Replies to post #10496 on China MediaExpress Holdings, Inc. (fka CCME)

[martych]

Here is my thinking/analysis on GM and revenue growth.

Revenue
I don't think using Y/Y growth trends works particularly well for CCME given the non-linear signing of new buses and the mix shift between inter-city and airport. Seasonal utilization variances is a good point. Hopefully that will become clearer after this conference call and the following 10k detail becomes available. I'm tracking the actual number of busdays operating by each type and calculating the revenue thereon. Some iisues like utilization fluctuation, ramp time for new bus signings or seasonal pricing changes are still unknown but hopefully iteration will improve the predictability in time.

Concesssion fees/gross margin
The wildcard is how much additional expense gets added by amortizing the upfront payment for acquired buses. This is relatively new as they didn't really have any capitalized costs of note at 12/31/09. For the interim quarters this year they disclosed current prepaid of $1.9m on 3/31, $3.3m on 6/30 and $3.8m on 9/30. Since current is defined as within 12 months that means the following quarter's amortization would be a minimum of $475k, $825k and $950k sequentially. For Dec-10 they added 1,621 inter-city and 26 airport buses on 10/1/10 but I couldn't find any disclosure of what was paid to acquire them. So whatever payments were made will be amortized for a full quarter. Also yet unknown is the negotiated cost to be paid annually for newer contracts. Knowing Jacky made the comment about declining margins made me assume that they may be seeing higher fees in more recent signings, especially on the airport buses. The ramp in bus days is pretty remarkable: Mar-10 was up 161% sequentially. Jun-10 was 53% and Sep-10 was 13%. Dec-10 should be 12% if my math is accurate as compared to 7% on inter-city routes.

The other component of COGS that should increase as a pct of revenues is the depreciation. Even ignoring SWITOW, they have stated that going wireless is important to their advertisers. They need to prove ads were run as part of the contract and the wireless system will do it automatically. They disclosed in the C09 10k that it would cost about $150k per bus station to implement so we likely will see that start occuring either in this quarter or shortly into 2011. SWITOW is a wild guess at this point but it will require capital and spending on the website design and servers and those costs will likely be capitalized and expenses over time as COGS. The catelog design, print costs and distribution expense including pays to bus operators will likely be in market expense not COGS.

In summary it looks like margins will come down in future. I'm modeling out 73% for C11 but wouldn't be surprised to see it drop another 1-2 pts based on the above.

[RyanW439]

you are correct. I was thinking gross margins, but shouldn't factor GM's by themselves to extrapolate net income. I think some costs that maybe flat/fixed one year could also increase, ie pay raises, raises on taxes via property value increases, increases in rent payments yoy, although these are hard to figure until they're seen. Commercial rental agreements (assuming they rent office space in the various branches) are in my experience usually on multi-year leases, so they may not vary year to year.

Conservatively, I dont think these numbers are out of the question, although utilization rates could vary somewhat. That didnt seem to be a major effect from Q4-09 to Q1-10 though..

Note: when I asked for someone to poke holes, I thought it would be to lower my exppectations, not increase them! Not complaining though..