Global Hunter Securities, LLC
New YorkNewport Beach
New York Sales & Trading: (212) 415-4721Newport Beach Sales & Trading: (949) 274-8050Research: (949) 274-8052
www.ghsecurities.comOctober 15, 2010
Company UpdateChina: China Industrial Consumer and Clean Technology
Ping Luo, CFApluo@ghsecurities.com646-264-5688Jodi Dai firstname.lastname@example.org
Price Target Metrics: 9x P/E (2010)
Float:10.0MMDiluted Shares:35.8MMShort Interest:4.4MMAverage Daily Volume:897k52 Week Range:$7.51 - $14.82
Cash and Investments:$139MMDebt:$0MMEnterprise Value:$363MMNet Cash/Sh:$3.89
PRICE & VOLUME CHART
1 1 - 2 0 0 9 1 2 - 2 0 0 9 0 1 - 2 0 1 0 0 2 - 2 0 1 0 0 3 - 2 0 1 0 0 4 - 2 0 1 0 0 5 - 2 0 1 0 0 6 - 2 0 1 0 0 7 - 2 0 1 0 0 8 - 2 0 1 0 0 9 - 2 0 1 0 1 0 - 2 0 1 0
ESTIMATES $ (MMs except multiples & EPS)200920102011Revenue
Q1 (Mar)$18.8A$44.5A$60.1EQ2 (Jun)$19.1A$53.5A$67.6EQ3 (Sep)$26.1A$55.7E$77.7EQ4 (Dec)$32.0A$57.3E$82.7EFY$95.9A$211.0E$288.1E
EV/Sales3.8x1.7x1.3x EPS (GAAP)
Q1 (Mar)$0.36A$0.54A$0.55EQ2 (Jun)$0.40A$0.80A$0.62EQ3 (Sep)$0.56A$0.59E$0.71EQ4 (Dec)$0.49A$0.48E$0.66EFY$1.81A$2.38E$2.55E
Q1 (Mar)$11.3A$25.3A$35.7EQ2 (Jun)$11.9A$39.2A$40.2EQ3 (Sep)$16.3A$30.8E$46.1EQ4 (Dec)$20.4A$31.5E$49.0EFY$59.9A$126.9E$171.0E
China MediaExpress Holdings, Inc.
Our extensive due diligence reinforces our thesis; Reiterate Buy.
During our recent trip to China, we conducted extensive due diligence and channel checks on CCME’sbusiness. We met with the company's entire management team including six regional managers,checked CCME’s sales contracts and bank statements, and interviewed advertising agencies, directadvertisers and bus operators. We took buses in Beijing, Fuzhou and Guangzhou to view thecompany’s operation and advertising programs. In addition, we met with a representative from CTR,a market research firm, and two directors at Starr International. Our due diligence results reinforceour thesis on the company and we continue to believe that CCME is a leader in its niche market. Webelieve the fundamentals of the business remain solid. Thus, we reiterate our Buy rating.
HighlightsInterviews with advertising customers.
CCME works with ~30 ad agencies who contribute ~70% of total revenue, with the remaining 30% from direct advertisers. We interviewed a number of ad agenciesand direct advertisers, including agencies which purchase advertising time in Beijing and Guangzhouairports. The revenue amount these agencies disclosed to us matched that in the sales contracts and thecustomer list and revenue breakdown presented by CCME. These customers represent annual contractvalue of approximately RMB400MM ($60MM), or ~30% of our estimated ‘10 revenue. The agenciesreceive business either directly from brands or from 4As or other large advertising agencies. Theseadvertisers stated that CCME’s large network and quality customer service make it the top choice inthe inter-city bus market.
Interviews with bus operators.
CCME’s network currently covers over 60 bus operators and close to25,000 buses. The bus operators we interviewed ran a total of 4,000 buses. They receive concessionfees ranging between RMB600 and RMB1,500 per bus per month, which we view as considerably lowas compared to its peers in other outdoor media markets. We believe the low cost is due to a lackof major competitors in this niche market as well as weak bargaining power from bus operators whooperate in a highly fragmented market. Concession fees typically account for 70%+ of COGS of a mediacompany. Continuing to control concession fees is a key task for a media company. We believe this lowlevel of concession charges explains CCME’s high margin profile.
Taking the rides.
We took CCME’s buses in Beijing, Fuzhou and Guangzhou to view its operationand programs. The programs were rotated with 30 minutes of entertainment content and 10 minutes of advertisements. We saw brands including multinational names such as Pepsi-Cola, P&G, Coca-Cola,Siemens, and Samsung, and well-known domestic brands such as China Mobile, China Post, WanglaojiBeverage, Tongyi Green Tea, Huangjin Dadang Nutrition and Yili Dairy, among others. Bus operatorsexpressed favorable feedback from passengers; we believe the availability of various entertainmentcontent makes passengers more receptive to advertising programs.
Meeting regional managers.
We met with regional managers in charge of sales and customer servicein Beijing, Guangdong, Sichuan, Jiangsu, Hubei and Fujian. We cross checked with them the number of buses, top agency customers and total revenues in each region. Currently there are ~30 people ineach region who provide customer service to existing customers and develop new local customers (esp.direct advertisers) in the region.
Visit to Starr International.
We visited Starr’s Shanghai office and met with directors who statedthey have done a thorough due diligence before their $30MM investment in January, including hiringACNielsen to conduct due diligence and market research, and Deloitte to audit CCME’s financials. Theyindicated that they monitored CCME’s operation and financial results on a monthly basis and continuedto believe in its fundamentals, which is further evidenced by Starr’s additional investment of $13.5MMannounced earlier this week to purchase 1.5MM common shares from early investors of the company.
We have spent substantial time and effort in our ongoing due diligence over the lastthree months, the results of which reinforced our thesis. Shares are currently trading at just 6x our ’10EPS (or 4x after backing out $139MM or $3.89/share in net cash). We expect more positive catalystsin the near term as the company continues to expand its network. As such, we reiterate our Buy ratingand $21 price target, which is 9x our ’10 EPS of $2.38.
China MediaExpress provides TV advertising network on inter-city expressbuses and airport express buses in China.
SEE ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES AT THE END OF THIS REPORT