An absolutely gripping story continues…
Here for the first part, is it a scam or a huge opportunity? Well..
SA Editors: The following research report was issued today by Global Hunter Securities:
We were in China last week to conduct additional due diligence on China MediaExpress Holdings (CCME). We visited CCME’s headquarters again, and reviewed all of its contracts with advertising clients and bus operators, tax filings, and bank statements for the last three years. We called or met 16 top advertisers, who verified a total of approximately $105MM of revenue or ~50% of our estimated 2010 revenue.
We called China Telecom (CHA), and the exclusive advertising agents for Coca Cola (KO) and L’Oreal (LRLCY.PK), who confirmed they have placed ads on CCME’s platform. We also spoke to 17 bus operators, who confirmed that they have signed in aggregate 14,191 buses with CCME, or 52% of the total number of buses CCME reported. The amount of revenues and buses these advertising customers and bus operators confirmed with us matched the numbers in the contracts we reviewed at CCME.
Shanghai Ba-shi Public Transportation and Eading Group also confirmed their partnerships with CCME. CCME until 2010 had been focused on expanding its intercity bus network in tier II and III cities, and has utilized regional advertising agencies which have extensive local relationships, rather than many of the national 4A agencies. We believe this niche market position and unique approach has made them less visible but kept them very profitable.
Based on our due diligence to date, our thesis remains unchanged: CCME is a leader in the inter-city bus advertising market with a unique business model and large growth potential. We reiterate our Buy rating and $26 price target.
Reviewed contracts, tax filings and bank statements: The company presented to us all of its bus operator and advertiser contracts, tax filings and bank statements for the last three years. The taxes paid and cash balances appeared reasonable and matched GAAP reported numbers.
Verified advertising revenue. We called or met 16 of CCME’s top advertising clients. The revenue they confirmed to us matched what we saw in the contracts provided by CCME. Revenues from these advertisers added up to roughly $105MM, or ~50% of our estimated 2010 revenue. We believe the company currently has a total of 40 agencies and 20+ direct advertisers. The advertisers cited the large size of CCME’s bus network, the enclosed environment and captive audience thus a high “reach” rate, and availability of third party (CTR) media monitor as the reasons why they are engaged with CCME. The company in the past has been choosing regional agencies due to the regional nature of its bus network. These regional agencies have deep relationships with local brands, regional 4A agencies and other advertising agencies from which they receive orders.
Advertisers we called or met: (We use abbreviation of the companies in order not to disclose the CCME business partners. We have documented all the materials including full company names, contact persons and telephone numbers for any compliance check.)
Confirmed number of buses: We called or met the top nine of CCME’s bus operators, and an additional eight bus operators referenced in some internet bloggers’ reports. The number of buses and concession fees per bus per month they told us matched what we saw in the contracts provided by CCME. The number of buses from these operators adds up to 14,191 buses, or 52% of total 27,200 buses reported by the company. From the contracts we reviewed, we believe the company has currently signed contracts with 65-68 bus operators.
We asked when the relationships with CCME started and the terms of the contracts. The majority of these bus operators signed 5-year contracts, one signed a 7-year contract, and one signed an 8-year contract. We asked how many buses they have engaged with CCME and how much is the monthly rent (concession fee). The number of buses they told us matched what we saw in the contracts. The rents/concession fees ranged from RMB500 to RMB1000 per bus per month, which also matched the contracts. They told us the concession fees increased 10-15% every year. We asked how many screens they have and they indicated that normally a bus has one or two screens, but some longer-distance “sleeper” buses have more than four screens. We also asked whether the buses are using DVD or hard disk drives to play programs. They all said they use hard disk drives and screens installed by CCME, and that as soon as the bus starts, the screens and programs are automatically turned on, and will stay on until the bus is off (drivers cannot turn the screen off or change programs).
We also asked whether they are aware of any of CCME’s competitors. They told us they do not see other companies with CCME’s scale. A couple of the bus operators used to work with other media companies before CCME, but switched to CCME for its much larger size, better credibility and services. Some of the bus operators used to have DVD devices installed and their own production teams before CCME, but it took time and resources to find, buy or produce programs, which was a headache for them as that was not their core business.
We also asked them the likelihood of renewing their contracts with CCME once they expire. The bus operators told us it is very likely, because CCME is credible (pays on time), provides good services (the company has a local team on site in each region to repair equipment and change programs twice a month), and has copyrighted programs which make them feel comfortable. They can provide entertainment programs to passengers and get paid every month; most of them consider it a good deal. For some of the bus operators, they have worked with CCME for 4-5 years, and have established stable relationships. They indicated that they see no reason not to renew the contracts after expiration.
We also asked them whether they have seen the document from a division of Ministry of Transport. They said yes. The majority of these bus operators are state owned companies under the Ministry of Transport and would prefer to use business partners recommended by the government authority.
