NASDAQ: CCME Update 1/7/11 Opinion: Risk: Target: Outperform Aggressive $32.

00
CCME; Pricing Power And Bus Network Drive Upside To 2011; Establishing As Top Pick We are establishing CCME as a 2011 Top Pick and believe, at current valuation (3.5x 2011 EBITDA vs. 38% y/y growth), with a projected 2011 free cash flow yield of ~16.0%, 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% (which increases our estimates across the board), 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 have raised our 2011 ad rate increases from 10% to 12%. We are raising 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, results in 2011 Revenue/EBITDA/ FD EPS increasing ~9%/4%/3%, respectively. Of our $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 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 old estimate of 65.9%, or $199.5 million, to 62.8%, or $206.8 million. However, we believe as SWITOW ramps in 2012, that its will be incrementally positive to CCME’s profit structure.

Darren Aftahi - Senior Analyst (612) 851-4910 daftahi@northlandcapitalmarkets.com
Changes • Raising 2011E Rev/EPS to $329.2M / $3.04, respectively Stock Data Price 52 Week Range Market Cap. Avg. Volume (3 Months) Shares Out. Float Institutional Ownership Insider Ownership Shares Short Net Cash / Share Tang. BV
Source: Thomson, NCM estimates

$16.33 $8.50 - $14.82 $560M 1,181K 40.3M 33% 9% 82% 3.6M $4.42 $4.77

• •

Estimates (FY = December) Rev $Mil. 2009 1Q Mar 18.8A 2Q Jun 19.1A 3Q Sep 26.1A 4Q Dec 32.0A FY 95.9A P/S 6.9x 3-5 yr. Rev. Growth EPS $* 2009 1Q Mar 0.36A 2Q Jun 0.40A 3Q Sep 0.56A 4Q Dec 0.62A FY 1.81A P/E 9.0x 3-5 yr. EPS Growth 2010 44.5A 53.5A 57.0A 61.3E 216.3E 3.0x 2011 N/A N/A N/A N/A 329.2E 2.0x 30-50% 2011 N/A N/A N/A N/A 3.04E 5.4x 20-25%

• •

2010 0.54A 0.80A 0.81A 0.61E 2.75E 5.9x

• •

* Non-GAAP EPS

IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION STARTING ON PAGE 6

China MediaExpress Holdings, Inc. (CCME) Page 1 of 8

© Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402 Toll Free (800) 851-2920 | Main (612) 851-5900 | Trading (800) 851-4595 | Fax (612) 851-4954

Estimate Changes Raising estimates driven by confidence CCME can raise ad rates beyond historical 10% levels in 2011. We are raising 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. When we initiated, 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 have raised our 2011 ad rate increases from 10% to 12%. We are raising our ending total bus count estimate for 2011 (from 28,546 to 29,786 (+4.3%)), largely due to two recent contract wins, which will increase CCME’s inner-city bus network by 2,067 in 1Q11. This comparatively large increase in the Company’s bus network during the first quarter of 2011 results in incremental revenues in 2Q11/3Q11/4Q11, which along with increased ad rate increases, drives our 2011 revenue estimate increase from ~$302.6 million to ~$329.2 million. Additionally, we are modeling for Company’s recent SWITOW business addition (B2C platform) to see relatively limited traction in the early stages of 2011, estimating incremental revenue of ~$5.4 million in the first year of operation. To derive this estimate, we assume total bus passengers in 2011 of which 10% are unique passengers, and purchasing conversion rates increase from 0.5% to 1.5% throughout the year. We also make an assumption about ASP levels ($50-$65) and CCME revenue share rates of 5%, which, in our view, is conservative. Of our $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 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 old estimate of 65.9%, or $199.5 million, to 62.8%, or $206.8 million. However, we believe as SWITOW ramps in 2012, that its will be incrementally positive to CCME’s profit structure. We have also adjusted our model to account for the ~$10 million cash infusion (in 4Q’10) from Starr International’s exercise of 1,545,455 common stock warrants at $6.47 each on December 9, 2010.

