分众传媒(002027)

Growth correlated to the new economy

We initiate coverage of Focus Media with a Buy rating and a target price ofRMB14, implying 35% upside potential. Focus Media has recently been includedin the MSCI-A and is a leading player in China’s ad industry with dominantmarket share in two channels of advertising: (1) inner building media (90%), and(2) cinema screens (pre-movie advertising). Compared to traditional channels ofadvertising, such as TV etc, these two channels achieve greater impact, given theyare in confined areas holding the captive attention of viewers. These channelsare favored by leading internet/FMCF clients, such as JD, Ali, Baidu, and P&Getc, which contribute approximately 50% of FM’s revenue. We view FM as wellpositionedto ride the growth of China’s new economy. We project a profit CAGRof 20% against peers' 10-15%.

Inner building media, the only growing traditional advertisement channel

While the growth of other traditional advertisement channels, such as TV/radio/newspapers, has dropped in the past few years, we have seen building mediagrowth remain robust. This is because, amid the intensifying competition fromgrowing internet advertising, building media is more effective in delivering themessage to targeted groups of consumers and raising overall brand awareness.Focus Media dominates the building media market, with market share of morethan 90%. We expect inner building segment revenue to generate a CAGR of16% in 2017-19E, driven by c.12% screen expansion and a 4% increase in ASP.We believe Focus Media's screens (both LCD and poster frame) will continue topenetrate into tier 2-3 cities and the company can increase the utilization rate ofits screens.

Cinema media, riding on China's movie screen growth

Focus Media has 60% market share in theater advertisements (ads before themovie) in China. We have noticed robust growth in this segment in the past fewyears (65%/42%/51% yoy revenue growth in 2014-2016), thanks to significantgrowth in China's movie screens, which have doubled to more than 40,000+from only 20,000 in 2014. As this segment is correlated with the movie screenexpansion, we estimate that cinema media revenue CAGR to be 13% in 2017-19E,in line with our estimate of overall movie screen growth.

Valuation and risks

Our primary valuation method is based on DCF (9.8% WACC and 3% TGR). FocusMedia is currently trading at an ex-cash PER of 18x (the company has a net cashof RMB7.54bn as of 1H17) on our 2018E earnings estimate vs. its 20% three-yearearnings CAGR. We believe the risk-reward profile seems attractive. Key downsiderisks: 1) more theaters start their own advertisement businesses; 2) threats fromother advertising modes; 3) a slowdown in the China movie downstream industry;and 4) slowdown in the internet/FMCG sector growth.