1、Asia Pacific Equity Research 24 August 2010 Focus Media Overweight FMCN, FMCN US 2Q10 Review: Strong cash flow and margin leverage. Revising up PT to US$23 Price: $18.54 Price Target: $23.00 Previous: $22.00 China Digital Media Dick WeiAC (852) 2800-8535 J.P. Morgan Securities (Asia Pacific) Limite
2、d Ritesh Gupta (91-22) 6157 3307 J.P. Morgan India Private Limited Imran Khan (1-212) 622-6693 J.P. Morgan Securities Inc. 81420$Aug-09 Nov-09 Feb-10 May-10 Aug-10Price PerformanceFMCN share price ($)NASDAQ Composite (rebased)YTD 1m 3m 12mAbs 17.0% 4.1% 15.5% 108.8%Rel 21.8% 8.9% 18.6% 101.8%See p
3、age 13 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objec
4、tivity of this report. Investors should consider this report as only a single factor in making their investment decision. Reported strong 2Q10 revenue of US$158.2M (up 26.7% QoQ and 20.4% YoY) vs. our estimates of US$146.2Mn and consensus estimates of US$143.7Mn. Non-GAAP EPS of US$0.30 is (up 98% Q
5、oQ and up 161% YoY) ahead of ours (US$0.24) and street forecast (US$0.23). Strong cash flow and profitability. FMCN reported CFO of US$37.8M, and FCF of US$26.6M. Adj. operating margin increases from 14% in 1Q10 to 28% in 2Q10. We expect FMCN to continue to see margin leverage, with strong profitabi
6、lity and cash flow growth, driven by organic growth, with capex and rentals remain relativity stable. LCD network optimization could lead to upside in 2011. LCD saw strong growth of 45% QoQ and 34% YoY, due to solid ad market and good execution. Focus Media is on track in expanding media inventory i
7、n its B-network; and expects to raise ad rates for its B-network to be on par with A-network starting 2011. We expect net positive effects in 2011: (1) to reduce high utilization (90%) for A-network, while improving utilization rate for B-network (60%), (2) increase overall spend on both networks. F
8、rame Media saw relatively slower growth of up 2% QoQ. The company plans to expand number of frames in lower-tiers to gain revenue market share (without lowering the rate). Maintain OW. Dec 10 PT of US$23 (up from US$22) implies 23.1x 10E and 18.7x 11E adj. dil. PE, or 18.8x 10E and 15.3x 11E ex-cash
9、 PE. Share price drivers include: (1) FMCN delivering a few quarters of consistent results, (2) cyclical ad market upturn leading to multiples expansion, and (3) 2011 revenue upside from new ad rates for B-network. Near-term risks include (1) in next 1-2 months: CEO could hedge his share holdings to
10、 repay loans, leading to a perception of share sales, and (2) macro slow down could cause earnings downside in 2011. Maintain Focus Media on Asia Focus List. Reuters: FMCN; Bloomberg: FMCN US US$ in millions, year-end December FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E Net Sales 505.0 561.7 583.4
11、 688.0 ROE (%) -12.2 9.9 12.9 13.7 52-Week range US$8.6-1 9.3Operating Profit (EBIT) -154.7 93.3 191.5 245.1 ROIC (%) -5.0 10.6 13.6 13.7 Shares Outstg 145MMEBITDA -16.0 190.4 266.5 318.6 Qtr GAAP EPS (US$) 1Q 2Q 3Q 4Q Avg daily value US$25MMPre Tax Profit -149.4 99.4 199.6 256.0 EPS FY09 0.09 0.11
12、-0.05 0.23 Avg dly volume 1.2MMReported Net profit -208.8 72.7 166.6 214.2 EPS FY10E 0.12 0.27 0.30 0.30 Index (NASD) 2,160Reported EPS (US$) -1.61 0.49 1.10 1.40 EPS FY11E 0.19 0.31 0.35 0.37 Free float 49%P/E (x) -11.5 37.6 16.8 13.3 1M 3M 12M Dividend Yld (%) 0%Adj. EPS * 0.39 0.99 1.23 1.53 Abs.
