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1/5SEE ANALYST CERTIFICATION AND OTHER IMPORTANT DISCLOSURES AT
THE END OF THIS REPORT
Global Hunter Securities, LLCFort Worth Houston Los Angeles New
York
Newport Beach New Orleans San FranciscoInstitutional Sales &
Trading: (949) 274-8050
Research: (949) 274-8052www.ghsecurities.com
August 16, 2Company Upd
Ch
Senior Analyst: Ping Luo, [email protected]: (212)
644-8
Associate Analyst: Jodi [email protected]: (212)
644-8
China MediaExpress Holdings, Inc.(Nasdaq: CCME)Event: Strong Q2
results. Raising estimates and price target; Reiterate Buy
Summary: China MediaExpress (CCME) reported strong Q2 results
which highlightedimpressive gross margin improvement due to greater
contribution from higher-margin airpexpress buses. The company
continued to expand its network by adding new buses operators into
its system. The company also generated strong operating cash flow
of $25MMthe quarter and further strengthened its balance sheet.
With $139MM in net cash, managemexpressed the consideration of
various options to improve shareholders value. We expcontinued
growth as the company further expands its inter-city and airport
bus network aexplores value-added services. Despite a strong 1H,
CCME reiterated its prior FY10 net incoguidance, which we view as
conservative. We are raising our 10 and 11 EPS estimates. believe
shares are considerably undervalued, trading at just 4.5x our 10
EPS estimate. Thwe reiterate our Buy rating and raise our 12-month
price target from $18 to $21, represen
9x our new 10 EPS estimate.Highlights
Strong Q2 results. Q2 revenue of $53.5MM was roughly in line
with our $55.1MM estimate and represeover 180% YoY growth and 20%
QoQ growth, driven mainly by expansion in network coverage. Net
incof $28.5MM or $0.80 per share (based on 35.8MM diluted shares)
was far ahead of our estimat$21.5MM or $0.53 per share (based on
40.5MM diluted shares). In Q2, the company continued to
expannetwork. It increased the number of bus operators and number
of buses from 46 and 20,422 at the end oto 59 and 22,775 at the end
of Q2, respectively. At present, the company has its programs
running on o23,200 express buses with 61 bus operators. Airport
express buses that CCME just started reporting incontributed
$13.1MM or 24% to total revenue, representing an 87% QoQ growth.
CCME currently coversairports in Guangzhou, Fuzhou, Beijing, and
Qingdao.
Gross margin shines. The EPS outperformance in Q2 was largely
due to an impressive gross marg79%, representing a significant
improvement from 62% in 2Q09 and 60% in Q1, and compared to
estimate of 64%. We believe the higher than expected gross margin
was primarily attributed to increaweight of airport express buses
(24% of Q2 revenue versus 16% in Q1) which carries much higher
marg(over 80% versus ~60% for inter-city express buses). Management
expects gross margin to stayapproximately 70% in 2H.
Strong balance sheet and cash flow. The company generated strong
operating cash flow of $25MM foand $38MM for 1H. As of the end of
Q2, CCME had $139MM in cash and no debt, up from $114MMcash at the
end of Q1. In regards to the use of cash, management plans to
deploy $10MM for equipmupgrades and repairment, $10MM-$20MM to
acquire operating rights from other media companies, $10MM-$20MM to
implement a new value-added service project (on-bus brochures).
With plenty of casits balance sheet, management mentioned that the
board is considering various options to maximshareholders value,
weighing alternatives such as a share buyback, dividend
distribution, and investminto future expansion.
FY10 guidance appears conservative. Management expressed
confidence in continuing to expandnetwork while keeping concession
fees stable. However, management also cited uncertainty in
Chieconomic outlook in 2H and potential increases in costs of new
projects as a basis for prudence. Therefdespite an impressive Q2,
the company reaffirmed its prior FY10 guidance of $82MM-$85MM in
adjustedincome (excluding acquisitions and non-cash charges), which
we view as conservative.
Raising estimates. We maintained our 10 and 11 revenue
projection at $211MM (120% YoY) $288MM (36% YoY), respectively. We
increased our gross margin assumption from 59% to approxima64%-65%
for the next six quarters, on increased revenue from higher margin
airport buses. This is belowroughly 70% gross margin management is
projecting. We remain conservative considering potential cincreases
associated with new concession rights contracts with new bus
operators, lump sum paymentsacquisitions, and renewal of existing
contracts when they start to expire in 11. Our 10 net income
estimwas increased from $83MM to $92MM based on the upside in Q2
and a higher gross margin, and ourEPS estimate was raised from
$2.03 to $2.38. We also increased our 11 net income estimate from
$113to $126MM, and our 11 EPS estimate from $2.30 to $2.55.
