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CCME Analyst Report

CCME Analyst Report

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March 12, 2010POST SPAC SPECIAL SITUATION
China MediaExpress (CCME)
SPAC Analytics Special Situation Research
Key dataCurrent
Price (USD)11.56Short term target20.0012 month target 28.00Market cap ($ mn)457F.d. enterprise value (EV)336F.d. shares outstanding (mn)39.6Public float10.1
Dec 31 YE2008200920102011
Revenue6395143191EBITDA38587795Adj net income27415466EPS basic0.971.431.642.00EPS f.d.0.781.161.361.66F.d. P/E14.810.08.57.0EV/EBITDA7.54.94.43.6EBITDA growth %201533223EBITDA margin %60615450
Med. Comp. Multiples
20092010
P/E21.637.7EV/EBITDA 13.311.2
China MediaExpress (CME) Description:
Since its inception in November 2003, CMEhas grown rapidly to become China’s largesttelevision advertising operator on inter-cityexpress buses. The Company generatesrevenue by selling advertisements on itsnetwork of television displays installed onover 21,000 express buses originating infourteen of China’s most prosperousregions, including the five municipalities ofBeijing, Shanghai, Guangzhou, Tianjin andChongqing and nine economicallyprosperous provinces, namely Guangdong,Jiangsu, Fujian, Sichuan, Hebei, Anhui,Hubei, Shandong and Shanxi whichgenerate more than half of China’s GDP.
CCME – Sustainable growth from a well defended niche
Key investment points
 
Intriguing business
: Growth driven by network expansionfrom 20,000+ buses in 2009 to 30,000 buses by the end of2010. Advertisers are attracted to CCME’s large scale(100+ million monthly viewers) and low CPM rates.CCME’s CPM rates should not suffer competitive pricingpressures due to its well protected niche, leading 32%market share and large discount to its peers. Excellentcash generation with low DSO. Growth, profit margins andcash conversion superior to all China out-of-homeadvertising public peers.
 
Compelling valuation:
Despite these positives, CCMEtrades at a 69%+ discount to its direct public peers.
 
Credibility no longer an issue:
The primary issueholding back a higher multiple has been credibility after atough SPAC IPO that raised little cash. The recent StarrInternational preferred investment is validation thatCCME’s business is sound. Starr spent four months of duediligence before making the decision to invest $30M.Additional actions to build credibility have been the hiring ofDeloitte and Touche auditors, repurchase of $1M publicwarrants and active communication with public investors.
Valuation
Our short term target is $20.00 which is 14.7x FY10F P/E(12.4x P/E ex-net cash) and 8.7x 2010 EV/EBITDA. Our 12month target is $28.00 which is 10.4x 2011 EV/EBITDA whichis in line with typical out-of-home advertiser forward multiples.Our 12 month target is crossed validated with our DCF modelthat generates a $28.23 valuation.Our forecast is conservative with net income below theminimum net income targets set by the Starr investmentagreement. For the 4
th
quarter 2009 we forecast $13.2M netincome for true fully diluted EPS of $0.38.
To meet the Starr2009 net income target, 4
th
quarter net income will need tobe $14.7M which would generate fully diluted EPS of $0.42.Bottom line:
CCME’s well defended niche and cash rich balance sheet ($100M net cash) support a sustainable andhigh growth outlook for its business. We expect the release of strong 4
th
quarter audited results andpositive guidance for 2010 to be the catalyst to move the shares towards our short term target of $20.00.
Neil Danics
(858) 366-4580 MBA, CMA ndanics@spacanalytics.com
 
