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Sunday, June 13, 2010

CCME - How to Profit From China's Emerging Middle Class

Much has been written as of late about the emerging middle class in China and the the increase in domestic consumption. Workers wages are rising, and multi-national companies are tripping over themselves to establish their brand in what they see as the next big growth market. The headlines are everywhere:

"Pepsi, Coke in race to conquer China"
"China to become second largest advertising market"
"Getting the Chinese to drink like Americans"
"American Eagle wants to capitalize on China's consumer spending boom"

In a recent article, Stephen Roach said China will soon embark on a 5 year stimulus plan to boost internal consumption. In this Bloomberg article the other day, it stated "Companies including Volkswagen AG and PepsiCo Inc. are boosting investment in the world’s third-largest economy to tap rising consumer spending fuelled by the government’s stimulus package and higher wages.
“China will remain an attractive investment destination as the government spurs consumer spending,” said Xing Ziqiang, a Beijing-based economist at China International Capital Corp. “The expansion of infrastructure, including transport links, in central and western regions is also opening up a vast inland market for consumption and investment.”

While Chinese stocks have been in a bear mode, it has mainly been the property and infrastructure stocks. CAAS, FMCN, ASIA, HMIN, SORL, AUTC, CAGC, CNYD, DEER are just some examples of stocks that still maintained P/E ratios of 10-30, even in the latest bear market for Chinese companies. The common theme amongst most of them is they are domestic consumption stocks.

Well what is apparent to me is this is the next momentum wave for Chinese stocks. What is equally apparent to me is that there will be a boom of advertising as companies fight to get the attention and loyalty of chinese consumers. That is why China MediaExpress is the most undervalued Company in this space and the best stock I can find to take advantage of this next wave of momentum.

China MediaExpress Holdings, operates the largest television advertising network on inter-city express buses in China. CCME's clientele includes local brand names as well as those well-known international and national brands such as Coca Cola (KO), Pepsi (PEP), Siemens (SI), Hitachi (HIT), China Telecom (CHA), China Mobile (CHL), China Post, Toyota (TM), Bank of China and China Pacific Life Insurance.

1) CCME is audited by a big 4 auditor Deloitte. A major investment firm Starr International, performed months of diligence before investing $30m in CCME. They were recently listed on the Nasdaq Global Select market which has the most stringest corporate governance requirements.

2) CCME has long term (5-8yr) agreements with over 50 bus operators that cover about 22,000 buses (up from 10,000 in 2007) with 80M passengers/month - the whole market is estimated at 65,000 buses. There are substantial benefits to this type of scale in dealing with advertisers, particularly in an advertising market as immature and fragmented as China. They are also an excellent way to reach second and third tier cities, as many advertisers are clamoring to do.

3) CCME has approximately $114 million of cash with no debt. They will generate approximately $50m of cash this year from operations. Their DSO's are approximately 40 compared with over 100+ for many Chinese companies. Their rates are low so they get paid quickly. This is unique for a Chinese companies. With CCME there is no fear of furhter dilution. Their CFO recently stated, "we have sufficient resources to fund our business expansion plans, including internal growth initiatives as well as potential acquisitions.”

4) CCME has amazing growth. The Net Income target is $71-$75m this year which would represent 79% growth from 2009. That $71-$75m range seems very conservative by management since they did $18m Net Income in Q1 ($72m run rate) and they expect higher growth and margins the rest of the year. Management has a huge incentive to make $84m of net income this year in the form of earn out shares. I believe the Company will make the $84m in net income this year. With approximately 40.5m fully diluted shares, EPS could range from the $1.85 guidance to over $2 if they hit the earn out target. FMCN, which is the best comparable in this sector, currently trades at a P/E of 17 based on the 2010 estimates of $0.94 EPS. To give CCME a P/E of 17, they would have a share price of $34 right now. This research report gives them a $35 target and said they are discounted 68% to their peers. Read Report

This stock is incredibly undervalued given the above 4 discussion points. CCME, being a new listing has yet to receive analyst coverage. The Company stated they have met with many analysts and institutions so I personally expect coverage soon. Analysts typically assign P/E ratios anywhere from 10-30, depending on the Company. Because of the above discussion points I think CCME qualifies for a higher multiple. Lastly, they were recently selected to be added to the Russell Global Select fund.

CCME is the most undervalued stock poised to profit from China's emerging middle class.
I am long CCME.

1 comment:

Anonymous said...

Thanks for sharring importent information in this blog.
It was very nice.

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