CCME Oct 15th, 2010 Global Hunter Report

8/8/2019 CCME Oct 15th, 2010 Global Hunter Report

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Global Hunter Securities, LLCDallas/Fort Worth ♦ Houston ♦ Los Angeles ♦ New York

Newport Beach ♦ New Orleans ♦ San FranciscoNew York Sales & Trading: (212) 415-4721

Newport Beach Sales & Trading: (949) 274-8050Research: (949) 274-8052

www.ghsecurities.com

October 15Company U

China: China Industrial Consumer and Clean Techn

Ping Lupluo@ghsecuriti

646-26

Jo jdai@ghsecuriti

646-26

Rating: Buy

Price Target: $21.00

Price Target Metrics: 9x P/E (2010)

Current Price: $14.02

Float: 10.0MM

Diluted Shares: 35.8MM

Short Interest: 4.4MM

Average Daily Volume: 897k

52 Week Range: $7.51 - $14.82

Market Cap: $502MM

Cash and Investments: $139MM

Debt: $0MM

Enterprise Value: $363MM

Net Cash/Sh: $3.89

RICE & VOLUME CHART

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Vol

STIMATES $ (MMs except multiples & EPS)

2009 2010 2011

evenue

1 (Mar) $18.8A $44.5A $60.1E

2 (Jun) $19.1A $53.5A $67.6E

3 (Sep) $26.1A $55.7E $77.7E4 (Dec) $32.0A $57.3E $82.7E

Y $95.9A $211.0E $288.1E

V/Sales 3.8x 1.7x 1.3x

PS (GAAP)

1 (Mar) $0.36A $0.54A $0.55E

2 (Jun) $0.40A $0.80A $0.62E

3 (Sep) $0.56A $0.59E $0.71E

4 (Dec) $0.49A $0.48E $0.66E

Y $1.81A $2.38E $2.55E

E 7.7x 5.9x 5.5x

BITDAS

1 (Mar) $11.3A $25.3A $35.7E

2 (Jun) $11.9A $39.2A $40.2E

3 (Sep) $16.3A $30.8E $46.1E

4 (Dec) $20.4A $31.5E $49.0EY $59.9A $126.9E $171.0E

V/EBITDAS 6.1x 2.9x 2.1x

China MediaExpress Holdings, Inc.(Nasdaq: CCME)

Our extensive due diligence reinforces our thesis; Reiterate Buy.

Summary:During our recent trip to China, we conducted extensive due diligence and channel checks on C

business. We met with the company's entire management team including six regional man

checked CCME’s sales contracts and bank statements, and interviewed advertising agencies,

advertisers and bus operators. We took buses in Beijing, Fuzhou and Guangzhou to vie

company’s operation and advertising programs. In addition, we met with a representative from

a market research firm, and two directors at Starr International. Our due diligence results rei

our thesis on the company and we continue to believe that CCME is a leader in its niche mark

believe the fundamentals of the business remain solid. Thus, we reiterate our Buy rating.

Highlights

Interviews with advertising customers. CCME works with ~30 ad agencies who contribute ~7total revenue, with the remaining 30% from direct advertisers. We interviewed a number of ad agand direct advertisers, including agencies which purchase advertising time in Beijing and Guanairports. The revenue amount these agencies disclosed to us matched that in the sales contracts acustomer list and revenue breakdown presented by CCME. These customers represent annual covalue of approximately RMB400MM ($60MM), or ~30% of our estimated ‘10 revenue. The agereceive business either directly from brands or from 4As or other large advertising agencies. advertisers stated that CCME’s large network and quality customer service make it the top chothe inter-city bus market.