China MediaExpress Holdings, Inc. (CCME) © Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402 Page 2 of 8 Toll Free (800) 851-2920 | Main (612) 851-5900 | Trading (800) 851-4595 | Fax (612) 851-4954

NCM Estimate Change Summary
($ in millions, except per share data)

Ending Bus Count

Old New Change Change-%

2011E 28,546 29,786 1,240 4.3% $302.6 $329.2 $26.7 8.8% $199.5 $206.8 $7.3 3.7% $142.5 $147.4 $4.9 3.4% $2.90 $3.04 $0.14 5.0% $124.2 $126.2 $1.9 1.5%

Revenue

Old New Change-$ Change-%

EBITDA

Old New Change-$ Change-%

Non-GAAP Net Income

Old New Change-$ Change-%

Non-GAAP Diluted EPS

Old New Change-$ Change-%

Free Cash Flow

Old New Change-$ Change-%

Source: Northland Capital Markets estimates * May not add due to rounding

Valuation
CCME Price Target Calculation
($ in millions except per share data)

Projected CCME 2011E EBITDA Assigned Enterprise Value (EV)/EBITDA Multiple Discount to peer group multiple Implied EV Current cash on hand Implied Market Capitalization FD Shares including 2010/2011 earnouts Implied price per share of CCME
Source: Northland Capital Markets, Com pany Filings
1

2011 $207 7.5x 30% $1,560 $170 $1,730 54.3 $31.85

1

As of 9/30/2010

China MediaExpress Holdings, Inc. (CCME) © Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402 Page 3 of 8 Toll Free (800) 851-2920 | Main (612) 851-5900 | Trading (800) 851-4595 | Fax (612) 851-4954

Risks to the Achievement of Price Target
Variable Interest Entity (VIE) Structure CCME relies on contractual arrangements rather than equity ownership in controlling its key operating subsidiary Fujian Fenzhong Media which operates as a variable interest entity. If Chinese regulations regarding foreign investments in VIE change materially, it could have an adverse effect on CCME. Increased Competition Although the market in which CCME operates is very fragmented, if a competitor experiences success in expanding its network it could put pricing pressure on CCME and potentially take market share from CCME. Ability to obtain free entertainment content If CCME is unable to obtain free entertainment programs from its Chinese media partners, or extend existing agreements to obtain free content, it may be forced to purchase additional content and could substantially increase CCME’s cost of operations. Concession fee agreements CCME enters into and negotiates framework agreements with its bus operators to display advertisements and entertainment content. If CCME is unable to negotiate reasonable framework agreements, its concession costs may increase substantially. Bus operators More than one-fifth of inter-city express buses carrying CCME’s network are operated by three bus operators. If any major bus operator experiences a business disruption it might suspend or stop its transportation services, and in turn the number of inter-city express buses carrying CMEs network could decrease significantly. Strategic Alliance with TTAVC If CCME is unable to maintain its agreement with the TTAVC it may be unable to expand its network as planned. Moreover, CCME would lose its exclusive rights and other advertising network operators may establish in vehicle television systems on buses. CCME’s agreement with the TTAVC is set to expire October, 2012. China Operating in China presents certain inherent political, governmental, and economic risks which could affect CCME’s business. Management The chairman and CEO, Mr. Zheng Cheng effectively owns ~35% of CCME outstanding stock and is a major contributor to the vision, execution and growth of CCME’s operations. Should anything happen to Mr. Cheng, CCME operations could be adversely affected. Capital Structure TM Media was a former special purpose acquisition company (SPAC), which typically is associated with a large amount of warrants and potential share dilution. However, through the reverse merger and share exchange as well as actions by the company, all public warrants have been redeemed during the first quarter of 2010. Readers should recognize that the risks outlined above do not represent a comprehensive list of all risk factors that may impact price target achievement. See 10-k and company filings for additional disclosures.

