
2
4
7
1
FCF
43
25
2
1
Cash
57
30
6
2
AR
13
6
3
0
PP&E
11
11
9
3
Assets
83
49
19
5
ST debt
0
0
0
0
AP
2
2
1
0
Equity
48
35
8
2
ROE
87.42%
75.14%
92.11%
56.25%
CME’s Reverse Merger Into TM Under Microscope
Before we go on to the valuation of CME, I would like to have my readers understand its public listing history, which is essential to know in order to understand the gap between its intrinsic value and its current price.
CME got listed on AMEX after it reversely merged into a Blank Check Company, TM.
I strongly recommend that you read the details here.
In my version of summarization, it goes like the following:
TM went IPO on October 17, 2007, raising net proceeds of $79 million. They issued 10.255m units (each unit include one common share and one warrant executable at $5.5/share) to the public. The management issued themselves 2.25m shares and 2.1m non-callable warrants executable at $5.5 on a cashless basis. In case of failing to find a target to merge, TM would use all the cash to reimburse external investors and the shares of the management would become worthless.
During the following years, TM was searching for targets using Pali Capital as the advisor. TM described in its SEC filing four unfruitful attempts it made on different targets before landing on CME. In November 2008, TM started to negotiate with CME for a merge. Previous to that, CME prepared an F-1 filing for public offering in the US market but decided not to file due to the poor market situation.
During the negotiation, CME offered the following historical financials and projections.
(in million USD)
2006
2007
2008
2009E
2010E
2011E
Net Sales
4.0
25.8
63.0
104.2
196.6
305.5
Gross Profit
2.5
12.7
37.9
71.5
140.9
219.5
EBITDA
2.0
12.6
38.0
65.5
128.5
197.8
Pre-Tax Income
1.6
11.0
35.2
60.2
119.4
186.1
Net Income
0.9
7.0
26.4
42.1
83.6
130.3
Based on the proposed valuation of CME and share prices in April 2009, the following comparable table was what negotiating parties used for valuation. It is worth noticing that Focus Media, the China outdoor media flagship company, was not included in this comparable table because it was having internal problems and writing off assets so that its data were not reliable.
EV/Revenue
EV/EBITDA
P/E
2008
2009E
2010E
2008
2009E
2010E
2008
2009E
2010E
VisionChina Media (VISN)
2.2
1.6
1.3
5
3.5
2.8
8.4
7.7
6.2
AirMedia (AMCN)
1.5
1.1
0.9
5.3
6.3
3.2
11.7
15.1
8.8
Baidu (BIDU)
14.2
11.4
8.4
31.2
25.4
18.8
42.8
36.5
27.5
Sohu (SOHU)
3.4
2.9
2.5
8.1
6.8
5.9
11.5
10.8
9.8
Sina (SINA)
2.6
2.5
1.7
11.3
8.1
5.7
15.6
18
14
TM/CME
2.8
1.7
0.9
4.6
2.7
1.5
9.8
6.3
3.9
An earlier comparable table used in December 08, which includes Focus Media, is quoted here:
P/E
2008E
2009E
2010E
VisionChina Media (VISN)
8.3
6.5
5.3
AirMedia (AMCN)
11.7
8.7
7.1
Focus Media (FMCN)
5.1
4.7
3.7
TM/CME
8.2
4.5
2.5
On October 15, 2009, shareholders of both companies approved the deal and the merge took effect. TM paid 20.915 m shares and $10m cash, at the initial valuation of $178m. If CME management may earn up to 15 million more shares if they achieve certain benchmarks. When TM warrants get converted, CME can also get $20.9 million cash from it, thus valuing CME at a maximum of $319m, assuming TM stock price of $8.
At the time of merge, TM also offered its existing shareholders an option to convert their shares to cash. The majority took the offer. 9.6 million out of 10.255 million outstanding public shares converted to $7.91 per share, taking down $76m from the balance sheet. This is very typical for Blank Check company investors as they can now reduce their exposure to the acquired company by redeeming the original outlaid capital and keeping the upside with warrants.