13、 Perf. (%) 4.1 15.5 108.8 Market Cap US$2.7BAdj. P/E (x) 48.0 18.6 15.1 12.1 Rel. Perf. (%) 8.9 18.6 101.8 Price Target US$23EV/EBITDA -131.4 11.1 7.9 6.6 Cash 597 722 984 1,290.4 Price Date Aug 23, 2010P/B (x) 2.3 2.1 1.8 1.5 Equity 1,190 1,310 1,559 1,865.0 Y/E BPS (US$) 8.1 8.8 10.3 12.1 Source:
14、Company data, Bloomberg, J.P. Morgan estimates. * Note: Excluding share-based compensation expense. 2 Asia Pacific Equity Research 24 August 2010Dick Wei (852) 2800-8535 Company description P (2) increased competition in frame media which could lead to lower pricing power; (3) potential increase in
15、 concession fees in the hypermarket business line; and (4) higher accounts receivables and higher capex, which can lead to lower-than-expected free cash flow generation. Peer group valuation comparison table Price (LC) Market cap EV/EBITDA P/E Aug 23 US$ MM 2010E 2011E 2010E 2011E Airmedia N AMCN 3.
16、5 230 24.9 4.5 42.3 10.3 VisionChina N VISN 3. 251 -3.5 9.0 nm 23.2 FocusMedia OW FMCN 18.5 2,689 10.5 7.5 18.6 15.1 Clear Media NR 100.HK 4.4 302 5.1 4.4 15.6 13.1 JC Decaux OW DEC FP 19.1 5,305 9.5 8.2 25.5 17.1 Clear Channel N CCO 10.4 3,712 10.1 9.0 nm 521.5 Lamar Advertising OW LAMR 26.8 2,468
17、11.3 10.3 nm nm Median 10.1 8.2 22.1 16.1 Source: J.P. Morgan estimates. Bloomberg estimates for non rated companies. 3 Asia Pacific Equity Research 24 August 2010Dick Wei (852) 2800-8535 FMCN 2Q10 Review Strong 2Q10 results Focus Media reported 2Q10 revenue of US$158.2M (up 26.7% QoQ and 20.4% YoY
18、) vs. our estimates of US$146.2Mn and consensus estimates of US$143.7Mn. Non-GAAP of US$0.30 (up 98% QoQ and up 161% YoY) is ahead of ours (US$0.24) and street forecast (US$0.23). Non-GAAP net income for 2Q10 was $44.3Mn (up 90% QoQ, up 57% YoY), vs. company guidance of US$35.5-$US37.5M. Figure 1: F
19、MCN 2Q10 Review US$ Mn 2Q10 JPM est Variance QoQ (%) YoY (%) Guidance 2Q10 Consensus Total Revenue 158.2 146.2 8.2% 26.7% 20.4% 143.7 Gross Profit 81.6 67.7 20.5% 52.1% 20.7% Gross Margin (%) 51.6% 46.3% Operating Profit 31.4 24.1 30.4% nm nm Adj. Operating Profit (ex-share comps.) 44.3 36.9 20.2% n
20、m nm Adj. Op Margin (ex-share comps.) 28.0% 25.2% Net Income (GAAP) 25.3 19.3 31.4% nm nm Adj. Net Profit (ex-share comps.) 39.8 32.1 24.0% 126.3% 168.8% Adj. Net Margin (ex-share comps.) 25.2% 22.0% Diluted EPS (GAAP) 0.17 0.13 31.7% nm nm 0.12 Adj. Diluted EPS (ex-share comps, and one time charges
21、, US$) 0.27 0.22 24.4% 121.5% 134.6% 0.23 Adj. Diluted EPS (ex-share comps and amortization and one time charges, US$) 0.30 0.24 25.0% 98.0% 161.0% sSource: Company, Bloomberg, J.P. Morgan estimates Core commercial location network (US$72.5M) saw strong revenue growth of 45% QoQ and 34% YoY. In-stor
22、e networks revenue (US10.9M) also saw strong 42% QoQ and 21% YoY growth. On the other hand, frame media revenue was flattish at US$25.2 (up 2% QoQ, down 5% YoY). Figure 2: Segmental Revenues Growth US$ Mn 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 LCD Business 34.6 54.1 56.0 64.1 50.2 72.5 QoQ growth -42% 56% 4%
23、 14% -22% 45% YoY growth -45% -33% -24% 8% 45% 34% Frame Business 23.5 26.6 22.1 26.8 24.8 25.2 QoQ growth -40% 13% -17% 21% -7% 2% YoY growth -20% -29% -50% -32% 6% -5%In-Store Network 6.3 9.0 7.6 7.4 7.7 10.9 QoQ growth -33% 41% -15% -3% 4% 42% YoY growth -63% -47% -54% -22% 21% 21%Internet Advert
24、ising 19.2 27.1 28.2 33.4 28.1 35.7 QoQ growth -28% 41% 4% 19% -16% 27% YoY growth -61% -64% -60% 25% 47% 32% Movie and Billboard Business 19.3 14.6 12.5 12.6 14.1 13.9 QoQ growth -11% -24% -15% 1% 12% -2% YoY growth -36% -42% -27% -5%Source: Company. 4 Asia Pacific Equity Research 24 August 2010Dic
