Updated from Nov. 24BEIJING -- Shares of Focus Media ( FMCN) are flirting with historic highs, up 14% since the Chinese advertiser beat third-quarter earnings expectations last Tuesday. Based on Friday's close of $68.16, Focus Media has more than doubled in value so far this year, boasting a 102% rise. The Shanghai-based firm's strategy: push deeper into existing markets in China's richest big cities and accelerate the move into less affluent, fast-developing cities, all the while continuing to scoop up smaller ad firms. In a move CEO Jason Jiang said would "strengthen our focus" on expansion in China's second tier of cities in 2007, the company on Monday named a new chief operating officer, former head of marketing Diana Congrong Chen. The company is a pure play on the
The firm's strategy looks like a recipe for fat sales growth. But some argue Focus Media's prospects are over-hyped. "It's sort of an investor darling right now," says Shaun Rein, managing director of the Shanghai-based China Market Research Group. Yet he questions the effectiveness of Focus Media's ads in office buildings, which are broadcast on LCD screens in lobbies and near elevators to be viewed by waiting patrons. "Consumers might look at the screens, but they don't actually retain anything," Rein contends. "There's too much ambient noise. And a commercial may be 30 seconds long, but people get pushed into the elevator after 10 seconds so they don't really get what the commercial's about." Though ads are supposed to be targeting well-heeled businesspeople, Rein recently spotted Focus Media screens running ads on the 20-yuan ($2.53) airport minibus in the southern Chinese city of Shenzhen. "They say they're targeting rich people," he says. "But the bus mostly carries young people, people who are at the lower end of the income scale or who just want to save money." Rein has also seen Focus Media screens in plenty of less-than-prime office buildings. Another potential problem: Rein believes the cost of maintaining the company's liquid crystal display (LCD) screens will be higher than expected, because of China's ambient pollution as well as regular wear and tear.
Even those who like the stock acknowledge the need for caution, particularly from a competitive standpoint. There's no shortage of rival firms now trying to edge in on Focus Media's core business of running ads in office buildings, which offers tempting 70%-plus profit margins. Two competitors -- Beijing All Media and Culture Group, and Shanghai Media Group -- are both developing a substantial presence in office TV advertising in their respective cities. Such local media outfits "may have several advantages, including a broader range of media content
and a closer relationship with local government," writes Morgan Stanley analyst Richard Ji. (Morgan Stanley has done investment-banking for Focus Media within the past year.) Ji, who has an overweight rating on the shares, points out that as Focus Media tries to sell more display ads in supermarkets, airports and trains, it will increasingly run up against ad firms that specifically focus on these markets (and can claim they're better at targeting the right customers). Ji still likes the stock, citing Focus Media's "nationwide scale, brand recognition, and superior operation." But he says it will need to keep tabs on rivals to maintain its market lead. Given its focus on the still-emerging and unpredictable ad display market, Focus Media looks likely to remain one of the more controversial of Chinese stocks. But for the moment, bullish investors seem inclined to disregard longer-term potential risks and opt for the teacup-half-full approach.