On December 8, 2009, the merged firm upgraded its auditor to Deloitte.
On December 29, 2009, the call option on the warrants was triggered because the stock price stayed above $11.50 for 20 trading days in the last 30. When the redemption was consummated on January 29, 2010, nearly all warrants were converted. $47m was received and $20.9 was paid out to the original CME owners according to previous agreement. Before the warrant triggering, the company managed to redeem 1.9 million at 50 cents each, reducing the share dilution.
On January 12, 2010, the company had Starr International, whose ultimate owner is Hank Greenberg, the legendary CEO who reigned AIG (AIG) for almost 40 years, to invest $30m in the business to exchange 1m preferred shares, which is convertible to 3m common shares, and 1.5m warrants executable at $6.47.
Since the majority of TM shareholders chose to sell back the shares but to keep the warrants, TM used all of its cash for the conversion, leaving no cash to CME. In order to make the benchmark that is hinged on net income, not EPS, CME raised fund from Starr International for potential future acquisitions, effectively selling shares at $8.8/share. This transaction is dilutive to the existing equity holders, but on the other hand, Hank Greenberg’s reputation helped endorsing CME, supporting the business in the long run.
And here is a complete count of major capital structure changes.
TM started with 12,505 m share, 10.255 m callable warrants executable at $5.5, 2.1 m non-callable warrants executable at $5.5, which is convertible on a cashless basis.
TM issued to original CME share holders 20.915 m shares, $10m cash, and $20.9 million extra cash from warrants redemption.
TM issued to the finder 0.1m share.
TM issued to Pali Capital 0.33 m share and .33 m warrants.
TM redeemed 9.6 million shares with $76 million cash.
CME, after reverse merge, issued convertible shares equivalent to 3m shares and 1.5m warrants to Starr International for $40m consideration.
CME redeemed 1.9m warrants at 50 cents each.
CME converted 8.08m warrants, collecting $47m and paying out $20.9m to the original CME owners.
CME issued 1m shares to the original CME owners for making the 2009 net income targets.
If CME makes 83.5m net income in 2010, the original owner will get 7m more shares. If CME makes 130.2m net income in 2011, the original owner will get another 7m more shares.
As of the end of the first quarter 2010, the share count is 36.9m, with contingent 14m pending on operation in 2010 and 2011. Outstanding warrant count is 3.6m, 2.1m belong to the original TM owners and 1.5m belong to Starr International. Total diluted share count is 40.5m, combing the above two items. The company has over $110m cash in hand and its equity after all the transactions is about $102m, roughly $3 book value per share.
If you want to buy but are worried about the swings you might want to buy half.If it goes down barring any disastrous news you buy the other half lower and if it goes up you can buy the other half with some profit protection already built in.Thats one strategy
Amazing CCME is not too far from its 52 week high and China is in a bear market.I know that CCME does not trade on the Shanghai index and a lot of those stocks had PE ratios over 25 but when China turns this stock will fly to even greater heights.
http://www.businessweek.com/news/2010-05-12/china-s-bear-market-stocks-to-rebound-templeton-says-update2-.html
Bloomberg
China’s Bear Market Stocks to Rebound, Templeton Says (Update2)
May 12, 2010, 5:29 AM EDT
May 12 (Bloomberg) -- China’s Shanghai Composite Index, the first of the 10 biggest benchmark measures to enter a bear market this year, will rebound as a surge in exports lowers the risk of a slump in economic growth, according to Franklin Templeton’s local fund management unit.
The index rose 0.3 percent to 2,655.71 at the close, rebounding from a 1.9 percent drop yesterday that pushed losses from a November peak to more than 20 percent, the definition of a so-called bear market. The market’s slide came after government reports showed inflation accelerated last month, bank lending beat estimates and property prices jumped by a record.
“The market has reached its bottom this year and is poised for a rebound,” Xu Lirong, who oversees about $2.6 billion at Franklin Templeton Sealand Fund Management Co. in Shanghai, said in a phone interview yesterday. “Recent declines are overdone and further tightening measures such as interest-rate increases are already priced in.”