China MediaExpress Holdings, Inc. (CCME) © Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402 Page 4 of 8 Toll Free (800) 851-2920 | Main (612) 851-5900 | Trading (800) 851-4595 | Fax (612) 851-4954

China MediaExpress
($ in m illions except per-share data) Fiscal Year Ends Decem ber Total net revenues Cost Of Revenues Total Cost of Revenues Gross Profit Operating expenses Selling Administrative Expenses SWITOW Operating Expenses Total operating expenses Incom e from operations Interest Income, net Incom e before Incom e Taxes Income Tax Expense Deemed dividends on convertible preferred Foreign currency translation Net Incom e (GAAP) Non-GAAP Net incom e EBITDA GAAP-EPS (Basic) GAAP-EPS (FD) Non-GAAP Basic EPS Non-GAAP Diluted EPS Fully Diluted Shares Outstanding Margin Analysis: Total Cost of Revenues Gross Profit Selling Administrative Expenses Total operating expenses Operating Margins Non-GAAP Net Profit Margins EBITDA Percentage Change (Yr/Yr): Total net revenues Total Cost of Revenues Gross Profit Selling Administrative Expenses Total operating expenses Operating Income Non-GAAP Net income Non-GAAP FD EPS EBITDA Source: Northland Capital Markets, Company Filings 2008A $63.0 $25.1 $37.9 $1.1 $1.7 $2.8 $35.1 $0.1 $35.2 $8.9 1Q'09A $18.8 $7.1 $11.6 $0.3 $0.8 $1.1 $10.5 $0.0 $10.6 $3.1 2Q'09A $19.1 $7.2 $11.9 $0.3 $0.5 $0.8 $11.1 $0.0 $11.1 $2.8 3Q'09A $26.1 $8.6 $17.5 $1.4 $0.6 $2.0 $15.5 $0.0 $15.6 $3.9 Actuals 4Q'09A $32.0 $9.9 $22.0 $1.6 $0.9 $2.5 $19.5 $0.0 $19.5 $5.2 2009A $95.9 $32.9 $63.0 $3.5 $2.8 $6.4 $56.6 $0.1 $56.8 $15.0 1Q'10A $44.5 $17.9 $26.6 $1.8 $0.6 $2.4 $24.3 $0.1 $24.3 $6.2 ($9.2) $0.0 $8.9 $18.2 $26.0 $0.29 $0.27 $0.58 $0.54 33.5 2Q'10A $53.5 $11.4 $42.1 $2.1 $1.7 $3.8 $38.3 $0.1 $38.4 $9.8 3Q'10A $57.0 $13.2 $43.8 $2.3 $0.2 $2.5 $41.2 $0.1 $41.4 $10.2 4Q'10E $61.3 $18.4 $42.9 $2.6 $2.2 $4.8 $38.1 $0.1 $38.2 $9.6 Estim ates 2010E $216.3 $60.9 $155.4 $8.7 $4.7 $13.4 $141.9 $0.4 $142.3 $35.7 2011E $329.2 $97.9 $231.4 $12.9 $10.5 $14.0 $23.4 $208.0 $2.6 $210.6 $49.1

