Focus Media is a direct beneficiary of the economic boom in China. The company owns a network of flat screen TV’s set up in prominent places within the countries top tier cities. These screens continually broadcast advertisements to the masses who are waiting for busses, standing in lines, riding the elevators, or shopping. In Q1, the company was able to sell 90% of their available time slots in the tier 1 cities versus only 77% for Q1 last year. Furthermore the average ad price was roughly $12,000 up 2.5% from last year.
Acquisitions have allowed the company to grow into additional areas. A purchase of Allyes cemented their foothold in the internet market where more and more middle class Chinese citizens are spending time. Secondly, the company bought Framedia which places poster ads in public places much like the TV screens that Focus has mastered. Over the next year, the company plans to revamp many of Framedia’s posters to be digital posters able to change multiple advertisements in the same poster area. Analysts expect revenue to triple from these posters and it is expected that these posters will contribute $12m in revenue for Q2. For a company that brought in revenue of $68.2m in Q1, this is a significant increase.
Synergies with the Allyes acquisition should drive additional revenue as well. Formerly Allyes had access to roughly 300-400 clients who would purchase ads. Now Allyes has access to Focus’s 2,900 potential clients allowing the company to both sell more ads and increase the potential price as more customers are bidding for the same spots.
While the company has been very successful in the tier 1 cities of China, there is still plenty of opportunity in tier 2 cities that still have significant numbers of affluent citizens. In Q1, the company sold roughly 39.3% of all ads. After backing out its 90% rate in Tier 1 cities, it is clear there are many slots left to sell for the Tier 2 cities they have targeted. Average prices for these cities has increased as advertisers are seeing the benefit of reaching these additional cities, and selling rates will continue to pick up. Q1 was a seasonally weak time according to the Chinese calendar, so Q2 numbers will have a much more important effect on the stock and give us a better idea of just how fast this company is growing.
I was impressed to see that the company has no debt so they are not very constrained as to how much capital they can plow into new markets. The company typically partners with an affiliate in a new city until it has enough critical mass to then move into the city completely with more certainty of the market. While there is much room to grow, the management appears to be cautious and strategic with their growth decision making sure they do not over expand.
In a market that is ever expanding and growing, Focus Media seems to have a good handle on the economic environment and is a strong potential candidate for the international investors portfolio.
FD: Author has long position in FMCN
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Focus Media (FMCN)
June 19th, 2011 at 7:51 am
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June 19th, 2011 at 7:52 am
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