Xu joins Hamon Asset Management Ltd.’s Hugh Simon and RCM Asia Pacific Ltd.’s Mark Konyn in saying that the worst is over for Chinese stocks after the Shanghai Composite Index plunged 19 percent this year on concern the government will raise interest rates to contain inflation and crack down on speculation in the property market.
China’s exports increased a faster-than-estimated 30.5 percent in April, easing concerns that Europe’s debt crisis would halt the global recovery. European policy makers unveiled an unprecedented loan package this week worth almost $1 trillion and a program of bond purchases as they spearheaded a global drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.
Preventing Excessive Gains
The Chinese government should focus on preventing excessive increases in asset prices and liquidity after Europe’s loan package reduced the risk of another global slump, according to central bank adviser Li Daokui.
Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said yesterday. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.
“Inflation was in line with expectations,” Konyn, who oversees $12 billion, said in a phone interview from Hong Kong. “The worst is behind us and we are buying on weakness. There’s an opportunity by the fourth quarter for a recovery as measures take effect. It takes time.”
China’s central bank ordered lenders this month to set aside more deposits as reserves for a third time in 2010. The government imposed a ban in April on loans for third-home purchases and raised mortgage rates and down-payment requirements for second-home purchases to curb housing prices.
Possible Crash
Investor Marc Faber reiterated this week his May 3 prediction that China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst.
“We will have a slow down, that’s for sure,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview on May 10. “Will we have a crash? That’s quite possible. China is trying to cool the speculation and that will have an impact on economic activity.”
This year’s plunge in Chinese stocks has “played its course” and consumer companies are among those that may benefit most from a potential rebound, Hamon Asset’s Simon said yesterday.
Only Greece and Cyprus have had a bigger loss among 93 primary stock indexes tracked by Bloomberg this year. The Athens Stock Exchange General Index has tumbled 21 percent on concern the Greek government may default on payments of its sovereign debt.
“China’s fundamentals are much better than Greece,” said Templeton’s Xu. “We are just going to slow growth a bit with the economy at risk of overheating. The risk of a hard landing is very minor because exports have gained strength.”
The decline pushed the Shanghai Composite’s valuation to 19.8 times reported earnings, almost half the 37 multiple during its 2009 peak on July 31, data compiled by Bloomberg showed.
--Zhang Shidong. Editors: Allen Wan, Linus Chua
To contact the editor responsible for this story: Linus Chua at lchua@bloomberg.net
This statement really excites me and makes me understand why we saw so much growth.I dont think anyone on wall street even realizes it yet.What a shame
{The company just reported that its strategy to separate advertising rate charges for different media is paying big dividends. Preliminary first-quarter results show profits of as much as $18.5 million, on revenue that could come in as high as $45 million. That's a 40% sequential top-line increase and a better-than-29% jump in bottom-line numbers, even though the fourth quarter is typically the company's strongest.
}
Im really to excited.Sorry for getting carried away.
Cant post this enough
The company just reported that its strategy to separate advertising rate charges for different media is paying big dividends. Preliminary first-quarter results show profits of as much as $18.5 million, on revenue that could come in as high as $45 million. That's a 40% sequential top-line increase and a better-than-29% jump in bottom-line numbers, even though the fourth quarter is typically the company's strongest.
Still a hidden gem , but not for long
China MediaExpress Holdings Inc (AMEX:CCME) is also up 16.61% to $13.41. The company announced that it expects revenue for the first quarter of 2010 will be in the range of $44 to $45 million, and net income to be in the range of $17.5 to $18.5 million, prior to adjustments for accounting for the convertible preferred shares issued to Starr Investments Cayman II, Inc. in January 2010.
http://www.pennystocklive.com/20100511611/financial-market/big-percentage-movers-bee-niv-gnbt-ccme/
Wall Street's Best Unknown Stocks
http://www.fool.com/investing/general/2010/05/11/wall-streets-best-unknown-stocks.aspx
Wall Street's Best Unknown Stocks
By Rich Duprey
May 11, 2010 | Comments (0)
ShareThisWhen asked for the secret of his success, baseball player Wee Willie Keeler replied, "Hit 'em where they ain't." What worked for Willie at the plate applies equally well in investing.
