SearchMedia Holding. A Chinese Company with American Management
Last September,I went to Shanghai to attend SearchMedia Holding (IDI) AGM in Shanghai.I bought this stock in my portfolio.And I came there to verify that the company is really legit. I came back impressed my CEO and COO’s presentation and their strong intention to grow the company to be the leader in China Outdoor Advertising industry (they are currently number five or six based on revenue). I will point out how I view this company as a good play for investors who believe in the potential in China which is expanding very quickly in past years (assuming no hard landing in Economics in the coming years) .And this company should be 100% legit.I believe we can trust on CEO which is American and was a senior management in US listed before.So you can eliminate the discount of fraud factor that appears in another US-listed Chinese companies in US stock market.
The History of SearchMedia and Ideation
Ideation Acqusition Corp was a blank-check company created by Dr. Phillip Frost and his nephew, Robert Fried . Ideation went public in November 2007.And it has raised about $80 million from capital market. The cost basis for initial investors is about $6.00 from form-4 filling in November 2007. IDI acquired SearchMedia from former shareholder (Chinese managements and Chinese venture capital companies).Mr Robert Fired served as a CEO during the acquisition period.
SearchMedia was formed in 2005. It has operation in Out-of-home(OOH) media in China. It has operation in Billboard, In-elevator and transit advertising spaces. It expanded by organic growth and also by acquisition.It acquired 11 subsidiaries in 2008.
SearchMedia claimed that it had $88 Million as a revenue in 2008.IDI issued new shares to former shareholders of SearchMedia.The deal included 9 million shares and about 1 million in warrant ($6 conversion price). After the acquisition finished,Ideation changed its name to SearchMedia. And Dr Philip Frost installed new management team from USA. The new CEO ,Paul Conway, was an investment banker from Oppenheimer .He specializes in OOH Industry in both US and China and has done many deal in China media sector. IDI planned to continue its growth in China market by acquisition. The Outdoor Advertising space is very fragmented .The biggest player is Focus Media(NASDAQ:FMCN) still has about single digit market share.
But after the new management was in charged . They found that a lot of revenue from Old -SearchMedia was fabricated (Remember CCME.PK? ) . So they fired almost all of Chinese management in company and delayed the audited report in 2009.
IDI filed new audited report and restated revenue in 2008 was down by $45.7 million (almost half of $88 million from the previous financial report ). IDI wrote down a lot so the financial report does not look pretty good. It turned out that the in-elevator platform that SearchMedia has an operation on its own was not as a good as the former SearhMedia shareholder claim it was. The former team overstaed the revenue by 2 times.It was done by fake account receiveable and etc . But some subsidiaries are still have real and legit operation.
In 2010, it was the year for rebuilding company. Mr. Conway (NYSE:CEO) hired new auditor and changed a lot of internal control. IDI filed a lawsuit against former SearchMedia’s shareholders which own about 9 million shares(total share count is 20.9 million shares). They amended the earn-out agreement with the subsidiaries .They decided to keep some of them because they are still real .They also acquired a profitable bill board operator (Zhejiang Continental) .
The net income from acquired subsidiaries, which excludes the Company's headquarter elevator business and corporate expenses, was around $8-9 million in 2010
In 2011, IDI installed new COO ,Mr. Johnny Lo to Chief Operating Officer . He is veteran in Outdoor Advertising in China. IDI appointed new director , Mr. Peter W. H. Tan to Board of Directors . He is a venture capitalist in China. I think this is very good development of the company. I met Mr.Johny Lo in the AGM ,he seems pretty smart very dedicated to the company just like Mr Paul Conway who has a vision to grow IDI to a leader in China. The management I met in AGM both CEO and COO seem to have very strong determination to pursue this goal.
My investment thesis on SearchMedia
1.They were duped once from very first acquisition .I expect that they learn a very good lesson and will continue to operate safely in the future. The CEO said that their plan in acquisition is to use portion of cash and stock deal. One portion will be paid instantly on the acquisition date but big portion of cash or stock will be paid upon performance of the acquired entity within 1-2 year. So SearchMedia will have time to verify if they got the right and legit one to be in their holdings.If it is not ,they can terminate the earn-out clause.
2.The market becomes less competitive. Mr. Paul Conway told me in the AGM that back in 3-4 years back. There were a lot of capital flowed in to back the OOH market in China. When they came to bid in a concession to seal an advertising space they bid it to insanely-level price because of easy money . And it was very hard to win with a profitable concession. The same thing happened if you tried to acquire companies. Too much competition back then. But right now, the capital is tight. Because it is harder to get company listed in Foreign capital market due to massive scam of Chinese companies .And few venture capital want to seed on this segment in China. This increased the chance for IDI to success by both acquiring a good company that plan to list in oversea but cannot do it right now and seal the deal in renew or get the new profitable advertising space . Their competitors became less aggressive now.For example, Focus Media will not as aggressive as they were. They will put $650 million to share buyback program .
