Concerns and Opportunities in Focus Media Group

Focus Media (FMCN) just released its 3^rd quarter results. It was the 4^th quarter in a row that the company had bad news to share with investors. The stock price reached a 5 year low (6.5) after completing a 90% decline from its top price (65) in October 2007. So what happened to one of China's most promising media giants? The purpose of this short article is to provide insights about concerns that led investors to throw out the stock and to show the opportunities the company has to recover from the severe mistakes management made in the last 18 months.

The concerns:

Running too fast and merging 4 companies in 18 months – Focus acquired 4 companies in a very short period (mobile marketing company, in-store ads company, China's leading internet agency – All YES, and poster ads company). The first two new businesses appear to be very bad investments, and the company already wrote off the mobile company and plans to restructure the 2^nd while it writes off 50%, because the in-store advertising business is losing money. The 3rd seems to be a medium investment compared to the traditional business and only the fourth is a very good one.

Research shows that most mergers will fail (75%). A merger is a very complicated move that can confuse a company and create cultural conflicts. Trying to do four mergers in 18 months was a crazy idea and now we can see the results. Teva (TEVA), the biggest generic drug manufacturer is a good example of a company that proved it can constantly merge companies and maintain healthy growth rates.

Loss of Focus – Focus Media grew extremely fast by creating a leading indoor advertising business that offered a unique solution to advertisers in China – reach high end customers in office buildings and residential areas. It worked really well and profits surged, but the growth rate was not enough and the company tried to grow too fast by expanding to three new media segment they knew little about.

Constant changes in senior management – the entrepreneurs that built the company in a very impressive way made crucial mistakes and decided to leave the company. This is a shame, since they created impressive results from 2004 to 2006. They kept providing very good results to investors and detailed reports to enable investors understand their business.

The opportunities:

Return to Focus - One of the things I learned in a navigation course in the army is that if you lose your way, go back to where you started, or got lost. Focus's new management main challenge is to go back on track. The indoor advertising business is still a very good business and the company needs to put a lot of focus on it. It needs to provide more conservative growth goals to All Yes and enjoy the booming trend of China's internet. Regarding the in-store advertising business, it should close all the losing points of sale and transform this business to become profitable. It can become profitable if only given the right time to learn from business models the company used successfully in the past in the indoor advertising business.

Build a strong management team - The current CEO was very successful in the poster frame business. Now his challenge is much bigger – he needs to fix mistakes that were done prior to his period. By building a very strong management team that will stay at the company long term, he will be able to solve all the problems. Focus's image in the market got hurt from the bad trend in the company, but the current global crisis makes it easier for Chinese companies to recruit and retain good team.

Plan long term and grow in a steady manner – Focus has a great example – the Chinese government. They plan for long term and keep a very nice growth rate for 30 years already. 10-15 percent of growth per year will be enough for Focus to become a giant in 20 years. The former management grew too fast for 4 years and it thought it needs to maintain that growth rate instead of stabilizing the business on healthy growth rate. In 2007 the company reported 144.43M$ net income. If the company will maintain an average 15% growth in the next 20 years, the annual profit in 2027 would be 2.36B$. Based on a future P/E of 20, this will lead to a market cap of 47.2B USD (5,200% compounded growth). This makes sense based on China's bright economic future and Focus's strong market position, and would make every investor in the company very happy.

Build a strong Financial and IR team and reporting mechanism – it seems like the current management need to improve its IR. They keep failing to meet its predictions, unlike the years 2005 and 2006. It should maintain a fixed annual growth, like the biggest global generic drug manufacturer, Teva. This will lead to higher investor satisfaction and confidence and will enable the company to stay very stable even during global world crisis. In comparison, Teva's stock in the last 12 months was very stable (only 13% down from last peak reached in March 2008).

Stock position: Long FMCN.

Comments

[David Oliver:]

I have noticed that their screens are disappearing from some office lobbies now, and I don't see them in my local supermarket anymore. I find their screens intrusive and are not sad to see them go.

2008 Nov 16 07:32 PM