IPO Review: China Mass Media International Advertising Corp.

Business/Overview

China Mass Media International Advertising Corp. is a leading independent television advertising company in China. It provides a full range of integrated television advertising services, including:

• Advertising agency services: It provides advertising agency services to its clients by providing them with the advertising time slots that company obtained from CCTV**.
• Special Events Services: Under these services company undertakes sales and marketing of advertising time slots on CCTV** Channels 1 and 2 during major sporting events that will be broadcasted on these channels. Such sporting events include the Olympic Games, the FIFA World Cup and various other major sporting events.
• Production and Sponsorship Services: Provides "one-stop shop" services by rendering a full range of services, including planning, designing and production of television advertisements to its clients.

**CCTV: China's largest television network owned by China's central government

Operational Performance/Growth

Growth in minutes per day of advertising rights is the prime factor in judging company's operational performance and growth:

• Company secured advertising rights on an average of 37 minutes per day in 2005 and 2006, and 35 minutes per day in 2007, for regular daily programs on CCTV Channels 1 and 2.
• For 2008, it has obtained advertising rights of number of daily television programs either directly from CCTV or through agreements with "Guang Er Gao Zhi FTP", These programs offer a total of approximately 104 minutes of advertising time per weekday and approximately 78 minutes per day during the weekends, on CCTV Channels 1, 2 and 4.
• In addition since 2004 it had secured exclusive advertising rights of substantially all of the time slots during the annual Chinese New Year Gala program, which is watched by almost 40% of all television viewers in China every year.
• In December 2007, company also entered into an agreement with CCTV, to assist CCTV in the sales and marketing of advertising time slots in connection with all major sporting events to be broadcasted on CCTV Channels 1 and 2 in 2008, including the 2008 Beijing Olympic Games.
• In July 2008, it secured the exclusive advertising rights of CCTV's Spanish and French Channels, which are broadcast 24 hours a day to 36 countries around the world.

Financials

FY 2007 Vs FY 2006

• Company's revenues shows a rise of over 8% in FY 2007 as compare to FY2006.

Company's net income shows a rise of 23% in FY 2007 as compare to FY 2006 mainly due to reduction of income tax expenses as compare to corresponding period.

Q1 2008 Vs Q1 2007

• Company's revenues shows a rise of over 34% in Q1 FY 2008 as compare to Q1 FY 2007.
• Company's net profit shows a decline of over 20% in Q1 FY 2008 as compare to Q1 FY 2007 mainly due to high rise in income tax expenses and initial loss in new business undertaken in "Advertising agency services" segment.

Industry growth and outlook

(these are just assumptions and company/industry can perform differently)

China already has largest television population in the world, with the growing economy this number is rising further and also the popularity of television as a preferred advertising medium. China's television advertising market has developed significantly over the last decade.

• According to "ZenithOptimedia", China's television advertising spending is projected to reach US$8.7 billion in 2010, representing a CAGR of 13.8% from 2007 to 2010.

China Advertising Agency Market

• According to "Datamonitor", the China's advertising agency market generated total revenues of US$3.6 billion in 2006, representing a four-year CAGR of 24.2% since 2002.

With the expected moderate/high growth, the outlook for industry is positive

Company's Expectations/Outlook

(these are just assumptions and company/industry can perform differently)

• Its existing contracts will continue to give steady operating returns to company. (most of these contracts are signed on yearly basis and had to be renewed every year)
• Baring unforeseen circumstances like what happen in second quarter, company will show moderate growth in future, although wide fluctuations are expected in profits due to recent businesses undertaken and company's intention to further grow its business. (new businesses take some time to show profits and till then they put pressure on profitability of existing businesses)
• In first half of current financial year company shows a decline in profits due to business expansion, natural calamity, business dispute and rise in income tax expenses.
  • Now business expansion is on right track.
  • Effect of natural calamity on company will be more or less over by Q3 FY 2008.
  • Business dispute is now under judicial procedure and will only effect company after court decision.
  • Income tax expenses from now on will remain on higher side due to expiration of tax holiday and imposition of withholding tax.
• In near future company is expected to show some growth in its "advertisement agency" segment due to new businesses undertaken in early 2008 (which so far are showing losses.)
• Its "Special Events Services" segment can show greater rise than other segments due to upcoming Olympics in near future.
• Its "Production and Sponsorship Services" segment holds more promise as well as more risk than other two segments as now company has intended to enter in television program production.

Negatives

• Complex corporate structure

  As for most China based companies the corporate structure is complex. To meet the Chinese regulatory requirements company operate and control its business through various subsidiaries, and other entities under various contractual agreements.

• Dependence on CCTV

  Currently company depends almost entirely on CCTV for its media resources mainly advertising rights.

• Geographical risk

  Company generate all of its revenues from China.

• High rate of income tax in future

  Due to the expiration of tax holidays company will have to pay higher taxes in future.

• Business is subject to seasonal fluctuations

  Company historically have experienced higher revenues during the first quarter of every year due to Chinese new year celebration program (most widely viewed television program of China).

• Small size of company.
• Recent growth initiative by company can make company's profit to fluctuate even on same period comparable basis.

Positives

• Positive outlook of "Chinese television" industry
• Intention to entry in new businesses

  Company has shown its intentions to enter in television program production which if successful can take company to new highs

• Strong relationships with CCTV

  Company enjoys strong and years long relationship with CCTV. (largest and most viewed television network of China)

• Full range of services

  Unlike normal advertisement agencies, company provides full range of services to its clients right from planning, designing & production of advertisements to airing those advertisements at times most suitable and valued for its clients. This will gives company an edge above other competitors particularly when it comes to attracting new clients.

• Issue proceeds

  Company will receive net proceeds from this offering of approximately US$80.3 million after deducting issue related expenses (assuming an initial public offering price of $6.20 per ADS).

  All the proceeds from this offering will be used for company's future growth and other operational purposes, including potential acquisitions.

• Dividend

  Company currently intend to distribute 20% to 30% of its annual net income as dividends and retain the remainder to operate and expand its business.

Comments

[BreastFeeder2d:]

Very nice post, Thankyou for the insight into CMM. IPO should give them the boost they need to succeed,Olympics will also boost there revenue. I like growth and i see alot of it here.

2008 Aug 02 04:27 AM

[User 239133:]

very cheap listed, PE only 4 times, if listed in Hong Kong, should get much higher PE. , as HK: 623, PE is 23 times listed in June

2008 Aug 06 05:26 AM

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