3.The balance sheet look weak but it mostly from the consideration payable to the subsidiaries. Which mostly in stock deal at cost basis around $6.88 per share. In latest earning release , IDI will issue 1.3 million share and eliminate $9.6 million in consideration payable ($7.4 per share). This will result a gain on financial report because share price now is a lot less than that . And for the stock deal to pay for Zhejiang Continental (latest acquisition) .It costs $19 million in acquisition and around $10 is payable in stock .The conversion price is average 30-day price after the audited 2011 report is release ( IDI paid about 6x net income for Zhejiang Continental)
4.By first half of 2011,revenue increased 36.7% to $28.3 million from $20.7 million in the prior year period . IDI turned profitable in the first half of 2010 at $0.7 million .This look very tiny but it is important step In OOH media, most of the costs are fixed which is concession fee ,lease payment, etc. The current occupancy rate in 2010 for IDI is 80% for billboard, 60% for in-elevator and 30% for bus and subway advertising. If the rate increase ,it go straight to the net income line. So it is not hard for OOH company to has very high gross margin (FMCN has more than 50% Gross Profit Margin) .Actually, all the subsidiaries business are profitable by $9 million in 2010.The loss incurred was from HQ in-elevator business and corporate cost.
5.In OOH ,the operating side can be divided into 2 parts. One to deal with obtaining new advertising space or renew the current one. In this part, you must have a good connection with locals to succeed .So this part has to be done by local entrepreneurs .That’s why IDI use acquisition strategy to grow because it can acquire the good hand to deal with this aspect also. Another part is to sell the advertising space to media buyers. In this part, the bigger network you have is the better. So IDI try to build a big network to sell it like all-in-one package which can yield a better profit margin. And most of the media buyer in China nowadays are from overseas. They preferred to work with a trustable company .So IDI’s CEO which is American and he brought American style management to company is a plus. That makes overseas companies feel comfortable when they work with IDI
6.IDI is in talk with many acquisition targets. A lot of opportunity these day because it is very hard to do reverse-merger in US stock market for these Chinese companies .Mr. Paul Conway expect that a couple of acquisition that are currently in talk should boost company revenue to around $150 million next year.
7.The company was backed by Dr. Philip Frost .The billionaire investor. He backed and managed OPKO Health (NYSEMKT:OPK) also. He makes an investment in a lot of small cap and turn it to a profitable one. From the AGM ,Dr. Frost currently own 2.5 million shares of IDI (excluding warrant) .His cost basis is a lot higher than current market price. And he has the history of help funding the company when it needed (look at OPK) .So he is a wildcard here if any IDI needs to raise new capital in case if China has a recession or something goes wrong.
8.The claim against former shareholder can result in reduce the share count by 9 million share. But it takes time and it might not result in 100% cancel of their share. Because their subsidiaries have some legit operation(most of the fraud was HQ in-elevator business). Anyway, I expect the share count can be reduce by at least 4-5 million which is good anyway.
9.The company might have to raise new capital to obtain new acquisition and pay the current obligation in lease. But it is not substantial (should be around $15-$16 million) . And we have a good backer which has good record ( Dr. Frost put new money in Opko in the offering that is not much discount from market price and he has done the offering many times ) . Despite, the new share coming they will retire some share in the claims again former shareholder also.
10.Most of the salary for senior management team is by share option scheme which has high conversion price ( at least $2.70 and most are in $6-$7 range) .So they have skin in the game and perfectly align their interests with the shareholders.
In the conclusion,SearchMedia (IDI) was ignored by market participants. Because it is too small (almost no analyst coverage) and thinly trade. It has China-based operation which means fraud-alert in US market these days. And it has very poor balance sheet. But by my thesis above. I think IDI presents an investor a good risk/reward opportunity to gain exposure in China Economics. Now, we all have a concern on the recession everywhere .Europe ,USA and emerging market are no different. If China gets into recession ,the rest of the world will be too. And I feel better to invest in the country that are not as indebted and still in the developing mode. And in the company that is backed by famed investor who has good track record about not taking advantage from minor shareholder (IE,takes majority stake by offering new share a very low price). My investment gain will be aligned with major shareholder and the senior management team of the company as well.
Ideaion Acquestion Old Website (http://www.ideationacquisition.com/)
SearchMedia Current Website (http://www.searchmediaholdings.com/)
IR Unit for SearchMedia ( Email : firstname.lastname@example.org or Paul.Conway@searchmediaholdings.com)
Disclosure: I am long IDI
Disclosure: I am long IDI.