March 17, 2010 - 2:00am EST by
2010 2011
Price: 12.16 EPS $1.06 $2.11
Shares Out. (in M): 39 P/E 11.0x 6.0x
Market Cap (in $M): 468 P/FCF 11.0x 6.0x
Net Debt (in $M): -100 EBIT 60 119
TEV ($): 368 TEV/EBIT 6.0x 4.0x

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Introduction and history of going public via SPAC in Oct 2009

China MediaExpress (CCME) is a remarkable business, as I will describe, that I wrote about back when it was going public via a SPAC in October 2009 (ticker was TMI then). The key to the original SPAC idea at the time was the warrants (TMI-WT, exercisable at $5.50, since redeemed once the stock hit the $11.50 redemption cap) which were trading at $0.65 with the stock at $8.00 - they had no chance the deal wouldn't go through (and the warrants to $0) due to an amendment they made. The company was clearly worth more than $8 but that was then and now the stock is at $12.16 and much has transpired over the last 5 months. The stock is easily worth $30, I don't know exactly what it's worth, it depends on things that can't easily be predicted, but as they say you don't have to know a man's exact weight to tell he is fat!

After the deal closed in October, people seemed skeptical that it was a good one, especially considering that there was a 93% redemption rate (i.e. 93% of the public SPAC shareholders, mostly hedge funds, chose to redeem for $8 cash rather than get ownership in the business - providing little cash to the business) - how good could the deal be that 93% didn't want to be in on? Well almost all of them were in on the deal for the "discounted cash" trade where if you bought the SPAC shares in March at $6, you were getting $8 worth of t-bills in October with certainty - maybe add some leverage and that's a pretty good risk-free return.

Of course, "hypothesis drift" is frowned upon by many intelligent investors, as it can mean avoiding to face up to being wrong by weaving new facts into your previous story, but it didn't work well here. Personally I like to think I don't have any problem changing my mind when there's new information and like to just think my opinion is the path of least resistance through the facts but we all make mistakes of course! Interestingly I called several funds in this and other SPAC deals and - sticking to their original thesis of the discounted T-Bill trade - they hadn't even looked at the deal and didn't even know the business being brought public. I think the definition of opportunity in investing is when some people know more than others, legally, of course.

There was much skepticism on the legitimacy of the deal and at the time of the SPAC I was confident enough to take a reasonable position ~10-15% (which alone ended up making the investment partnership I run return 83% overall in Q4! Our 2nd best quarter of 2009), though the fraud risk wasn't zero with the company being new and in China. The fact that the SPAC managers, who had the cash and a reasonable amount of time to work with, chose this business and did the DD as opposed to a private company-initiated, shell-company reverse merger reduced the fraud risk by a factor substantially in my mind. After all there's no such thing as a bad risk, just a mispriced one and you have to think how much you are being compensated by taking the China/fraud risk - in this case it was a large amount of compensation. Since then, they have had 2 substantial events: Deloitte is their auditor and Starr International made a PIPE investment of $30M after months of DD (they are run by former AIG head Greenberg and have made some $500M of investments in Asia). This appears to have now eliminated the fraud risk and I think if the numbers turned out to be bogus it would be one of the more elaborate schemes ever.

So, with that introduction of the past and why the business as it stands can be looked at without the cloudy risk of it just being fabricated, what is this business?

The Business - Overview

China MediaExpress, founded in 2003, is in the business of installing TVs; providing programming and selling advertising on inter-city buses in China. They show 30 minutes of programming followed by 10 minutes of advertising; the bus trips average 2.5 hours so the same ad loop is played more than once per trip (the programming changes though). Their revenue comes from advertising agencies primarily now (~84% in Q3 2009) though they have some direct revenue from advertisers (~16% in Q3 2009) - Coke for example.

In general, my framework for business always boils down to two key points:

1) What value do you provide to society?

2) How difficult would it be for someone else to copy that value proposition?

If you have both of these, profit follows.

1) Value proposition: If you're on a bus for 2 hours with nothing else to do and nowhere else to go, I expect you're probably a lot happier having some programming and willing to listen to ads (maybe even enjoy them vs. staring at the seat in front of you!) compared to some other situations in life where you would really not be bombarded by ads (like say watching a tv show?).

2) How difficult to copy this: While I expect many people on these buses have cell phones and many are getting Internet (I'm not sure how good reception is on the Chinese inter-city highways though), I don't know about you but I cannot easily read on a bus. CTR Market research says that 80% of people on the buses regularly watch the TV displays (note also they are unobstructed, unlike ads in subways where people walk in front of them), which is consistent with this intuition. So - while people are on the bus, they watch the ads, so the general model makes sense, but how easy would it be for some other company in the same business to copy their proposition?

CME currently has a 5 year agreement with the Ministry of Transport in the PRC that goes through Oct 2012 making them the only authorized inter-city bus advertising company in China. Clearly the people here are favored by/friendly with the government and the risk of being hurt by the government seems minimal. They have long term (5-8yr) agreements with 49 bus operators now that cover about 21,000 buses (up from 10,000 in 2007) with 80M passengers/month - the whole market is estimated at 65,000 buses. There are substantial benefits to scale in dealing with advertisers, particularly in an advertising market as immature and fragmented as China. While maybe quite as extreme as this, imagine if the government had given eBay a 5 year exclusive agreement to do online auctions back when the Internet was starting - do you think that once that agreement ended there would be any way that an outsider could dislodge them from their leadership position given the cumulative advantages of scale there? I think it's somewhat similar for this niche, though again not as extreme. When this contract expires in Oct 2012, even if it's not renewed, it seems unlikely it will matter.

