“Television on a Stick” to turn Chinese Billboards into “Digital Money Machines”

Solution to the advertising stock teased by Robert Hsu

By Travis Johnson, Stock Gumshoe, April 1, 2010

Today we’re taking a look at a Robert Hsu teaser once again — this time it’s for his China Strategy newsletter, which he’s currently got “on sale” for about a hundred bucks a year. And he’s telling us that new “television on a stick” technology is going to turn billboard in China into “digital money machines” and make a fortune for us all.

There are only a few digital advertising companies in China that focus on the “out of home” market, which is what he’s talking about here (billboards, video screens in building lobbies and buses, etc.), so I’m sure we can identify this one for you. What’s the tease?

“In fact, China’s biggest bank, HSBC Holdings, is so convinced this represents the next big thing in revenue growth, they’ve already plunked down over $150 million in seed money, hoping to quadruple their investment in the next three years.

“If you can get in now—before the rest of Wall Street catches wind—you, too, could turn $5,000 into $20,000 in the next three years.”

Well, I’m all for a 300% gain — so what’s the stock?

Before pitching the newsletter, he goes on to lay it on thick about this “television on a stick” technology:\

“What, Exactly, Is ‘Television on a Stick’?

“Simply put, it’s a digital billboard—a massive television screen, if you will—that are sprouting up like weeds all over China, and streaming advertisements 24/7 from airports, buses, cocktail lounges—you name it.

“It’s no wonder.

“That’s because advertisers have found them quite effective on a return on investment (ROI) basis.

“As a result, these “Televisions on Sticks” are delivering huge profits to the companies that build, install, and sell advertising on them.”

And then we get some more specifics about this particular stock that help to narrow it down:

“When Wall Street Catches Wind of This Company, You Could See Its Share Price Explode from Under $5 to $10 This Year and On to $25 in the Next Three Years!

“That’s a big claim, I know.

“But not when you consider the company has a near monopoly with a 50.7% market share on Beijing’s transportation system—subways and buses when tens of millions of Chinese spend hundreds of hours a year! …

“Since April 2005, the company has installed nearly 130,000 mobile digital displays in 27 major Chinese cities. This extensive network can reach 95 million Chinese consumers on a daily basis.

“… went public in 2007 ….

“For example, in 2008, the company pulled in $104.1 million in total revenue, a 254.2% increase from 2007. That year advertising revenue totaled $103.5 million, a 276.6% increase from 2007. Net income also jumped as well—398% from 2007.”

Jeez, so we’re not even halfway through the ad and already the promise has expanded — we won’t be hitting just $20 within three years, but $25. Mmmmm.

And the last clue is a spiel about some of the institutional owners:

“This Is Why HSBC Holdings Has Plunked Down $150 Million in Seed Money, Hoping to Quadruple Their
Money in the Next Three Years….

“The big money has started investing, following HSBC’s lead, with Goldman Sachs grabbing a $28 million stake, FMR investing $58 million, and OZ Management taking a $70 million position while Columbia Wanger has invested nearly $100 million.”

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So who are we looking at here? The company teased must be:

VisionChina Media (VISN — click here for a free trend analysis of VISN from MarketClub, one of my advertisers. And actually, I just got word from them that MarketClub is currently offering a rare free trial with no credit card required, so you can check out their system at no charge for two weeks by clicking here)

Heard of VisionChina? It wouldn’t be surprising, they were a market darling back during the Olympics, with everyone salivating about the demand for all those eyeballs that were using Beijing’s public transportation. And like their competitor Focus Media (FMCN), they’ve had plenty of ups and downs in their share price in recent years.

But if we look at those institutional investors, and at the chart, we come to an interesting little revelation: Those institutional holdings are accurate, but, as usual with such things, they’re quite stale — so HSBC did report owning about $154 million worth of VISN as of December 31, and Oz held $70 million and Columbia Wanger $99 million. Together those reported stakes would have been worth about $323 million as of the end of last year.

Wait, you say, I could buy the company for just about $320 million right now!

That’s right — the shares have plummeted since those holdings were released, so while HSBC did have $154 million in shares, representing about 20% of the company at the time, if they still hold those shares today they’re only worth about $66 million. The market cap for VisionChina is about $335 million, and they have net cash on the books, too, so if you were taking the company over today it’s theoretically worth $310 million. So yes, less than those three big holdings from those institutional investors were worth back on New Year’s Eve, at a time when together they controlled about 40% of the firm. It will be a while before we know whether HSBC and the other institutions still hold the shares as of this quarter, but it wouldn’t be shocking if they sold some when everyone else was doing so.

So why did the shares fall from a high of about $12 back in December and January to $4 and change today?

Well, Tim Hanson at the Motley Fool, who writes for a competing global investing newsletter, had this to say in a recent article:

“As advertising rates drop in China, Vision’s sales are slowing and profit margins are narrowing. In fact, sales were up just 3% in the fourth quarter and the company’s gross margin dropped to 45%.

“This problem was compounded by the company’s decision to purchase DMG Media, the operator of digital mobile TVs in the Shanghai subway system, for $160 million in cash and stock. That move dramatically increased the company’s fixed costs and weakened its balance sheet at a time (the present) when it doesn’t look prudent to have done either of those things.

“All of this resulted in the company issuing first quarter 2010 guidance of “no less than $22 million” in sales, and analysts suggest that portends a significant net loss.”

So … a softening advertising market in China, a growth darling of a stock that made a poorly timed acquisition, and analysts think it’s at a transition point as it goes from growing at better than 50% per year to maybe growing around 10% a year in the next few years. That makes it tough to value the stock, certainly, and right now it’s trading at what looks like pretty reasonable valuation — a trailing PE of about 12 and a 2011 PE of about 14 … it’s just that we’re in a strange period where the PE might go negative for a little while, since analysts think they’ll lose money in 2010.

So what do you think? Is VisionChina a nice solid grower, with a dominant position in a key advertising market? Or is it a flash in the pan that has burned out? I can’t tell you, of course, I just know this is the stock that Robert Hsu’s teasing for huge gains in the years to come … let us know what you think about it by sharing a comment below.