Xinhua Finance Media Grossly Undervalued; Expecting Major Upside

On 29 May 2007, Xinhua Finance Media Ltd. (XFML) committed US $50 million towards a share buy-back program. In the words of the Company:

We believe that XFMedia’s stock has been unduly punished in recent days and that buying back shares represents an excellent investment at prevailing price levels – especially in light of our strong first quarter results and positive outlook.

Since the announcement, XFML stock price has whipsawed through the month of June. The stock has moved from a low of $6.90 on June 1, 2007 to a high of $10.51 on June 20, 2007. The stock currently trades at $8.67 as of June 28, 2007 close, up 25.65% from its June 1, 2007, low.

With a lackluster IPO in March 2007, XFML has become a haven for those shorting the stock. Data from a website tracking short interest provides the following for XFML:

Short interest increase: 724%
Shares short prior period: 612,000
Shares short current period: 4,432,900
Days-to-cover: Four

It is not my intention to build a case for XFML as a short squeeze candidate, although the data above suggests XFML as a very good candidate for such a squeeze. I look to analyze the Company on a fundamental footing and understand why XFML is penalized and ignored by Wall Street.

Institutional Ownership

Financial institutions own 19.5% of the 135.82 million common shares outstanding. In the past 3 months institutions have been net buyers adding 13.62 million shares into their kitty. The top institutional holders as of 31 March 2007 are:

Vinik Asset Management LP: 2.00M shares
Trafelet & Company: 1.46M shares
OZ Management: 1.31M shares
J.P. Morgan Securities Inc.: 1.15M shares
Jennison Associates LLC: 1.12M shares
Waddell & Reed Investment: 0.70M shares
Federated Investors, Inc.: 0.50M shares
Legg Mason Capital Management: 0.50M shares

Revenues

Revenues are broken across the following categories as per the table below:

Advertising sales and advertising services both show strong top-line growth on annual and quarterly basis.

New Revenue Streams
487 Million Mobile Phone Users in China

XFML is looking to market mobility, interactive products and services to the fast growing and very active mobile phone population in China. To this end XFML acquired a 100% stake in Beijing Mobile Interactive Co. in June 2007. Going forward one expects the mobile phone segment to contribute substantially to both top and bottom-line performance. It is an important development and highlights the understanding that management has of business opportunities, economic and political landscape of China.

Conclusions

Sell-off is overdone!

Yes, the sell off has been overdone and the 25% retracement seen in June reflects this sentiment.

Lets look at some additional data under the following assumption – XFML will meet the forecasted EPS targets set out for FY 2007, FY 2008 and FY 2009. The data below is gleaned from various analyst forecasts.

Stock Price (June 28) = 8.67
Forecasted EPS, FY 2007 = $0.38
Forecasted EPS, FY 2008 = $0.62
Forecasted EPS, FY 2009 = $0.76
Forward P/E (3 Years) = 14.77
Forward EPS growth rate = 41.42%

Forward PEG = 0.36

The PEG ratio indicates that XFML is grossly undervalued compared with peers such as Focus Media (FMCN) whose forward PEG ratio is at 0.76

Based on the above data, in my opinion, the path of least resistance points upwards for XFML.

I expect XFML to breach $16 within the next three Quarters.

Disclosure: The author is long XFML.

XFML 3-mo chart

Comments

[Chimin Sang]

Sorry, Deepak, but you are on the wrong side of investment. Put it short: poor corporate governance is unforgivable in this case, and this company lacks organic synergy of its own. XFML has little history, little culture, a bogus name. It is doom to fail.

[STLPlace]

While I am not good at predicting the stock price in near term,
I am not confident about Xinhua Finance's long term success.

www.stlplace.com/2007/.../