Interviews with bus operators. CCME’s network currently covers over 60 bus operators and c25,000 buses. The bus operators we interviewed ran a total of 4,000 buses. They receive concfees ranging between RMB600 and RMB1,500 per bus per month, which we view as consideraas compared to its peers in other outdoor media markets. We believe the low cost is due to of major competitors in this niche market as well as weak bargaining power from bus operatoroperate in a highly fragmented market. Concession fees typically account for 70%+ of COGS of acompany. Continuing to control concession fees is a key task for a media company. We believe thlevel 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 opeand programs. The programs were rotated with 30 minutes of entertainment content and 10 minadvertisements. We saw brands including multinational names such as Pepsi-Cola, P&G, CocaSiemens, and Samsung, and well-known domestic brands such as China Mobile, China Post, WaBeverage, Tongyi Green Tea, Huangjin Dadang Nutrition and Yili Dairy, among others. Bus opeexpressed favorable feedback from passengers; we believe the availability of various entertaicontent makes passengers more receptive to advertising programs.

Meeting regional managers. We met with regional managers in charge of sales and customer sin Beijing, Guangdong, Sichuan, Jiangsu, Hubei and Fujian. We cross checked with them the nof buses, top agency customers and total revenues in each region. Currently there are ~30 peoeach region who provide customer service to existing customers and develop new local customerdirect advertisers) in the region.

Visit to Starr International. We visited Starr’s Shanghai office and met with directors who they have done a thorough due diligence before their $30MM investment in January, including

ACNielsen to conduct due diligence and market research, and Deloitte to audit CCME’s financialsindicated that they monitored CCME’s operation and financial results on a monthly basis and conto believe in its fundamentals, which is further evidenced by Starr’s additional investment of $13announced earlier this week to purchase 1.5MM common shares from early investors of the com

Reiterate Buy. We have spent substantial time and effort in our ongoing due diligence over ththree months, the results of which reinforced our thesis. Shares are currently trading at just 6x oEPS (or 4x after backing out $139MM or $3.89/share in net cash). We expect more positive cain the near term as the company continues to expand its network. As such, we reiterate our Buyand $21 price target, which is 9x our ’10 EPS of $2.38.

Company Description: China MediaExpress provides TV advertising network on inter-city e

buses and airport express buses in China.

SEE ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES AT THE END OF THIS REPORT



China MediaExpress Holdings, Inc. (CCME) DisclosuresPing Luo, CFA, certify that the views expressed in this report accurately reflect my personal beliefs about this company and that I have not and will not r

ompensation directly or indirectly in connection with my specific recommendations or views contained in this report.

Jodi Dai, certify that the views expressed in this report accurately reflect my personal beliefs about this company and that I have not and will not receive comperectly or indirectly in connection with my specific recommendations or views contained in this report.

s with all employees of GHS, a portion of our analysts’ compensation is based on investment banking revenues.

lobal Hunter Securities, LLC does and seeks to do business with the companies covered in this research report.

Risks & Considerations

ncrease in concession fees. CCME’s core strategy is expanding its network within inter-city express buses. Successful execution relies at a large exten

artnership with bus operators. The company signed concession rights contracts with bus operators to display advertising programs on their buses. These cosually have a term of 5-8 years and allow concession fee to increase 10-30% every year. CCME’s future growth is dependent upon its ability to renew these coith existing partners or to obtain new contracts with new operator partners. Although majority of the contracts expires after 2015, some of these contracts sxpire at the end of 2011. The company may not be able to renew the contracts with the bus operators or they may encounter significant increases in concees, which will have a severe negative impact on the operation and profitability of the company’s business. The bus operators may set up a bidding systemvites competition and results in significant increases in costs for CCME.

ncrease in entertainment content fees. The company currently receives free entertainment content mainly from Fujian Southeastern TV and Hunan Satelhe agreement with Hunan Satellite TV expires in August 2010, and agreement with Fujian Southeastern TV expires in 2015. If CCME could not renew the agreer the two TV stations decided to charge CCME on the content, the profitability of the company could be negatively impacted or the company may have to loternative ways to obtain entertainment content.

