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.
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