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Update
2/1/11
Opinion: Outperform CCME; Pricing Power And Bus Network Drive Upside To 2011; Reiterating Top Pick
Risk: Aggressive We are reiterating CCME as a 2011 Top Pick and believe, at current valuation (3.9x 2011
Target: $32.00 EBITDA vs. 38% y/y growth), with a projected 2011 free cash flow yield of ~14.6%, an
announced dividend, a growing core bus network, and new incremental revenue channel, that
Darren Aftahi - Senior Analyst could add tremendous revenue to its story long-term, that CCME, is a must Buy. We remain
(612) 851-4910 staunch believers shares are undervalued by a material factor, Street 2011 estimates
daftahi@northlandcapitalmarkets.com remain conservative based on our belief ad rate increases are likely to be well above our
Changes
revised modeled 12%, and reiterate our $32 price target and Outperform rating, which is
based on approximately 7.5x EV/ EBITDA multiple, a 30% discount to its Chinese DOOH
• None
peers, to our $207 million revised estimate.
China MediaExpress Holdings, Inc. (CCME) Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402
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Valuation
China MediaExpress Holdings, Inc. (CCME) Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402
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Risks to the Achievement of Price Target
Variable Interest Entity (VIE) Structure
CCME relies on contractual arrangements rather than equity ownership in controlling its key operating
subsidiary Fujian Fenzhong Media which operates as a variable interest entity. If Chinese regulations
regarding foreign investments in VIE change materially, it could have an adverse effect on CCME.
Increased Competition
Although the market in which CCME operates is very fragmented, if a competitor experiences success in
expanding its network it could put pricing pressure on CCME and potentially take market share from CCME.
Bus operators
More than one-fifth of inter-city express buses carrying CCME’s network are operated by three bus operators.
If any major bus operator experiences a business disruption it might suspend or stop its transportation services,
and in turn the number of inter-city express buses carrying CMEs network could decrease significantly.
China
Operating in China presents certain inherent political, governmental, and economic risks which could affect
CCME’s business.
Management
The chairman and CEO, Mr. Zheng Cheng effectively owns ~35% of CCME outstanding stock and is a major
contributor to the vision, execution and growth of CCME’s operations. Should anything happen to Mr. Cheng,
CCME operations could be adversely affected.
Capital Structure
TM Media was a former special purpose acquisition company (SPAC), which typically is associated with a
large amount of warrants and potential share dilution. However, through the reverse merger and share
exchange as well as actions by the company, all public warrants have been redeemed during the first quarter of
2010.
Readers should recognize that the risks outlined above do not represent a comprehensive list of all risk
factors that may impact price target achievement. See 10-k and company filings for additional
