Replies to post #44937 on China Growth Stocks

[GorillaGorilla]

CCME And my biggest reason - and this is where I probably have to disagree with most of you. I have an issue with the business model. I do not believe that streaming video advertising on buses would work in Europe or the U.S. - people would not accept it and advertisers don't want to be seen merely as an annoyance

I live in UK, we dont even like adverts on our TV programs, however, they have tv "news" program on repeat on the trains. I do find it annoying and go and read in the "quiet area". However, I am a tiny minority nearly everyone prefers to be in the TV sections of the train (either they want it or dont care - never asked). My impression is that the bussines model works very well - celebrities and gossip remains popular with the travelling public.

Anyone have a different experience?

rich

[ratobranco]

CCME - Rames, just to address a few of your concerns:

1) Unanimous enthusiasm - clearly, this has passed. In fact, now you have almost unanimous agreement that the stock is a POS--maybe not the company, but definitely the stock. Furthermore, the board itself is very quiet. Everyone seems to be gone. No more happy. All sad. Sentiment-wise, that's bullish.

2) EPS growth - If you account for the unused cash, there is strong EPS growth in the comparison between 2010 guidance and 2009 results. Now, if they use the cash for acquisitions, then the EPS will go up. If they don't, if they keep it on the balance sheet, then it needs to be backed out--or you should not count the new shares. Otherwise, you're treating the capital that the cash represents as if the company has just destroyed it--raising its share count for nothing in return. That will make the underlying business look much weaker than it actually is.

I take issue with the idea that it's reasonable to expect companies to grow their EPS 30% every year. We've obviously seen strong growth in the 2009 earnings season, but that is largely because of the low 2008 comparison. Think about it--how can a company consistently grow EPS 30% when the underlying economy in which it operates is growing at a 10% clip? Very tough task, if not impossible. I think that those who expect their portfolio holdings to grow at that rate year in and year out are in for a disappoint.

If CCME only grows EPS 20% over last year, that's not a problem in my view. It would be excellent growth. Double the growth of the underlying economy.

3) Issue with the business model. First, I wouldn't underestimate the cultural differences. The Chinese may like western goods, and they may be destined to grow their consumption levels to parity with ours, but that doesn't mean that they are destined to develop the same social and cultural sensitivities that we have. From a social and cultural perspective, the kind of advertising that CCME engages in is accepted and very common. More importantly, it has proven to be very effective.

Second, I would point out that CCME is not trapped inside its current revenue stream. There are plans to expand into other advertising formats and venues.

In the meantime, the current business provides a strong source of operating cash flow backed by long-term contracts and significant barriers to entry. The return on invested capital in that business is 71%--higher than anything you will find anywhere, period. These guys don't need much money to make money, and you can see that in the numbers.

Net of cash, the busines is being valued at 3 times earnings. So even if you get no growth at all--and the numbers are clearly showing strong growth--you still have a business that pays for itself twice even before any of its guarantees expire. That's huge IMO.