Xinhua Finance Media: Positive Developments Ahead

I am currently holding a fairly large cash balance and mainly holding conservative positions, but I do like to invest a small part of my portfolio in more speculative positions. One stock I recently purchased is Xinhua Finance Media (XFML). XFML is a subsidiary/spinoff of their parent company Xinhua Finance Limited (XFL) which trades only in Tokyo. XFL is a provider of financial information products and is trying to become the "Bloomberg" of China. Among other assets, XFL owns Mergent Inc. which owns the "dividend achievers" indicies and highly respected Ford Research.

XFML leverages XFL's proprietary financial content to create high quality programming, financial print publications and advertising which targets the prime demographic group of high net worth Chinese individuals. Sounds like a pretty good long term area to be in.

XFML is a "busted IPO" which came out at $13 a share but has now dropped to around $8.00. It had some corporate governance issues reported back in May that killed the stock price, but most of this was caused by a few disgruntled employees at Glass Lewis who went to work for a competitor. There are also some shareholder class action lawsuits related to the post-IPO stock price drop. But these law suits have almost become automatic whenever any stock price drops because of all the class action securities lawyers looking for work.

I believe most of the XFML negatives are out, and we are starting to see some positive developments. Here are some of the things I like about XFML:

1) Sponsorship: Vinik Asset Management acquired 2 million shares in the first quarter of 2007. Jeff Vinik is a savvy active trader, so his XFML position may have changed since then, but we at least know that XFML is on his watch list.

2) Stock buy back of $50 million was recently announced.

3) The company is growing rapidly. On July 9, XFML raised its second quarter revenue guidance up to $27-29 million from $23 million.

4) XFML recently acquired Beijing Mobile Interactive Co. in June 2007 which sells mobility, interactive products and services to the booming mobile phone population in China. Their other advertising sales and services businesses are also growing rapidly.

Full Disclosure: I am long shares of XFML.

XFML 4-mo chart

Comments

[lliang88]

I also think the company is good. Though the EPS is lower than expected, the revenue is higher, and the growth is high, too.
Any insight about the recent sell-off? Looks like some sort of manipulation.

[frankposting]

Fredy Bush sacrified EPS to achieve growth. Good for long-term. However, taking shareholders' interest (both long-term and short-term) into account, a good balance is very important. The analysts always push for EPS. An alternative is to add earning outlook on revenue outlook to avoid wildly inflatted EPS estimates from those unfriendly analysts.

[frankposting]

Let's do some math.

For 2Q07, the revenue was $29.0M and EBITDA was $9.1M, thus the gross margin was 31% -- almost inline with the cpmpetitors -- not bad. However, the adjusted net was only $2.8M, i.e., the operation margin was only 10% -- too low.

If the revenue for 3Q07 can reach the consensus ($38M), XFML needs 22% operation margin to meet the current estimated EPS ($0.12).

For the year 2007, XFML needs 27% overall operation margin (wrt $130M revenue) to meet the current estimated EPS ($0.35).

I believe that XFML will have difficulties to achieve those expectations. Better to add XFML's own earning outlook on revenue outlook. Otherwise, low pps will continue to hunt XFML.