20181227-高盛-分众传媒-002027.SZ-Slowdown_in_both_revenue_growth_and_network_expansion_12页_1mb

Focus Media Information Tech (002027.SZ) Summary

Core Content

Focus Media Information Tech (002027.SZ) is a leading player in China's outdoor advertising sector, particularly in inner building media. The company has faced challenges in both revenue growth and network expansion, influenced by macroeconomic headwinds and competitive pressures. Goldman Sachs (GS) has revised its financial forecasts and lowered the 12-month price target due to these factors.

Main Points

• Revenue Growth Slowdown:

  • Revenue growth is expected to slow down to the low teens level after 4Q18, similar to the period of 2013-15.
  • The company anticipates a decline in net income (NI) for 2019E to Rmb5.58bn due to lower average selling price (ASP) and higher cost per screen.
  • 4Q18 and 1Q19 are projected to be the troughs for revenue and NI growth.

• Macro Headwinds:

  • Traditional media advertising expenditure declined by 2.8% in October 2018, further from a 1.5% yoy fall in 3Q18.
  • The impact of macroeconomic slowdown is expected to extend to inner building ad spend, particularly affecting brand advertising at the low end.

• Competition Dynamics:

  • Xinchao Media, a rival, has secured Rmb2.1bn in new financing, led by Baidu, which may prolong the price war.
  • Focus Media has slowed its network expansion, with management indicating that the pace may be reduced to the low end of its target for 2019.
  • The combined penetration rate of Focus Media and Xinchao Media in China's elevator ad market is estimated at 30%, with the overall penetration exceeding 50% when including smaller players.

• Valuation and Price Target:

  • GS has cut its 12-month price target to Rmb7.89 (from Rmb11.67), but maintains a "Buy" rating due to the stock's attractive valuation.
  • The stock trades at a P/E ratio of 14x for 2019E, compared to an average of 20x for global outdoor advertising peers and 18x for domestic media peers.

• Financial Performance:

  • Revenue growth is expected to be 21% in 2018E, followed by 10% in 2019E, and 13% and 15% in 2020E and 2021E respectively.
  • Gross profit margin is projected to decline from 65% in 2018E to 58% in 2019E, stabilizing at 55% in 2020E.
  • EBIT margin is expected to fall from 42% in 2018E to 34% in 2020E, then stabilize at 34% in 2021E.

Key Financial Data

• Market Cap: Rmb82.3bn / $11.9bn
• Enterprise Value: Rmb78.6bn / $11.4bn
• 3m ADTV: Rmb791.8mn / $114.4mn
• EPS (2018E-2021E): 0.41, 0.38, 0.43, 0.43 (New)
• P/E (2019E): 14.8
• P/B (2019E): 4.7
• Dividend Yield (2019E): 3.4%
• CROCI (2019E): 13.0%

Revenue and Cost Trends

• Revenue Growth (2018E-2021E): 21%, 10%, 13%, 15%
• COGS Growth (2019E-2020E): 35%, 20%
• ASP Decline: Expected to continue in 2019-2020, with a 2%-3% decrease.
• Net Income Decline (2019E): 8% yoy to Rmb5.58bn.

Network Expansion

• Screen Roll-out: Focus Media is expected to roll out 1.1-1.2mn new screens by the end of 2018, surpassing its previous target of 1mn.
• 2019 Expansion: The company may slow down its screen expansion in 2019 due to macroeconomic uncertainties and reduced competition.
• Elevator Coverage: By the end of 2018, the combined elevator coverage of Focus Media and Xinchao Media is close to 30% of total elevators in China, with the overall penetration expected to exceed 50%.

Strategic Outlook

• Monetization Focus: Focus Media is shifting its strategy from expansion to monetization of new screens.
• Long-term Outlook: The company anticipates a stabilization of profitability in the next 2-3 years if a dual oligarchic market structure emerges.
• Industry Growth: The overall growth rate for the inner building media business is expected to be around 10%-12% in the next few years.

Conclusion

Despite the challenges from macroeconomic slowdown and intense competition, Focus Media remains a compelling investment due to its attractive valuation and strategic shift towards monetization. The company is expected to stabilize its profitability in the medium term, with the potential for a dual oligarchic market structure in the industry.