25、k Wei (852) 2800-8535 Healthy growth from FMCG Company believes advertising space to continue seeing broad based recovery in second half of 2010 and 2011. FMCG has been the most active segments driving growth for Focus Media. FMCG accounted for close to 45% of total advertising revenues for Focus M
26、edia. For Autos, company has been witnessing healthy demand from Auto players and hasnt experienced any slowdown. Autos and Transportation account for 23% of total revenues for the company. Real Estate accounts only for 4% of total revenues for Focus Media. Strong improvement in Margins Gross margin
27、s improved to 51.6% in 2Q10 vs. 43.0% in 1Q10 and 51.5% in 2Q09. Adj. operating margins were 28.0% in 2Q10 vs. 13.7% in 1Q10 and a loss of 2.6% in 2Q09. Adjusted Net margins (excluding share based comp., amortization, and one time charges) were 28.0% in 2Q10 vs. 17.5% in 1Q10 and 11.3% in 2Q09. Comp
28、any saw a strong leverage over largely fixed rental costs and salary. We expect margins to improve further in 2H10 with a healthier topline. Company reiterated that for every one percent change in revenue there is approximately a 65 bps change in bottomline. Healthy 3Q10 Guidance Core business reven
29、ues (inc. movie theater network) are expected to be in the range of US$120Mn-US$123Mn, up 8% QoQ and up 37% YoY. This is against our expectations of US$109.4Mn (excluding US$5Mn movie theatre guidance) Excluding Movie Theatre, 2Q10 guidance is US$115Mn-US$118Mn (implies up 7% QoQ and up 36% YoY) vs.
30、 our expectations of US$109.4Mn. Net revenues for the non-core business (contribution through to the date of disposal of Internet advertising services of approximately $10 million) are expected to be in the range of $20-$22 million. This is also inline with our expectations. The Companys non-GAAP ne
31、t income is expected to be in the range of US$48Mn-US$49Mn, well above our estimates of US$43.0Mn. Share repurchase In Aug-10, company increased size of its share repurchase plan to US$300Mn from US$200Mn earlier while extending the termination date to Feb-2011 from Jun-2011. From February 2, 2010 t
32、o August 23, 2010, Focus Media has cumulatively spent $36.7Mn in share repurchases. Majority of purchase is done in 2Q10 and early 3Q10. Company believes current valuations to be cheap and thus thinks that repurchase is a better way to use cash than giving out dividends. Other Operating Metrics Heal
33、thy Net cash flow from operations in 2Q10 was US$37.8 Mn, up from US$5.2Mn in 1Q10. Company cash is US$588M as of 2Q10, slightly declining QoQ due to share repurchase program. Days of sales outstanding were down to 86 days in 2Q10 vs. 96 days in 1Q10. Reclassification of Movie Theatre Advertising Bu
34、siness Company has started classifying Movie Theatre Advertising business into its core business. Post disposal of its internet subsidiary Allyes, FMCN is left with only one FMCG accounted for close to 45% of total advertising revenues for Focus Media. 5 Asia Pacific Equity Research 24 August 2010Di
35、ck Wei (852) 2800-8535 non-core business of Outdoor billboard network. Company reiterated its focus to expand Movie business on account of large expansion potential from the business. Company estimates current number of screens in China to be 5,000 vs. 35,000 in US. The segment is already profitabl
36、e. Improved utilization rates from Tier 2 cities As per company, utilization rates for some Tier 2 cities have improved over last couple of years. Some of these cities are at utilization rates close to 70%-80%. However, the overall utilization rate for Tier 2 cities doesnt increase much due to furth
37、er expansion to add more cities into the network which initially are at a lower utilization rate. Similar pricing for A and B LCD networks Due to historic reasons, Network A is perceived to be better quality network (with premium locations and number of buildings) compared with Network B. The challe
