BEIJING -- Hong Kong stocks ended mixed Tuesday, with the Hang Seng index falling 0.7% to 15,858 and the Shanghai Composite adding 0.5% to 1657.
A note from Morgan Stanley Tuesday homed in on the China media market, singling out
as a top pick. Focus Media is a compelling little story stock -- it's attracted a slavish following among investors and journos alike as a play on Chinese advertising, which is growing like gangbusters. But the company plays in a quirky niche all its own.
Focus inelegantly calls itself an "out-of-home multiplatform lifestyle media company." What it really does is sell ads, then broadcast them over a vast network of proprietary, public flat-panel displays.
The company has installed over 50,000 LCD displays in office buildings, supermarkets, malls and airports throughout dozens of Chinese cities, all of which can be used to target ads at a theoretically pliable consumer (which would include that minority in China not obsessively sending text messages on their mobile phones).
Morgan Stanley's Richard Ji, who has an overweight rating on the stock, calls Focus Media a "quasi-monopolistic" ad leader in one of the fastest-growing ad markets worldwide.
Industry hands say that even as China's overall ad business surges, traditional television and print markets are fragmenting (just like in the West), which could allow competing media like outdoor and Internet advertising to gain share.
Morgan Stanley's report quotes marketer ZenithOptimedia, which estimates that in the 10 years through 2004, China's ad buying jumped 5.5 times, outstripping its nominal GDP growth of 2.9 times and far surpassing U.S. ad sales growth of 1.7 times in the same period.
The bank believes China's total ad sales, which reached $16 billion last year, could keep growing at a compound annual growth rate of 17% to 18% through 2008, aided by the proliferation of outdoor and online media and the 2008 Beijing Olympics.
Against this backdrop, three-year-old Focus has quickly established itself as a player of some credibility, signing on clients such as
Management has otherwise busied itself by applying some of the $170 million in IPO proceeds toward several acquisitions, including the January 2006 purchase of rival Target Media for $325 million. Focus now owns an estimated 95% of the outdoor audiovisual market. Most recently in March, the company scooped up the leading WAP-based mobile ad firm, Dotad.
The spate of acquisitions moved Morgan Stanley's Ji to cite integration risk among the company's challenges.
But does its business model have long-term staying power? Some foreign companies have also dabbled in flat-panel ads, but the medium has proven mostly unprofitable in Western markets. It's not yet clear that ads aimed at bored consumers will actually convince them to buy stuff -- and advertisers are increasingly demanding proof that their marketing dollars work. Focus Media has been carrying out some of its own studies to examine the effectiveness of its approach.
Focus has some other head-scratchers on its plate. It's expensive to purchase and install a nationwide network of LCD displays, and it's not yet clear how quickly they will need to be replaced.
Also, it must knit together its newly acquired companies and in the meantime maintain its organic growth. Precisely because the China ad market is so geographically fragmented, there's potentially huge share to be gained. But on the downside, it's difficult and time-consuming for those in expansion mode to gain scale and build up a well-trained, quality work force -- always one of the top managerial headaches in China, especially outside first-tier cities.
To be fair, everybody in the ad business faces the same hurdles. And because Focus Media is currently targeting Fortune 500 companies and large domestic companies, it can tailor its service to tackle those big accounts. That's likely to sustain its growth for at least the next few years.
"Focus Media has already reached a nationwide scale, and that is the No. 1 advantage," says Ji. He also likes the company's focus on high-income earners. An estimated 90% of workers in the offices serviced by Focus have college degrees, compared to less than 5% of the general Chinese population. "Advertisers would love to tap into this segment," Ji says.
In 2005 Focus Media sales jumped to $68 million from $29 million, with profit rising to $24 million from a mere $400,000.
But is it a savvy investment? Well, it ain't cheap. Since the IPO in mid-July 2005, shares have zoomed from $20.20 to a split-adjusted price of $62.48.
The stock has been trading less than a year, and like any emerging market play it has relatively greater potential for volatility. After hitting a high of $69.18 on May 19 -- the day it beat first quarter 2006 earnings expectations -- the stock has lost about 10%. But given the scale of the run-up, that actually doesn't look so bad.