$26.4 $26.4 $35.1 $1.26 $1.26 $1.26 $1.26 20.9

$7.5 $7.5 $11.1 $0.36 $0.36 $0.36 $0.36 20.9

$8.3 $8.3 $11.7 $0.40 $0.40 $0.40 $0.40 20.9

$11.7 $11.7 $16.4 $0.56 $0.56 $0.56 $0.56 20.9

$14.3 $14.3 $20.6 $0.66 $0.62 $0.66 $0.62 23.0

$41.7 $41.7 $59.8 $1.97 $1.93 $1.93 $1.81 23.0

$28.6 $28.6 $40.3 $0.86 $0.80 $0.86 $0.80 35.8

$31.1 $31.1 $43.3 $0.93 $0.81 $0.93 $0.81 38.4

$28.7 $28.7 $40.3 $0.83 $0.61 $0.83 $0.61 46.9

$97.3 $106.5 $149.9 $2.91 $2.49 $3.22 $2.76 38.7

$161.4 $147.4 $206.8 $4.34 $3.04 $4.31 $3.04 48.4

39.8% 60.2% 1.7% 2.7% 4.5% 55.7% 41.9% 55.7%

38.0% 62.0% 1.4% 4.5% 5.9% 56.1% 39.7% 59.4%

37.8% 62.2% 1.6% 2.6% 4.2% 58.0% 43.4% 61.2%

33.0% 67.0% 5.2% 2.3% 7.5% 59.5% 44.6% 62.8%

31.1% 68.9% 5.0% 2.8% 7.9% 61.0% 44.8% 64.5%

34.3% 65.7% 3.7% 3.0% 6.6% 59.0% 43.5% 62.4%

40.2% 59.8% 3.9% 1.3% 5.3% 54.5% 40.8% 58.3%

21.3% 78.7% 4.0% 1.7% 7.1% 71.6% 53.4% 75.3%

23.2% 76.8% 4.0% 2.0% 4.4% 72.4% 54.7% 76.1%

30.0% 70.0% 4.2% 2.4% 7.8% 62.2% 46.8% 65.8%

28.2% 71.8% 4.0% 2.2% 6.2% 65.6% 49.3% 69.3%

29.7% 70.3% 3.9% 3.2% 7.1% 63.2% 44.8% 62.8%

143.8% 90.1% 199.8% 18.6% 134.1% 69.8% 219.4% NA NA NA

24.3% 22.1% 25.8% 1.9% 87.0% 55.7% 23.3% 15.9% 15.9% 30.4%

24.4% 19.3% 27.7% 20.0% 4.0% 9.4% 29.2% 29.6% 29.6% 36.4%

65.5% 33.6% 87.6% 338.0% 12.2% 134.1% 83.0% 83.3% 83.3% 93.3%

90.6% 48.3% 118.7% 492.3% 240.2% 367.7% 104.7% 99.6% 81.5% 116.4%

52.3% 31.4% 66.1% 220.4% 65.7% 125.9% 61.3% 58.2% 43.9% 70.4%

137.2% 151.2% 128.7% 562.6% (28.6%) 113.7% 130.2% 143.5% 52.0% 133.0%

180.1% 57.7% 254.6% 611.3% 236.2% 376.9% 245.8% 244.5% 101.3% 244.9%

118.0% 52.9% 150.2% 66.4% (61.2%) 28.1% 165.6% 166.9% 45.3% 164.2%

92.0% 85.3% 95.0% 58.3% 143.8% 89.0% 95.8% 100.5% (1.8%) 95.8%

125.5% 85.0% 146.6% 148.6% 65.6% 111.4% 150.6% 155.4% 51.9% 150.6%

52.2% 60.6% 48.9% 48.4% 122.0% 74.2% 46.5% 38.4% 10.5% 37.9%

China MediaExpress Holdings, Inc. (CCME) © Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402 Page 5 of 8 Toll Free (800) 851-2920 | Main (612) 851-5900 | Trading (800) 851-4595 | Fax (612) 851-4954

Analyst Certification
I, Darren Aftahi, certify that (1) the views expressed in this report accurately reflect my personal views about the subject company and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Important Disclosures China MediaExpress Holdings (CCME) Ratings History

Explanation of Ratings:
Outperform (BUY) Market Perform (HOLD) Under Perform (SELL) Under Review Outperform the S&P 500 by at least 10%. Perform within 10% above or below the S&P 500. Under perform the S&P 500 by at least 10%. Estimates, ratings and/or price target are subject to possible changes in the near term.

Risk Profile:
Conservative Moderate Aggressive Lower risk and volatility. Average risk and volatility. Above average risk and volatility.

Rating Distribution Breakdown as of January 7, 2011:
Coverage Universe Outperform (BUY) Market Perform (HOLD) Under Perform (SELL) Investment Banking Relationships Outperform (BUY) Market Perform (HOLD) Under Perform (SELL) Count 74 16 4 Count 10 0 0 Percent 79% 17% 4% Percent 11% 0% 0%

China MediaExpress Holdings, Inc. (CCME) © Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402 Page 6 of 8 Toll Free (800) 851-2920 | Main (612) 851-5900 | Trading (800) 851-4595 | Fax (612) 851-4954

.

Important Disclosures
Northland Securities intends to seek compensation for investment banking services from the subject company in the next 3 months. Northland Securities makes a market in the subject company's security. The analyst responsible for preparing this research report receives compensation that is based upon various factors including Northland's institutional trading commissions and total revenues which may be generated by Northland's investment banking activities.