38、nge the company has been seeing is very high ultization rate for Network A - during peak weeks, Network A may be sold out. On the other hand, Network B still runs with extra capacity at around 60% utilization. The company plans to add more buildings to B network by (1) moving some Network A building
39、s to Network B, and (2) all new buildings to join Network B. As a result of the change, both the quality and quantity of B network should become as par with A network. At present, the rates for Network B are only 70% of that in Network A. After the change, company expects to increase rates for Netwo
40、rk B to be on par with Network A. After the transition, the company expects similar ROI or CPM for both networks. Currently 70% of Network A customers advertise on Network B. After the transition the company should be able to move some Network A clients to Network B, so to relieve capacity constrain
41、ts in Network A. The company is not likely to merge Network A and B, as to do so would lead to very high rates, or a very long cycle time. In other words, for a particular ad, a single channel increases reach, but reduces the frequency. This may not be desirable for advertisers. 6 Asia Pacific Equit
42、y Research 24 August 2010Dick Wei (852) 2800-8535 Figure 3: LCD display network screens 119,240123,140120,131128,033131,219133,514130,890131,006132,485142,305105,000110,000115,000120,000125,000130,000135,000140,000145,0001Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10LCD TV screensSource: Company
43、 Figure 4: In-store display screens 61,42058,49356,61442,82442,34044,78345,19544,51740,84845,686010,00020,00030,00040,00050,00060,00070,0001Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10In-Store display sSource: Company. Figure 5: Frame Media Non Digital Screens 225,473250,966273,813290,169 288,42
44、3246,095225,762 225,104235,160238,689050,000100,000150,000200,000250,000300,000350,0001Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10Frame Media - Non Digital ScreensSource: Company. Figure 6: Frame Media - Digital Screens 21,44725,01929,54634,19539,54638,89336,53935,97235,599 35,83505,00010,00015
45、,00020,00025,00030,00035,00040,00045,0001Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10Frame Media - Digital ScreensSource: Company. 7 Asia Pacific Equity Research 24 August 2010Dick Wei (852) 2800-8535 Earnings Estimate Revision For 2010 and 2011, we revise down the revenue by 7% and 20%, respec
46、tively. This is mainly due to the sales of internet business (Allyes and iResearch). Overall, we revised 2010 EPS up by 8% and 2011 EPS down by 2%. Table 1: Focus Media Earnings Revisions Table Revised Prior Change (USD, Mn) 2Q10 3Q10E 4Q10E 2010E 2011E 2Q10 3Q10E 4Q10E 2010E 2011E 2Q10 3Q10E 4Q10E
47、2010E 2011E Total Revenue 158.2 142.2 136.4 561.7 583.4 146.2 157.9 173.6 602.6 726.3 8% -10% -21% -7% -20% Commercial location 72.5 82.3 83.2 288.2 350.7 64.9 67.2 73.1 255.4 307.7 12% 22% 14% 13% 14% In-store network 10.9 12.3 13.5 44.3 57.4 8.4 10.1 10.6 36.8 46.2 29% 21% 27% 20% 24% Poster frame
48、 25.2 26.6 28.1 104.7 123.1 28.2 32.1 37.5 122.6 149.7 -10% -17% -25% -15% -18% Internet business 35.7 10.0 0.0 73.8 0.0 29.5 32.5 35.7 125.9 147.3 21% -69% -100% -41% -100% Movie Theatre and Outdoor (Outdoor only starting 3Q10) 13.9 11.1 11.5 50.7 52.2 15.1 16.0 16.7 62.0 75.5 -8% -31% -31% -18% -3
49、1% Gross Profit 81.6 82.4 84.0 301.8 361.7 67.7 76.1 88.4 285.9 368.3 21% 8% -5% 6% -2% Gross Margin (%) 51.6% 58.0% 61.6% 53.7% 62.0% 46.3% 48.2% 50.9% 47.4% 50.7% Operating Profit 31.4 29.0 28.7 93.3 191.5 24.1 23.3 33.4 85.0 201.7 30% 24% -14% 10% -5% Adj. Operating Profit (ex-share comps.) 44.3 41.9 41.6 144.9 209.9 36.9 36.1 46.2 136.2 223.
