分众传媒(002027)

Robust growth in 2017, bottom-line beat consensus and our number – Buy

We reiterate Buy on Focus Media (FM) and raise our PT by 13.7% to RMB18.2. FM’s 2017 bottom-line beat our number by 10% and consensus by 3%, based on its preliminary results. We have seen more traditional consumer and education companies investing more via FM’s ad channels. In addition, FM has operating leverage as its cost of rent for each screen/post frame is fixed.

2018 outlook: we expect robust growth to continue on further penetration

We forecast 23% top-line and 25% bottom-line growth in 2018. We have noticed internet companies focusing more on lower-tier cities as they penetrate China. As a result, FM’s management said that its internet clients are requesting screen/post frame penetration in lower-tier cities. We expect post frames to increase to 1.6m and LCD screens to increase to 300,000, up c.20% yoy. We raise our 2018/2019 earnings forecasts by 11% and 12% to reflect this.

Internet, FMCG, education and Baijiu seeing high growth

Internet/FMCG clients such as JD, Ali, Baidu and P&G contributed c. 50% of FM’s ad revenue and their growth remains robust as they are paying more attention to the inner building and cinema advertisement channels. Our channel checks also found strong incremental growth from K12 education and Baijiu companies. For example, mgmt said that Baijiu’s advertisement revenue was only RMB2-3m in 2016, but it increased 10x to RMB300m in 2017 and is likely to double in 2018E. In education, K12 after-school tutoring companies in particular are spending more on advertising (for both online and offline classes);these include TAL, EDU, DADA abc (哒哒英语) and Zhangmen (掌门一对一).

Valuation and risks

Our main valuation method is DCF (9.8% WACC, 3% TGR). FM trades at an excash PER of 24x (it had RMB3.8bn net cash as of 9M17) on our 2018E earnings vs. its 26% three-year earnings CAGR. We view risk-reward as attractive. FM paid 80% of its earnings as dividend and mgmt guides for largely unchangedpayout for FY2017. Risks: 1) more theaters start their own advertisingbusinesses; 2) threats from other advertising modes; 3) a slowdown in China’sdownstream movie industry; 4) a slowdown in internet/FMCG sector growth.