Seeking stocks that others ignore, shun, or simply forget gives individual investors like you an edge over the professionals. When Wall Street turns a blind eye, you have a chance to get in before these stocks get discovered -- or rediscovered -- and start taking off.
Below, we'll check out companies with only a handful of analyst coverage, then pair our list with the opinions of the Motley Fool CAPS community. A stock that garners CAPS' top ratings, but hasn't yet caught analysts' attention, could be your next home run investment.
Stock
CAPS Rating (out of 5)
Wall St. Picks
Expected 5-Yr. EPS Growth
China MediaExpress Holdings (Nasdaq: CCME)
****
0
N/A
KMG Chemicals (Nasdaq: KMGB)
*****
2
20%
MELA Sciences (Nasdaq: MELA)
***
4
40%
Source: Yahoo! Finance and CAPS. N/A = not available.
Remember, with little or no analyst support for these stocks, you'll have to do your own scouting to see whether they deserve a spot on your portfolio's roster. Don't buy or sell them based solely on their appearance here.
A utility player
China MediaExpress Holdings operates China's largest television ad network on intercity buses. The company just reported that its strategy to separate advertising rate charges for different media is paying big dividends. Preliminary first-quarter results show profits of as much as $18.5 million, on revenue that could come in as high as $45 million. That's a 40% sequential top-line increase and a better-than-29% jump in bottom-line numbers, even though the fourth quarter is typically the company's strongest.
When similarly situated Focus Media (Nasdaq: FCMN) reports earnings later this month, we'll see whether only China MediaExpress's business prospects are growing by leaps and bounds, or whether the boom is more of an industrywide phenomenon. Back in March, Focus reported revenue well ahead of even its own expectations, and forecast solid numbers for the first quarter, too.
Surprisingly, VisionChina Media (Nasdaq: VISN) hasn't enjoyed the same good fortune. It reported yesterday that it suffered a 14% decline in revenues, largely because of rate hikes and an acquisition binge. Apparently, television isn't benefiting from the same growth opportunities that other outdoor and transportation-based media do.
A private placement ChinaMediaExpress completed earlier this year has boosted CAPS member egarl's confidence: "Fast growing with cash to acquire more assets. 2010 will be a rapid growth year for them."
How about this statement
Zheng Cheng, CME’s Founder and CEO, commented, “2010 started on a very strong note. Our top and bottom line for the first quarter exceeded revenue and net income reported in the 2009 fourth quarter, traditionally our strongest quarter of the year. Much of the revenue growth in the current first quarter resulted from increases in our rate card commencing January 2010 and higher advertising rates on the airport shuttle buses, a market we entered in late 2009. We have successfully implemented our strategy to separately package advertising time slots on the airport shuttle buses which as expected generated higher revenue.”
Our top and bottom line for the first quarter exceeded revenue and net income reported in the 2009 fourth quarter, traditionally our strongest quarter of the year.
Our top and bottom line for the first quarter exceeded revenue and net income reported in the 2009 fourth quarter, traditionally our strongest quarter of the year.
Bogus
Thanks for the post.My only worry is that bus contract announcements seem to have fallen behind.We have not heard much lately in bus signing announcements.Am i wrong about this ? If so please correct me.I hope they announce some more contracts soon.
12 AH print.News really hasnt even been released yet except for filing
So EPS should be off the hook if this is their weakest quarter yet they do 18 M without all of the new buses fully included or an acquisition possible .Could an acquisition be in the works ? If they did 18 Mil this quarter what will full year look like ? If they even get half of their bus addition goals what will 2011 look like ? Remember also this is with China stocks being treated like a venereal disease.Where will CCME be when sentiment changes ? Oh it will change China is booming !!