Other Disclosures
Northland Capital Markets computes the relative valuation ratios of the covered company and typically measures price-to-earnings, price-to-book, price-to-sales, price-to-cash flow, and computes free cash flow to the firm and discounts it back at the firm’s cost of capital to derive a net present value per share. The primary analyst may be contacted to discuss the inputs that were used to determine the target price range. Northland Capital Markets reports will provide short-term commentary, but our ratings are forward looking by at least 12 months, unless otherwise noted, to reflect our financial model expectations. Northland’s investment thesis, valuations and ratings are subject to change without notice and the primary analyst should be contacted to ensure that our opinions have not changed since the date of this report. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. However, we have not verified such information, and we do not make any representations as to its accuracy or completeness. Any statements nonfactual in nature constitute only current opinions, which are subject to change. Individual investors are advised to carefully consider the risks associated with investments in equity investments, particularly in small cap and micro cap securities. Northland’s research universe includes a large proportion of this type of investment. This research report does not take into account the investment objectives, financial needs and risk parameters of individual investors. Individual investors are advised by Northland Securities to discuss their particular financial situation with their investment representative and other professional advisors, prior to acting upon any recommendations in this report. Past performance is not necessarily an indication of future performance. This report reflects our current opinion. We do not assure future performance. Security prices fluctuate. Unless otherwise noted, the price of a security mentioned in this report is the market closing price as of the end of the prior business day. ‘Northland Capital Markets’ is the trade name for certain capital markets and investment banking services of Northland Securities, Inc., member FINRA/SIPC. Further information is available upon request.

Northland Securities, Inc. 45 South 7th Street Suite 2000 Minneapolis, MN 55402 Member FINRA/SIPC

China MediaExpress Holdings, Inc. (CCME) © Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402 Page 7 of 8 Toll Free (800) 851-2920 | Main (612) 851-5900 | Trading (800) 851-4595 | Fax (612) 851-4954

NORTHLAND CAPITAL MARKETS| EQUITY RESEARCH

RESEARCH
Mike Grondahl, Director of Research mgrondahl@northlandcapitalmarkets.com (612) 851-5982 Chad Bennett cbennett@northlandcapitalmarkets.com (612) 851-5965 Chris Krueger, CFA ckrueger@northlandcapitalmarkets.com (612) 851-4913 Mike Latimore mlatimore@northlandcapitalmarkets.com (404) 386-0850 Marty Beskow, CFA mbeskow@northlandcapitalmarkets.com (612) 851-4911 Richard Shannon, CFA rshannon@northlandcapitalmarkets.com (612) 851-5908 Eric Stine estine@northlandcapitalmarkets.com (612) 851-5930 Darren Aftahi daftahi@northlandcapitalmarkets.com (612) 851-4910 Ian Kell ikell@northlandcapitalmarkets.com (612) 851-5945 Ryan Wright rwright@northlandcapitalmarkets.com (612) 851-5926

INSTITUTIONAL SALES
Tim Mitchell, Director of Institutional Sales tmitchell@northlandcapitalmarkets.com (612)-851-5921 Steve Austin saustin@northlandcapitalmarkets.com (612) 851-5971 Steve Denault sdenault@northlandcapitalmarkets.com (612) 851-4912 Paul Manley pmanley@northlandcapitalmarkets.com (612) 851-5948 Scott Peterson speterson@northlandcapitalmarkets.com (612) 851-4928 Jeff Sheley jsheley@northlandcapitalmarkets.com (612) 851-5929 Bill Swanson bswanson@northlandcapitalmarkets.com (612) 851-5947 Kyle Haas khaas@northlandcapitalmarkets.com (415) 336-5953

TRADING
Brian Gifford, Director of Trading bgifford@northlandcapitalmarkets.com (612) 851-5934 Bill Beise bbeise@northlandcapitalmarkets.com (612) 851-5935 Kristen Eisinger keisinger@northlandcapitalmarkets.com (612) 851-5932 Steve Dragos sdragos@northlandcapitalmarkets.com (612) 851-4943 Pete Glanville pglanville@northlandcapitalmarkets.com (612) 851-5942 Bill Schaeder bschaeder@northlandcapitalmarkets.com (612) 851-4944 Eric Soderberg esoderberg@northlandcapitalmarkets.com (612) 851-5938

China MediaExpress Holdings, Inc. (CCME) © Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402 Page 8 of 8 Toll Free (800) 851-2920 | Main (612) 851-5900 | Trading (800) 851-4595 | Fax (612) 851-4954

Sign up to vote on this title
UsefulNot useful