ncreased competition. CCME does not currently have significant competition on inter-city express buses However, as mentioned, if bus operators open up a bystem, it could attract domestic and foreign media companies with strong financial resources and better technologies to compete for the inter-city bus adveusiness. Cost control and technology improvement is essential to CCME’s business. CCME also faces indirect competition from more traditional advertising chauch as TV and newspaper advertising, and other out-of-home advertising platforms such as airports and public mass transit systems. CCME’s clients typically adrough many different platforms in order to reach a broad range of consumers. The company competes for its clients’ advertising dollars with other media pla

echnology obsolete. The company current operates its advertising program with digital TV screens and hard disk drives and changes the programs manualr twice a month. Continued technology improvement is important to retain current advertiser and bus operator relationship. If a competitor presents more sophisechnologies which increase the effectiveness of advertising and better enhance passengers’ travel experience, advertisers and bus operators may opt to woat competitor.

xecution risks. The company plans to expand to new geographic regions and also introduce new services to its advertiser client such as publishing on-bus mao promote its clients’ products and service and setting up call centers to take orders on behalf of advertisers. The company may incur unexpected challenges inew regions as well as new business initiatives.

egulatory risks. CCME is subject to a series of advertising regulations to ensure that the content of the advertisements is fair, accurate and in full compith applicable laws. Violation of these regulations may result in penalties including fines and orders to cease business. In addition, China has been dereguladvertising market, allowing foreign companies to operate in China’s advertising industry. Continued deregulation may expose CCME to competition with moreational advertising companies with significantly greater resources.

VIE structure. CCME does not have equity ownership but relies on contractual arrangements to control its key operating subsidiary Fujian Fenzhong Mediaperates as a variable interest entity (VIE). Though the possibility is remote, if Chinese government changes its policies on VIE structures, CCME may lose f its key operating entity.

Explanation of Ratings

uy - The stock should be purchased aggressively at current prices. The stock is expected to trade higher on an absolute basis and be a top performer relaeer stocks over the next 12 months.

ina MediaExpress Holdings, Inc. (CCME) Company Update October 1

obal Hunter Securities, LLC Equity Research



ccumulate - The stock should be purchased at current prices. The stock has an attractive risk/reward and is expected to outperform peer stocks over th2 months.

eutral - The stock has average risk/reward and is expected to perform in line with peer stocks over the next 12 months.

educe - The stock should be sold at current prices. The risk/reward has become less attractive and is expected to underperform peer stocks over the next 12 m

ell - The stock should be sold aggressively at current prices. The stock is expected to trade lower on an absolute basis and be a top underperformer relaeer stocks over the next 12 months.

Ratings DistributionResearch Coverage Investment Banking Clients*

Rating Count % of Total Count % of Total % of Rating CategoryBuy 92 82.9% 9 90.0% 9.8%

Accumulate N/A N/A N/A N/A N/ANeutral 18 16.2% 1 10.0% 5.6%Reduce N/A N/A N/A N/A N/ASell 1 0.9% 0 0.0% 0.0%Total 111 100% 10 100% 11.1%

*Investment banking clients are companies from whom GHS or an affiliate received compensation from investment bankingservices provided in the last 12 months.Note: Ratings Distribution as of September 30, 2010

his material has been prepared by Global Hunter Securities, LLC ("Global Hunter") a registered broker-dealer, employing appropriate expertise, and in the beliefair and not misleading. Information, opinions or recommendations contained in the reports and updates are submitted solely for advisory and information pur

he information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore excny obligations under law, we do not guarantee its accuracy. Additional and supporting information is available upon request. This is not an offer or solicitatioffer to buy or sell any security or investment. Any opinion or estimates constitute our best judgment as of this date, and is subject to change without notice.

unter and our affiliates and their respective directors, officers and employees may buy or sell securities mentioned herein as agent or principal for their own acot all products and services are available outside of the US or in all US states. Copyright 2010.

ina MediaExpress Holdings, Inc. (CCME) Company Update October 1

obal Hunter Securities, LLC Equity Research

CCME Oct 15th, 2010 Global Hunter Report

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