To summarize, it would be nearly impossible to copy their value proposition in this sharply defined niche. I view this as one of the strongest competitive positions of any company I know at the moment.

The numbers

Growth factors

The two big growth factors are: 1) Growing their network of buses to get a larger chunk of the market - they expect to have 30,000 buses in their network by the end of 2010. and 2) Raising prices. The inter-city highway system and advertising market are both growing from a macro perspective, but the growth factors specific to this company are quite a bit stronger than the macro growth rates.

Adding buses to their network

is where they'll go first, they won't likely raise prices substantially since it makes more sense to get a dominant hold on the market through 2012 while they have the government exclusivity agreement. If you are a bus operator and some company (the only one) authorized by the government comes to you and says they will PAY you to install TVs that will show entertainment for your passengers (with ads of course) and then pay you a concession fee on an ongoing basis, are you going to reject this deal? I don't think CME will have a difficult time growing their base based on their value proposition to the bus operators.

-CME has over $100M cash on hand and will probably spend $30M or so this year for this purpose. Acquisitions are another option and the CFO has stated they expect their growth this year will be 50/50 organic/acquisition based.


- I find this part very interesting, though I expect it won't be a big factor for a year or two and will drive growth for this company for some time. Currently their CPM (cost per 1000 views for 15 seconds of ad) is about 3 RMB, this compares to about 180 RMB for TV - they are priced 98% below TV ads - even though they have a CAPTIVE audience that can't flip channels or go to the kitchen when the commercial comes on! Compared to someone like VISN with intra-city ads on subways, who charge 21 RMB per CPM it is also a huge discount for advertisers. Interestingly again, this is reflected in their DSO / receivables which is only about 40 days vs 120 days for someone like VISN. I expect the primary reason their pricing is so much lower is because it is "new media" that isn't as well established and conventional as TV or newspaper advertising, though the new media fraction of advertising dollars is growing (it was some 15% last year in China I believe).

- Pricing will also improve as they build up their own sales force which they are currently doing and go after direct advertisers instead of using wholesale ad agencies. Will be interesting to see how much they annoy their agencies with this, but I think the balance of power is heavily in CME's favor due to the long term bus operator contracts.

Despite this hugely discounted pricing relative to other mediums, their gross margins are over 60% (main cost is concession fees to bus operators) and the CFO has said they are likely to report net income of $41M on March 23 on revenue of $95M, up from $63M ($27M net income) in 2008 and $26M ($7M net income) in 2007. That's 50% growth from 2008 to 2009 despite many other Chinese advertisers reporting 20%+ revenue declines in 2009 with the global recession.

2010: o/s 39.6M(32.6+1 earnout+1.5 mgmt warrants+4.5 financing deal)
Net Income - $83.5M
EPS - 2.11

2011: o/s 47.6M(39.6+7 earnout from 2010)
Net Income - $130M
EPS - 2.73

2012: o/s 55.3(47.6+7 earnout from 2011)
Net Income - 169.2M
EPS - 3.06

Here is o/s including earnouts for future years based on the earnout targets from the SPAC (Starr's deal has make-goods from management at net income of $42M, $55M, $70M in 2009, '10, '11 respectively):

Why is it so cheap? Near Term Catalyst

They are releasing earnings on March 23 and their 10-K will be filed shortly after. If you look up CCME currently in any of the popular databases (Edgar, CapIQ, Yahoo Finance) it still shows the SPAC numbers, i.e. no revenue. After the 10-K is filed (their first full filing as the true business), it will all be updated and the world will finally see this hidden company with an incredibly strong competitive position and fantastic earning power and inevitable growth you aren't even paying a dime for at current prices.

Other positive factors:

-Management / founders own over 60% of the company so there are very aligned incentives, especially through 2012 with the earn outs.

-I expect the Yuan/RMB will not depreciate against the USD going forward and it has risen 5% or so per year recently, if this continues, consider it an extra 5% growth in your net income projections. Most economists seem to think the Yuan is undervalued 20-40% relative to the USD, I am not worried about currency risk on this investment.

Valuation Summary / Appendix

Sorry I'm terrible at copying tables into this so here are some expanded numbers, please check the original SPAC presentation for a summary on the earn outs and of course, always read all the SEC filings before investing.


2006 - $4M
2007 - $25.8M
2008 - $63M
2009 - $64M(first nine months)
2009E - $104.2M
2010E - $196.6M
2011E - $305.5M

Net Income:

2006 - $0.9M
2007 - $7M
2008 - $26.4M
2009 - $27.4M(first nine months)
2009E - $42M
2010E - $83.6M
2011E - $130.3M
2012E - $169.2M

Net Margin:

2006 - 22.5%
2007 - 27.13%
2008 - 41.9%
2009E - 40.3%
2009 Q3 - 44.8%


They are releasing earnings on March 23 and their 10-K will be filed shortly after. If you look up CCME currently in any of the popular databases (Edgar, CapIQ, Yahoo Finance) it still shows the SPAC numbers, i.e. no revenue. After the 10-K is filed (their first full filing as the true business), it will all be updated and the world will finally see this hidden company with an incredibly strong competitive position and fantastic earning power and inevitable growth you aren't even paying a dime for at current prices.

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