northland note from stockmannick on Twitter
Northland analyst note from this morning,
CCME; Pricing Power And Bus Network Drive Upside To 2011; Reiterating Top Pick
We are reiterating CCME as a 2011 Top Pick and believe, at current valuation (3.9x 2011
EBITDA vs. 38% y/y growth), with a projected 2011 free cash flow yield of ~14.6%, an
announced dividend, a growing core bus network, and new incremental revenue channel, that
could add tremendous revenue to its story long-term, that CCME, is a must Buy. We remain
staunch believers shares are undervalued by a material factor, Street 2011 estimates
remain conservative based on our belief ad rate increases are likely to be well above our
revised modeled 12%, and reiterate our $32 price target and Outperform rating, which is
based on approximately 7.5x EV/ EBITDA multiple, a 30% discount to its Chinese DOOH
peers, to our $207 million revised estimate.
Key Points:
•
When we initiated last July, we highlighted that as CCME grew its bus network across
Mainland China (PRC) that its value to the advertiser/agency community would grow,
giving it stronger “pricing power”. We believe the Company, with approximately 26k+
buses (although not linear) entering 1Q’11, has reached critical mass, to a point, it can
raise ad rates more than historical annual rates of 10%.
According to the China Economic Review, CCTV, the benchmark for advertising
mediums in China, has increased its ad rates by about 20% for 2011, compared with
increases of more than 40% at other domestic networks.
Based on our checks, we believe CCME could increase rates by as much as CCTV in
2011, however, we believe approximately 10%-15% may be more realistic. As such,
we recently raised our 2011 ad rate increase from 10% to 12%.
We recently (01/07/11) raised our estimates for 2011 on CCME driven by 1)
higher than expected ad rate increases, 2) slightly better than expected ending bus
count, and 3) incremental revenue (albeit modest) from the Company’s recently
announced SWITOW B2C channel.
The combined, resulted in 2011 Revenue/EBITDA/ FD EPS increasing ~9%/4%/3%,
respectively.
Of our prior $26.7 million increase in 2011 revenue, we expect it to be comprised of
~$5.4 million from SWITOW, ~$2 million from increased bus counts, ~$19.3 million
from ad rate increases.
We believe our prior increased revenue estimate will drive gross margin expansion to
70.3%, an increase of ~1.5% from our old estimate of 68.8%.
We note, we expect the new SWITOW business to add approximately $2.0 million to
total cost of revenues in 2011 from fees for exclusive rights agreements. We also
estimate total 2011 operating expenses could increase approximately $14.0 million due
to the new SWITOW business. As such, we believe EBITDA margins could compress
slightly in 2011 from our prior estimate of 65.9%, or $199.5 million, to 62.8%, or
$206.8 million. However, we believe as SWITOW ramps in 2012, that it will be
incrementally positive to CCME’s profit structure.