March 12, 2010 China MediaExpress (CCME)SPAC Analytics Special Situation Research
2
Summary Income Statement (mn USD):
20072008Q1Q2Q3Q4FSA Starr CCMEQ1Q2Q3Q4SA Starr CCMESA StarrCCME
Sales, net 25.863.018.819.126.131.195.1104.231.733.536.341.1142.7196.6191.0 305.5Cost of sales13.225.17.17.28.610.333.210.412.113.415.651.674.5Gross profit12.737.911.611.917.520.861.871.521.221.522.925.591.1140.9116.5 219.5Selling expenses0.91.10.30.31.41.93.82.32.93.55.113.920.6G&A0.71.70.80.50.61.23.21.31.11.21.85.48.2Total operating exp.1.72.81.10.82.03.17.03.64.04.76.919.328.8Operating income11.035.110.511.115.517.854.917.617.418.218.671.887.7Interest income0.00.10.00.00.00.00.10.00.00.00.00.00.0Income before taxes11.035.210.611.115.517.754.960.217.617.418.218.671.8119.487.7 186.1Income tax 4.18.93.12.83.94.414.34.44.44.64.618.021.9Net income7.026.47.58.311.613.340.613.213.113.713.953.965.8Foreign cur. Trans. 0.41.00.10.00.00.00.10.00.00.00.00.00.0
Net Income7.327.47.48.311.613.240.542.042.113.213.113.713.953.955.083.665.870.0130.3
Key metrics:
EPS - f.d.0.210.780.210.240.330.381.161.201.170.330.330.350.351.361.391.761.661.772.39P/E 55.314.810.08.57.0
D&A1.62.90.80.80.81.03.41.01.21.41.65.26.9
EBITDA12.638.011.311.916.318.858.2 65.518.618.619.620.277.0 128.594.6 197.8EV/EBITDA22.47.54.94.54.43.33.62.6
# of buses EOP10,05315,26016,00016,00018,00020,00020,000 21,00024,00026,00028,00028,000 30,00033,000Quarterly rev. per bus1,1561,2441,2011,1931,5351,6371,3481,5451,4911,4531,5231,4861,6381,565Annual growth29%8% 8% 10%5%Revenue growth540%276%24%24%65%86%51% 65%69%76%39%32%50%34%EBITDA growth 548%269%23%28%75%82%53% 72%65%57%20%7%32%23%Gross margin49%60%62%62%67%67%65%69%67%64%63%62%64%72%61% 72%Selling exp % of sales4%2%1%1%5%6%4%7%9%10%13%10%11%Opex % of sales6%4%6%4%8%10%7%11%12%13%17%14%15%EBITDA margin49%60%60%62%63%60%61%63%59%56%54%49%54%65%50%65%Tax rate37%25%29%25%25%25%26% 25%25%25%25%25% 25%Pro forma share count / EVBasic32.932.932.932.932.932.932.932.932.932.932.932.932.932.932.932.932.932.932.9Starr International - pref/common 3.03.03.03.03.03.03.03.03.03.0Earn out shares1.08.015.0Starr International - warrants 1.51.51.51.51.51.51.51.51.51.5SPAC mgmt. warrants 2.12.12.12.12.12.12.12.12.12.12.12.12.12.12.12.12.12.12.1F.d. shares35.035.035.035.035.035.035.035.036.039.639.639.639.639.639.647.639.639.654.6Market capitalization405405405405405405405405416457457457457457457550457457631Net debt / (cash)-121-121-121-121-121-121-121-121-121-121-121-121-121-121-121-121-121-121-121Enterprise value (EV)284284284284284284284284295336336336336336336429336336510
Assumptions / Notes:
Assumes no new acquisitions are made with $77M cash raised in Jan 2010.Gross margins decline in 2010 and 2011 reflecting higher concession fees to bus operators offset by some degree by a greater % of direct advertising clients.Selling expense as % of revenues increases by 6% in 2010 reflecting much larger direct sales force in 2010.No change to RMB exchange rate in 2010 or 2011.Net debt / (cash) includes cash from warrants redemption, net cash from the Starr Jan 2010 $30M financing, and estimated Dec 31, 2009 company net cash balance.SA refers to SPAC Analytics forecast.Starr refers to minimum net income targets per recent $30M Starr International preferred financing.CCME refers to the share based net income earn out targets per the SPAC merger transaction.Fully diluted EPS assumes all warrants and convertible preferred securities are converted into common shares.
2011F2009Annual Forecast2010FAnnual Forecast
 
 
March 12, 2010 China MediaExpress (CCME)SPAC Analytics Special Situation Research
3
CCME should avoid pricing & margin pressure due to its dominate share andunique cooperation agreement with the Chinese government
CCME controls over 32% of the China inter-city express bus television advertising market and by the endof 2010 CCME should control over 45% of the market. At the end of 2009 CCME had 20,000+ buses onits network, with 41,000+ television displays and a monthly audience of over 100 million people.Management expects to grow CCME’s network to over 30,000 buses by the end of this year. Theestimated total market is 65,000+ buses with 27+ passengers.CCME’s large network is highly attractive to advertisers who want to work with a supplier who hassubstantial scale to provide access to China’s growing middle class in high growth 2
nd
and 3
rd
tier cities.A key factor in CCME’s success is a five year cooperation agreement it signed with the TransportTelevision and Audio-Video Center, an entity affiliated with the Ministry of Transport of the People’sRepublic of China. The agreement designates CCME as the sole strategic alliance partner in theestablishment of a nationwide in-vehicle television system on buses traveling on highways in China. Theagreement gives CCME preferential status as the only authorized inter-city bus advertising company bythe government and serves as a strong tool to sign new bus operators to CCME’s network and to deternew competitors from entering the inter-city bus advertising market. The cooperation agreement expiresin October 2012. In the unlikely case the agreement is not renewed it would obviously be a negativedevelopment but not a disaster. The majority of CCME’s 47 bus operators have signed five to eight yearcontracts in the past year and several new bus operators are expected to be signed to long termcontracts between now and the end of 2012.Effectively with this cooperation agreement CCME has at minimum a 2.5 year window to further increaseits market share of the inter-city bus market with little competition. This reduces the pressure on CCME topay high concession fees to bus operators and/or reduce its CPM rates to keep business. Thus, CCME’sbusiness has a substantial advantage to several other China out-of-home advertising companies whoseverticals have competition which has led to margin pressures over the past year.
The quality of CCME’s advertising channel is high
CCME’s audience is highly captive since the average passenger typically sits on an express bus for overtwo hours. Passengers are able to view the television screens unobstructed unlike crowded intra-citybuses and subways where line of sight can be impeded and the attention span is limited due to shorttrips. The programming provided from Fujian SouthEastern Television Channel and Hunan SatelliteTelevision is considered entertaining and high quality. CCME displays advertisements in ten-minuteblocks after every 30 minutes of entertainment content, so audiences can potentially view the sameadvertisement up to three times per average journey. This repeated exposure to the same advertisementshould increase its effectiveness. CTR Market research found that 81% of all passengers said they hadwatched the television displays on CCME’s network and almost 80% said they regularly watched thedisplays on the network.CCME’s demographic is attractive despite some competitors criticizing the profile of an inter-city buspassenger. They believe that passengers on inter-city buses have low income and are under educated.While inter-city passengers are not as attractive as a pure urban demographic, the express bus marketdemographic is still attractive with incomes above the China average. According to surveys conducted bythe CTR Market Research in July 2008, the audience of CCME’s network had the following overallcharacteristics:
the average household income is over RMB 5,800 per month and the average individual income isover RMB 3,300 per month
over 50% of the target audiences have received a diploma, college degree or higher education
over 40% of the target audiences are professionals, managers, executives and business owners
over 40% of the target audiences are frequent travelers that take inter-city express buses for morethan once a month

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