Checked the discrepancy mentioned by some internet bloggers. We contacted the top eight bus operators (by number of buses) mentioned in some bloggers’ reports. Specifically, we visited Shanghai Ba-shi Public Transportation (Group) Co., Ltd, which a blogger said CCME does not have a relationship with. The manager we met there said they have 1,892 buses engaged with CCME (matched CCME’s contract); the monthly concession fee is RMB1000 per bus and they started the 5-year contract in January 2008. Tianjin Long Distance confirmed they have 1,270 buses engaged with CCME, Beijing Yinjian confirmed they have 860 buses engaged with CCME, Beijing Xianglong A-er-sha confirmed they have 430 buses engaged with CCME, Changzhou Highway confirmed they have 500 buses engaged with CCME, Beijing A-er-sha confirmed they have 207 buses engaged with CCME, Tianjin Jinyu confirmed they have 117 buses engaged with CCME. We do not see any meaningful discrepancy between these numbers provided directly by the bus operators and those claimed by CCME.
These state-owned bus companies do not sell tickets online and therefore are not motivated to update their website on time (some websites are as old as 2008). In the case of Beijing A-er-sha, the manager there told us it does only own 20+ buses, but they also manage a bus station and they have signed sub-agreements with other bus companies who stop at this bus station to have CCME’s screens installed on their buses. Beijing A-er-sha monitors those buses and keeps a deposit to make sure that they have complied with the agreements to play CCME programs. In addition, staff from CCME’s customer support goes onto those buses twice a month to change programs. Fujian Sanfu, which only has 33 buses, has also signed sub-agreements and in total has 120 buses in CCME’s network. Changzhou Highway also has sub-agreements with other bus companies.
For all the 17 bus operators we talked to, the numbers of buses they told us did match the numbers that we saw on CCME’s contracts. We verified 14,191 buses and believe the company currently has contracts with 65-68 bus operators. We rode the buses in Beijing, Fuzhou and Guangzhou. The experience is as what we expected.
Met with management and Starr. We felt management was eager to prove the legitimacy and validity of its business. The company has been open and cooperative with our due diligence work. We believe the company is currently assisting Deloitte in completing its annual audit, and has been actively collecting third-party verifications.
In addition, we visited Starr’s Shanghai office again. We believe Starr knows about the company far better than any other parties outside the company. Before investing $30MM in the company in January 2010, Starr had conducted comprehensive financial due diligence (using a big four audit firm), commercial/business due diligence (using AC Nielsen), legal due diligence (checked documentations, licenses, etc), and key management background checks. Starr has also been closely monitoring the company since then. From our visit to the senior management at Starr’s office in Shanghai, we believe Starr continues to believe in the company and remains a long-term investor of the business.
Eading and Switow. We contacted Eading Group, an authorized reseller of Apple (AAPL) and other brands, based in Fujian. CCME management has previously referred Eading as an Apple distributor. To our knowledge, the Chinese translations of reseller and distributor are the same, they both called “Jing xiao shang”. Even on Apple’s Chinese website it has called Eading a “Jing xiao shang”. The General Manager of Eading’s e-commerce division told us they started to negotiate a partnership with CCME five months ago and established the relationship over two months ago. Now CCME receives 2%-5% of the revenues generated from the sales of Apple products, and he believes that the main goal for CCME is to obtain Apple advertising contracts. Eading ships products directly from its own inventory to nation-wide consumers as they place orders through the internet or call centers. Eading has shipped over 100+ orders in the last two months from the Switow platform and he believes the business could soon grow much faster. He believes the consumer group CCME has is a quality group and that the Switow project is a very smart business idea for CCME. We picked up a Switow magazine in a food store in Fuzhou airport last week, called the 400 number, and consulted with the customer service in terms of how to buy an iPad. We noticed the brands on the magazine were mostly electronic products (TV, computer, camera, etc). Well-known international brands include Sony, Toshiba, Apple, Philips, Canon, Nike, Adidas, and domestic brands include Supor, Aigo, etc. Customer service said they had other products: home textile, shoes, kitchen ware, etc.
Our impression. CCME has been using regional advertising agencies as the bus network has been quite regional. The intercity buses usually travel within a province or among adjoining provinces, and until 2010, the company has been focusing on tier II and III cities. We believe these are the reasons why CCME has been less visible. From our conversation with these agencies, we learned that these local agencies, although typically small (20-100 employees), have deep local relationships and are able to receive orders from larger advertising agencies, local 4As, and/or brands directly. Each of these agencies represents 3-10 brands. Approximately 1/3 of these advertisers we talked to said they have represented Coca Cola, Pepsi (PEP), China Telecom or other large brands. They receive orders from these brands’ regional/provincial offices which have authorization to allocate advertising budgets to local ad agencies.
Although CCME has to offer higher discounts to these agencies, they bring large volume in addition to shorter DSOs. According to CCME, direct advertisers currently account for ~30% and ad agencies account for ~70% of its total revenue. Agencies usually sign a one-year contract (in some cases 3-6 months), buy time slots for each month, and pay at the end of the month. With a low profile, CCME has quickly expanded its network into 18 provinces/regions in the last three years and become a leading player in the intercity bus advertising market. We believe CCME probably has so far occupied the best regions and busiest intercity bus routes; it will be difficult for a new competitor to take its market share and compete with CCME. As the company expands into more geographic regions, they are just beginning to use national 4As, and recruit more direct advertisers as well.
Bottom line: Extensive due diligence reinforces our thesis. Maintain Buy.