disclosures.
China MediaExpress Holdings, Inc. (CCME) Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402
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China MediaExpress
($ in m illions except per-share data)
Actuals Estim ates
Fiscal Year Ends Decem ber 2008A 1Q'09A 2Q'09A 3Q'09A 4Q'09A 2009A 1Q'10A 2Q'10A 3Q'10A 4Q'10E 2010E 2011E
Total net revenues $63.0 $18.8 $19.1 $26.1 $32.0 $95.9 $44.5 $53.5 $57.0 $61.3 $216.3 $329.2
Cost Of Revenues
Total Cost of Revenues $25.1 $7.1 $7.2 $8.6 $9.9 $32.9 $17.9 $11.4 $13.2 $18.4 $60.9 $97.9
Gross Profit $37.9 $11.6 $11.9 $17.5 $22.0 $63.0 $26.6 $42.1 $43.8 $42.9 $155.4 $231.4
Operating expenses
Selling $1.1 $0.3 $0.3 $1.4 $1.6 $3.5 $1.8 $2.1 $2.3 $2.6 $8.7 $12.9
Administrative Expenses $1.7 $0.8 $0.5 $0.6 $0.9 $2.8 $0.6 $1.7 $0.2 $2.2 $4.7 $10.5
SWITOW Operating Expenses $14.0
Total operating expenses $2.8 $1.1 $0.8 $2.0 $2.5 $6.4 $2.4 $3.8 $2.5 $4.8 $13.4 $23.4
Incom e from operations $35.1 $10.5 $11.1 $15.5 $19.5 $56.6 $24.3 $38.3 $41.2 $38.1 $141.9 $208.0
Interest Income, net $0.1 $0.0 $0.0 $0.0 $0.0 $0.1 $0.1 $0.1 $0.1 $0.1 $0.4 $2.6
Incom e before Incom e Taxes $35.2 $10.6 $11.1 $15.6 $19.5 $56.8 $24.3 $38.4 $41.4 $38.2 $142.3 $210.6
Income Tax Expense $8.9 $3.1 $2.8 $3.9 $5.2 $15.0 $6.2 $9.8 $10.2 $9.6 $35.7 $49.1
Deemed dividends on convertible preferred ($9.2)
Foreign currency translation $0.0
Net Incom e (GAAP) $26.4 $7.5 $8.3 $11.7 $14.3 $41.7 $8.9 $28.6 $31.1 $28.7 $97.3 $161.4
Non-GAAP Net incom e $26.4 $7.5 $8.3 $11.7 $14.3 $41.7 $18.2 $28.6 $31.1 $28.7 $106.5 $147.4
EBITDA $35.1 $11.1 $11.7 $16.4 $20.6 $59.8 $26.0 $40.3 $43.3 $40.3 $149.9 $206.8
GAAP-EPS (Basic) $1.26 $0.36 $0.40 $0.56 $0.66 $1.97 $0.29 $0.86 $0.93 $0.83 $2.91 $4.34
GAAP-EPS (FD) $1.26 $0.36 $0.40 $0.56 $0.62 $1.93 $0.27 $0.80 $0.81 $0.61 $2.49 $3.04
Non-GAAP Basic EPS $1.26 $0.36 $0.40 $0.56 $0.66 $1.93 $0.58 $0.86 $0.93 $0.83 $3.22 $4.31
Non-GAAP Diluted EPS $1.26 $0.36 $0.40 $0.56 $0.62 $1.81 $0.54 $0.80 $0.81 $0.61 $2.76 $3.04
Fully Diluted Shares Outstanding 20.9 20.9 20.9 20.9 23.0 23.0 33.5 35.8 38.4 46.9 38.7 48.4
Margin Analysis:
Total Cost of Revenues 39.8% 38.0% 37.8% 33.0% 31.1% 34.3% 40.2% 21.3% 23.2% 30.0% 28.2% 29.7%
Gross Profit 60.2% 62.0% 62.2% 67.0% 68.9% 65.7% 59.8% 78.7% 76.8% 70.0% 71.8% 70.3%
Selling 1.7% 1.4% 1.6% 5.2% 5.0% 3.7% 3.9% 4.0% 4.0% 4.2% 4.0% 3.9%
Administrative Expenses 2.7% 4.5% 2.6% 2.3% 2.8% 3.0% 1.3% 1.7% 2.0% 2.4% 2.2% 3.2%
Total operating expenses 4.5% 5.9% 4.2% 7.5% 7.9% 6.6% 5.3% 7.1% 4.4% 7.8% 6.2% 7.1%
Operating Margins 55.7% 56.1% 58.0% 59.5% 61.0% 59.0% 54.5% 71.6% 72.4% 62.2% 65.6% 63.2%
Non-GAAP Net Profit Margins 41.9% 39.7% 43.4% 44.6% 44.8% 43.5% 40.8% 53.4% 54.7% 46.8% 49.3% 44.8%
EBITDA 55.7% 59.4% 61.2% 62.8% 64.5% 62.4% 58.3% 75.3% 76.1% 65.8% 69.3% 62.8%
China MediaExpress Holdings, Inc. (CCME) Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402
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Analyst Certification
I, Darren Aftahi, certify that (1) the views expressed in this report accurately reflect my personal views about the subject
company and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific
recommendations or views expressed in this report.