Reiterate Buy rating and increasing price target to $21. We
expect CCMEs impressive gromomentum to continue in 2H10 and 2011,
as the company expands its network and explores value adservices
and new strategic initiatives. Shares are trading at just 4.5x our
updated 10 EPS estimate, whwe believe is considerably undervalued
given an average forward P/E of 20x and median P/E of 10x in peer
group. We reiterate our Buy rating and raise our price target from
$18 to $21, which reflects a 9x multiple based on our updated 10
EPS estimate of $2.38.
RICE CHART
STIMATES - US $ (M M s except mult ip les & EPS)
FY 0 9 FY 10 F Y 10 F Y 11 F Y 11
Prio r N ew Prior N ew
evenues
1 M ar 18.8$ A 44.5$ 44.5$ A 59.0$ 60.1$ E
2 Jun 19.1$ A 55.1$ 53.5$ A 67.0$ 67.6$ E
3 Sep 26.1$ A 55.6$ 55.7$ E 78.0$ 77.7$ E
4 Dec 32.0$ A 56.3$ 57.3$ E 84.0$ 82.7$ E
Y 95.9$ A 211.5$ 211.0$ E 288.0$ 288.1$ E
V/ S al es 2 .5x 1. 2x 0 .8 x
PS, Diluted
1 Mar 0.36$ A 0.54$ 0.54$ A 0.49$ 0.55$ E
2 Jun 0.40$ A 0.53$ 0.80$ A 0.55$ 0.62$ E
3 Sep 0.56$ A 0.51$ 0.59$ E 0.65$ 0.71$ E
4 Dec 0.49$ A 0.46$ 0.48$ E 0.61$ 0.66$ E
Y 1.81$ A 2.03$ 2.38$ E 2.30$ 2.55$ E
/ E 5.9 x 4 .5x 4 .2 x
BITDA (Adjusted; see model)
1 M ar 11.3$ A 25.2$ 25.3$ A 31.9$ 35.7$ E
2 Jun 11.9$ A 29.5$ 39.2$ A 36.1$ 40.2$ E
3 Sep 16.3$ A 29.8$ 30.8$ E 41.9$ 46.1$ E
4 Dec 20.4$ A 30.2$ 31.5$ E 45.0$ 49.0$ E
Y 59.9$ A 114.7$ 126.9$ E 154.9$ 171.0$ E
V / E B I T D A 4 . 1x 1. 9 x 1. 4 x
Enterprise Value: $243MM
Tangible Book Value/Sh: $4.21
Net Cash/Sh:
1.9MM
$3.89
Market Cap: $383MM
Cas h & Investments: $139MM
Debt: $0MM
Pri ce Target M etrics: 9x P/E (2010)
Rating: Buy
Price Target: $21.00
35.8MM
2-w eek Range: $7.51-$14.82
Curre nt Price: $10.68
Diluted Shares:
Average Daily Volume: 340k
Float: 27%
Short Interest:
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
$0
$2
$4
$6
$8
$10
$12
$14
$16
10/09
11/09
12/09
1/10
2/10
3/10
4/10
5/10
6/10
7/10
Company Description: China MediaExpress provides TV advertising
network on inter-city express buand airport buses in China.
http://www.ghsecurities.com/http://www.ghsecurities.com/mailto:[email protected]:[email protected]:[email protected]:[email protected]://www.ghsecurities.com/
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China MediaExpress Holdings, Inc. (CCME) Company Update August
16, 2010
Global Hunter Securities, LLC Equity Research Page 4
China MediaExpress Holdings, Inc. (CCME) Disclosures
Analyst CertificationI, Ping Luo, certify that the views
expressed in this report accurately reflect my personal beliefs
about this company and that I havenot and will not receive
compensation directly or indirectly in connection with my specific
recommendations or views contained in thisreport.
I, 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 compensation directly or indirectly in
connection with my specific recommendations or views contained in
thisreport.
Important Disclosures GHS does and seeks to do business with the
company covered in this research report. As with all employees of
GHS, a portion of this analysts compensation is based on investment
banking revenues.
Risks & Considerations
Increase in concession fees. CCMEs core strategy is expanding
its network within inter-city express buses. Successful execution
relies toa large extent on its partnership with bus operators. The
company signed concession rights contracts with bus operators to
displayadvertising programs on its buses. These contracts usually
have a term of 5-8 years and allow concession fees to increase
10%-30% everyyear. CCMEs future growth is dependent upon its
ability to renew these contracts with existing partners or to
obtain new contracts with newoperator partners. Although a majority
of the contracts expire after 2015, some of these contracts start
to expire at the end of 2011. Thecompany may not be able to renew
the contracts with the bus operators or they may encounter
significant increases in concession fees,which will have a severe
negative impact on the operation and profitability of the companys
business. The bus operators may set up a
bidding system which invites competition and results in
significant increases in costs for CCME.