China Bankcard Consumer Confidence Index up 2.67 in April on Economic Optimism
http://english.cri.cn/6826/2010/05/09/1881s568548.htm
Chinese bankcard holders' were increasingly willing to spend in April as optimism about the Chinese economy grew, the latest consumer confidence figures showed Sunday.
The Bankcard Consumer Confidence Index (BCCI) stood at 86.80 in April, up 2.67 year on year but slightly lower than the record high of 86.89 in March.
The Chinese economy recovered with increased demand, industrial output, employment and imports in April.
Moreover, measures to cool China's overheated property market also boosted consumer confidence, the report said.
Many bankcard holders were willing to spend on discretionary items during the many sales campaigns ahead of the Labor Day holidays from May 1 to 3, the report said.
The BCCI index is compiled by Xinhua News Agency and China UnionPay, a national bankcard association.
They jointly started compiling the index in April 2009 based on bankcard transaction data and analysis of structural changes in urban consumption.
Pessimistic views on Chinese economy sensational, misleading
http://news.xinhuanet.com/english2010/indepth/2010-05/09/c_13284246.htm
Pessimistic views on Chinese economy sensational, misleading
by Ming Jinwei
BEIJING, May 9 (Xinhua) -- A few Western economists and investors claimed recently that the Chinese economy could "collapse" due to what many say are overblown fears of a real estate bubble.
These views are really untenable given the fact that the Chinese economy was the first of the world's major economies to bounce back from the lowest point of the global financial crisis and has maintained a good growth momentum since the beginning of this year.
No one would deny that real estate prices in China have risen too fast during the past few years, especially in some major cities, posing a major threat to the country's macroeconomic stability.
The government has announced tough measures in the past few weeks to rein in speculative property buying in the housing market, including discouraging banks from granting loans to speculators and increasing the minimum down payments for homebuyers.
Putting the development of the real estate market back onto a healthy and sustainable track is no easy job. But any claim that the problem could lead to a total collapse of the Chinese economy is nothing but sensational and misleading.
The Chinese economy proved to be rather resilient in the financial crisis. It grew 8.7 percent in 2009, the fastest pace registered in any major economies in the world.
By contrast, industrialized economies including the United States, the euro zone and Japan contracted 3.2 percent as a whole, while developing and emerging economies grew 2.4 percent combined.
In addition, the International Monetary Fund and other international organizations have all expressed confidence in the Chinese economy.
I haven't done the math but pmony5 on yahoo lists full year 2010 PE at 4 and a PE of 2 for 2011.I don't know if that is with just hitting #s or exceeding but its still awfully low.
Sorry back down to 12.44 .As usual a one off !
Rough day.
Any ideas on the after hours print of 12.95 ?
A one off or some news not out ?
Well take it even though its only 200 shares.
Follow through would be nice.
We really have had no news lately aside from the 527 buses
and i would hope a new news cycle would start as i believe new conferences approach.Someone mentioned upcoming conferences but i haven't heard of CCME participation ?
I reread your post and i don't think we really disagree.
It really doesn't matter.I think it should be on the Naz.
I get frustrated at CCME s action especially at the end of trading days.Follow through always seems to be an issue.I really think the stock would behave better on the Naz.One day we might actually get to find out.Good luck to you
( Tell me one thing that would prevent people from taking down CCME at the end of a trading day if the stock is listed on the Nasdaq? There is none in my view)
Really !.
I agree with your points that any stock can be taken down on any exchange but i dont understand why you wont cede the valuation and liquidity points.Fernando posted data on valuation and i think you would agree that the more liquid a market the more difficult to manipulate.I dont think CCME not being above 15$ can only be explained by the Amex but why do companies strive to uplist from the Pinks to Otc to Amex to Naz and or Nyse ?I cant believe you cant see that point.
Thank you even a 10 to 15% higher PE ratio would be a huge difference but a 50% higher PE would be a huge difference.I also believe that it is easier to manipulate a stock trading on smaller exchange.Remember many institutions wont even consider stocks that are not trading on a major exchange thus reducing market players and liquidity.