Important Disclosures
China MediaExpress Holdings (CCME) Ratings History
Explanation of Ratings:
Outperform (BUY) Outperform the S&P 500 by at least 10%.
Market Perform (HOLD) Perform within 10% above or below the S&P 500.
Under Perform (SELL) Under perform the S&P 500 by at least 10%.
Estimates, ratings and/or price target are subject to
Under Review
possible changes in the near term.
Risk Profile:
Conservative Lower risk and volatility.
Moderate Average risk and volatility.
Aggressive Above average risk and volatility.
China MediaExpress Holdings, Inc. (CCME) Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402
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Important Disclosures
Northland Securities intends to seek compensation for investment banking services from the subject company in the next 3 months.
The analyst responsible for preparing this research report receives compensation that is based upon various factors including
Northland Securities’ institutional trading commissions and total revenues which may be generated by Northland Securities’
investment banking activities.
Other Disclosures
Northland Capital Markets computes the relative valuation ratios of the covered company and typically measures price-to-earnings,
price-to-book, price-to-sales, price-to-cash flow, and computes free cash flow to the firm and discounts it back at the firm’s cost of
capital to derive a net present value per share. The primary analyst may be contacted to discuss the inputs that were used to determine
the target price range.
Northland Capital Markets reports will provide short-term commentary, but our ratings are forward looking by at least 12 months,
unless otherwise noted, to reflect our financial model expectations. Northland’s investment thesis, valuations and ratings are subject to
change without notice and the primary analyst should be contacted to ensure that our opinions have not changed since the date of this
report.
Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other
sources, believed to be reliable. However, we have not verified such information, and we do not make any representations as to its
accuracy or completeness. Any statements nonfactual in nature constitute only current opinions, which are subject to change.
Individual investors are advised to carefully consider the risks associated with investments in equity investments, particularly in small
cap and micro cap securities. Northland’s research universe includes a large proportion of this type of investment. This research report
does not take into account the investment objectives, financial needs and risk parameters of individual investors. Individual investors are
advised by Northland Securities to discuss their particular financial situation with their investment representative and other professional
advisors, prior to acting upon any recommendations in this report.
Past performance is not necessarily an indication of future performance. This report reflects our current opinion. We do not assure
future performance. Security prices fluctuate.
Unless otherwise noted, the price of a security mentioned in this report is the market closing price as of the end of the prior business
day.
‘Northland Capital Markets’ is the trade name for certain capital markets and investment banking services of Northland Securities,
Inc., member FINRA/SIPC.
China MediaExpress Holdings, Inc. (CCME) Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402
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NORTHLAND CAPITAL MARKETS| EQUITY RESEARCH
RESEARCH
Mike Grondahl, Director of Research Richard Shannon, CFA
mgrondahl@northlandcapitalmarkets.com rshannon@northlandcapitalmarkets.com
(612) 851-5982 (612) 851-5908
INSTITUTIONAL SALES
Tim Mitchell, Director of Institutional Sales Scott Peterson
tmitchell@northlandcapitalmarkets.com speterson@northlandcapitalmarkets.com
(612)-851-5921 (612) 851-4928
John Stratton
jstratton@northlandcapitalmarkets.com
(612) 851-5969
TRADING
Brian Gifford, Director of Trading Pete Glanville
bgifford@northlandcapitalmarkets.com pglanville@northlandcapitalmarkets.com
(612) 851-5934 (612) 851-5942
Steve Dragos
sdragos@northlandcapitalmarkets.com
(612) 851-4943
China MediaExpress Holdings, Inc. (CCME) Northland Capital Markets, Inc. | Equity Research | 45 South 7th Street, Suite 2000 | Minneapolis, MN | 55402
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