Increase in entertainment content fees. The company currently
receives free entertainment content mainly from Fujian Southeastern
TVand Hunan Satellite TV. The agreement with Hunan Satellite TV
expires in August 2010, and the agreement with Fujian Southeastern
TVexpires in 2015. If CCME could not renew the agreements or the
two TV stations decide to charge CCME for the content, the
profitability ofthe company could be negatively impacted or the
company may have to look for alternative ways to obtain
entertainment content.
Increased competition. CCME does not currently have significant
competition for inter-city express buses, however, as mentioned, if
busoperators open up a bidding system, it could attract domestic
and foreign media companies with strong financial resources and
bettertechnologies to compete. Cost controls and technology
improvement are essential to CCMEs business. CCME also faces
indirectcompetition from more traditional advertising channels,
such as TV and newspaper advertising, and other out-of-home
advertising platformssuch as airports and public mass transit
systems. CCMEs clients typically advertise through many different
platforms in order to reach abroad range of consumers. The company
competes for its clients advertising dollars with other media
platforms.
Technology obsolete. The company currently operates its
advertising program with digital TV screens and hard disk drives
and changesthe programs manually once or twice a month. Continued
technology improvement is important to retaining current
advertisers and busoperator relationships. If a competitor presents
more sophisticated technologies which increase the effectiveness of
advertising and better
enhance passengers travel experience, advertisers and bus
operators may opt to work with that competitor.Execution risks. The
company plans to expand to new geographic regions and introduce new
services to its advertiser clients such aspublishing on-bus
magazines to promote its clients products and services and setting
up call centers to take orders on behalf of advertisers.The company
may incur unexpected challenges in these new regions as well as new
business initiatives.
Regulatory risks. CCME is subject to a series of advertising
regulations to ensure that the content of the advertisements is
fair, accurateand in full compliance with applicable laws.
Violation of these regulations may result in penalties including
fines and orders to ceasebusiness. In addition, China has been
deregulating its advertising market, allowing foreign companies to
operate in Chinas advertisingindustry. Continued deregulation may
expose CCME to competition with more multi-national advertising
companies with significantly greaterresources.
A VIE structure. CCME does not have equity ownership but relies
on contractual arrangements to control its key operating
subsidiaryFujian Fenzhong Media, which operates as a variable
interest entity (VIE). Though the possibility is remote, if Chinese
government changesits policies on VIE structures, CCME may lose
control of its key operating entity.
See the Companys most recent SEC filings, including 10-Ks,
10-Qs, 8-Ks and proxy filings, for additional risks
andconsiderations.
Other Companies Mentioned In This Report None
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China MediaExpress Holdings, Inc. (CCME) Company Update August
16, 2010
Global Hunter Securities, LLC Equity Research Page 5
China MediaExpress Holdings, Inc. (CCME) Disclosures
(Continued)
Historical Recommendations
Date Rating Price Target
1. 7/1/2010 Buy $18.00 $8.772. 8/15/2010 Buy $21.00 $10.68
Closing Price
Initiated coverage on 7/1/2010 with a Buy rating and price
target of $18
$0.00
$2.00
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$6.00
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$12.00
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10/15/09
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12/17/09
12/24/09
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6/24/10
Explanation of RatingsBuy: We expect the stock to outperform the
average total return of the stocks in the analysts industry (or
industry teams) coverageuniverse over the next six to twelve
months.Neutral: We expect the stock to perform in line with the
average total return of the stocks in the analysts industry (or
industryteams) coverage universe over the next six to twelve
months.Sell: We expect the stock to underperform the average total
return of the stocks in the analysts industry (or industry
teams)coverage universe over the next six to twelve months.
Ratings Distribution
Rating Count % of Total Count % of Total % of Rating
Category
Buy 75 66.4% 8 80.0% 10.7%
Neutral 31 27.4% 2 20.0% 6.5%
Sell 7 6.2% 0 0.0% 0.0%Total 113 100.0% 10 100.0% 8.8%
Research Coverage Investment Banking Clients*
*Investment banking clients are companies from whom GHS or an
affiliate received compensation from investment banking services
provided in the
last 12 months.
Note: Ratings Distribution as of June 30, 2010
Disclaimer & Other DisclosuresThis material has been
prepared by Global Hunter Securities, LLC ("Global Hunter") a
registered broker-dealer, employingappropriate expertise, and in
the belief that it is fair and not misleading. Information,
opinions or recommendations contained in thereports and updates are
submitted solely for advisory and information purposes. The
information upon which this material is based
was obtained from sources believed to be reliable, but has not
been independently verified. Therefore except for any
obligationsunder law, we do not guarantee its accuracy. Additional
and supporting information is available upon request. This is not
an offer orsolicitation of an offer 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. Global
Hunter and our affiliates and their respective directors, officers
and employees maybuy or sell securities mentioned herein as agent
or principal for their own account. Not all products and services
are availableoutside of the US or in all US states. Copyright
2010.
