Chi-scam? Cooked books? Not this one:
[Evening of 9/16/10]
Updated buy recommendation from Global Hunter
China MediaExpress Holdings, Inc.
(NASDAQ: CCME)
Event: $30MM Share Repurchase Announced; Reiterate Buy.
Summary
China MediaExpress (CCME) announced a $30MM share buyback program this morning. We believe this is a materially positive development as it validates the company’s cash balance and management’s proactive stance in defending its equity currency at a time when 33% of the float is short. At the current price, the share repurchase program can accumulate 3.8MM shares or 42% of the ~9MM share public float. Shares were down 9.6% yesterday, and down 27% since August 13 when the company reported strong Q2 results. Q2 results highlighted impressive gross margins, strong operating cash flow ($25MM) and increased cash ($139MM, or $3.89 net cash per share). We believe the recent selloff has been rumor based as the China space remains under tremendous scrutiny and what feels like collusion between short sellers and the media. CCME has several points of external validation as it is a Deloitte audited company and has attracted a $30MM investment from the private equity group, Starr International. We have conducted channel checks with a number of bus operators and advertisers and have received positive feedback. As the company expands its inter-city and airport bus network, we expect continued growth and a potential increase in FY guidance on the Q3 call. The shares at current levels are trading at just 3.3x our ’10 EPS, or 1.7x our ’10 EPS if backing out cash, which is considerably undervalued, in our opinion. We reiterate our Buy rating and 12-month price target of $21, which is 8.8x our ’10 EPS estimate.
Highlights
The $30MM share buyback program. CCME announced that its board of directors has approved a share repurchase program for up to $30MM of its common stock. The program is effective immediately and remains in effect for one year. At current prices, if the repurchase program is executed in full, will repurchase 3.8MM shares, or 42% of approximately 9MM shares in the public float. We believe this is a highly positive development for the stock.
Rumor based selloff.
CCME shares have experienced significant volatility recently; shares were down 9.6% yesterday and down 27% from a month ago when the company reported strong Q2 results. We believe the sell off is related to negative events at unrelated, but also Chinese, public companies that has created a specter of doubt being cast across the entire universe of US listed Chinese companies. We view this type of dislocation opportunity as an incredibly attractive entrance point to new investors.
Deloitte, Starr, and our channel checks with bus operators and advertisers.
In the past two months, we have talked to a number of bus operators and advertisers, who have been working with the company for 3-5 years. They have provided positive feedback on their working relationship with CCME. We have also had discussions with a key executive at Starr International, a New York based private equity firm, who explained their own thorough due diligence that was conducted before their $30MM investment in the company in January 2010. They hired independent third parties to do business due diligence, financial due diligence and legal due diligence. Starr International has a board seat, advises on strategic directions and monitors the company’s financials on a monthly basis. CCME hired Deloitte Touche Tohmatsu as its independent auditor on December 4, 2009, who has audited CCME’s 2009 annual report and reviewed its quarterly results in the first two quarters of ’10.
Investor day.
The company hosted an investor day on September 7. This event was attended by approximately 20 institutional investors. The format was an introduction to two bus operators, two advertisers, and the market research firm CTR before CCME’s management team gave presentations to the investors. The group also toured the buses and bus stations which carry CCME’s operation.
Fundamentals remain strong.
The company generated $25MM in operating cash flow in Q2 ($38MM in 1H10), and had $139MM cash and no debt (or $3.89 in net cash per share) as of 6/30/2010. The company generated $46MM in net income in 1H, which exceeded half of the upper end of its full year net income guidance of $82MM-$85MM. Gross margin was improved to 78.7% due to high ASPs and gross margins from its new airport bus business. We believe a 65%+ gross margin is sustainable in the next two years.
Compelling valuation.
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.
Reiterate Buy.
We believe CCME’s fundamentals are intact. We expect CCME’s impressive growth to continue in 2H given its expansion strategies. We believe the valuation is very compelling; with shares trading at 3.3x forward P/E at current levels. 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.
