IDI - SearchMedia Holding

[king888]

I went to their AGM last month in Shanghai. The company looks promising so I just want to share an idea to the board members here. My last two ideas doesn't have any respond at all (But at least the stock price went up well)  I hope my writing skill improved .

 

Here is the link to my instablog

 

http://seekingalpha.com/instablog/352734-king707/226490-searchmedia-holding-a-chinese-company-with-american-management

[Baoxiaodao]

Hi King, I truly liked your ideas. They are original and unique. Just like you, I am walking in the swamps of neglected and unwanted small caps. And I understand why most of the board members did not respond. Personally, I like the idea even better when there is zero response. You should be happy because zero response meant your idea has a better chance to play out. At least this is what I think.

 

I think I understand what this business is about and I can ask friends in China for references. However, a few questions:

 

1. What is the worst case scenario or in other words, margin of safety?

2. How do you think the business will evolve over 3 years? For example, do you have any projections of financials?

3. Since IDI is short in cash, there will be huge dilutions. I try not to bias against acquiring by issuing shares. However, since the stock is cheap, why issue equities then?

4. Can you give us an idea what is the value of the current business without counting the expected growth?

 

I'd also like your current opinions on Weiji Films. Thanks in advance.

 

Fan

[Packer16]

Interesting idea, as I like the industry (high recurring revenues), but by my calcs the company is trading at 11.2x EBITDA (including the contingent payable).  Maybe I am missing the EBITDA associated with a new acquistion as I am annualized the 1H 2011 results for EBITDA.  Focus is trading at 12.6x EBITDA and the largest US company Lamar is trading at 8.5x EBITDA and a FCF multiple of 7x.  Is the strategy that IDI will be able to grow faster and thus deserves a higher multiple?  TIA.

 

Packer

[HJ]

I guess my question would be what is the competitive advantage here?  If the argument is that they have access to capital when a lot of these private companies are having trouble access foreign capital, it would seem a bit weak.  For one thing, there are quite a bit of domestic capital source now.  The issue may be that these domestic capital sources have traditionally not been willing to pay up, for these "manufactured revenue", when only "wide eyed" capital interested in creating a "China play" in the stock market is willing to pay multiples. 

 

Looking at the background of the principals involved here, there seem to be quite a bit of financial bend to these guys, a former Oppenheimer banker and a VC guy.  There seem to be a distinct lack of actual advertising experience, especially in China, as the actual advertising (as opposed to the financial) business is quite different.  As I understand it, the resource in short supply in Chinese advertising these days is access to actual people who are controlling advertising dollars.

 

If the argument is that this is a China play with trust worthy foreign management, I'm not sure if it is not a competitive disadvantage for the actual business, the way things work in China.

 

 

[king888]

Thanks for the feedback. Sorry for my late reply because I was moving my family away from the flood area in Bangkok.

 

I will try to answer some easier question first.

 

Interesting idea, as I like the industry (high recurring revenues), but by my calcs the company is trading at 11.2x EBITDA (including the contingent payable).  Maybe I am missing the EBITDA associated with a new acquistion as I am annualized the 1H 2011 results for EBITDA.  Focus is trading at 12.6x EBITDA and the largest US company Lamar is trading at 8.5x EBITDA and a FCF multiple of 7x.  Is the strategy that IDI will be able to grow faster and thus deserves a higher multiple?  TIA.

 

Packer

Look at this presentation. Based on share price of $2.00. IDI's EV is $43 million (page 16)  .But I think they do not include the contingent payable in there.

http://idi.irpage.net/documents/SearchMedia%20Investor%20Presentation%20May%202011%20Final.pdf

 

Let calculate it by ourselves.

Share count = 20.9 million

 

EV = (Share Price x 20.9m ) + Current Acquisition consideration payable (29.38m) +  LT acquisition consideration payable (10.4)  -  Cash ( 8.37m)

Base on $1.12 SP so we get

EV =  $54.82 Million

But the current accquisition payable is overstated .About $12 million will be paid by stock at the conversion price around $6.88. This is what I heard from the AGM.  But in latest relaese from the company .They will issue 1.3 million shares for $9.6 million acquisition payable . Let use the press release to calculate new Current consideration payable.

Adjusted Current Acquisition consideration payable = 29.38 - 9.6 + (1.3x1.12 ) =  $21.234 million

 

Adjusted EV =  $46.67 million

 

 

The LT acquisition payable will be paid by stock next year at the conversion price of 30-day average after the audited 2011 FS was released.

I think the acquisition payable is performance base so it is subject to change if the performance are worst or better.

 

And the  share count 20.9 million should be reduced by the lawsuit against the former share holder. Best case is 9 million share reduction  . Conservative case is 4.5 million share .

Adjusted EV (4.5 share reduction) = 46.67 -  5.04 =$41.63 million

 

For the EBITDA. I think using EV/EBITDA is not a good way to look at this company. Because they have a lot of expenses for the company restructure from all the mess they got. So using EV/Sale might be better alternative .  EV/Sale (2011H1 x2 ) = 41.63/51.66 = 0.74x  which is cheaper than FMCN . 

For EBITDA in 2011H1 =  1.757 + 0.752( amortization on intangible asset )  = $2.509 million

EV/EBITDA (2011H1 x2 ) = 41.63/5.018 = 8.2x .  which is also cheaper than FMCN but in par with LAMAR

 

From the AGM, CEO said that there might be some subsidiaries that IDI will consider not to complete the acquisition .This will reduce the acquisition payable but also reduce the revenue and should improve the profitability of the company.

 

The company does not have the conference call otherwise we should get better visibility on the future of the company.

 

 

 

 

[king888]

I guess my question would be what is the competitive advantage here?  If the argument is that they have access to capital when a lot of these private companies are having trouble access foreign capital, it would seem a bit weak.  For one thing, there are quite a bit of domestic capital source now.  The issue may be that these domestic capital sources have traditionally not been willing to pay up, for these "manufactured revenue", when only "wide eyed" capital interested in creating a "China play" in the stock market is willing to pay multiples. 

 

Looking at the background of the principals involved here, there seem to be quite a bit of financial bend to these guys, a former Oppenheimer banker and a VC guy.  There seem to be a distinct lack of actual advertising experience, especially in China, as the actual advertising (as opposed to the financial) business is quite different.  As I understand it, the resource in short supply in Chinese advertising these days is access to actual people who are controlling advertising dollars.

 

If the argument is that this is a China play with trust worthy foreign management, I'm not sure if it is not a competitive disadvantage for the actual business, the way things work in China.

Good points ,HJ.

The Chinese want to get high multiple if they sell their business. But today ,it is not a good idea to list companies overseas anymore. There are too much negativity. The Chinese stocks will not get high valuation like the old day anymore. So it is not worth their effort to list share oversea.  IDI provide another alternative by let the companies joining their clan and get the IDI share. But this method will not work as long as IDI's share price at this level.

 

Regarding the principal background,  IDI recently hired executive are Mr. Johnny Lo as a COO (http://idi.irpage.net/details.php?id=46894) .He is veteran in Out of home advertising industry in China.

The CEO's background as an Investment Banker can help IDI when they structure the acquisition deal. They try to make the deal the fair for IDI and help protecting the company from getting fooled again. For example in 2010 acquisition ,IDI acquired Zhejiang Continental at around 6-6.5x net income ( I am not sure about the multiple). The deal was worth $19.7 million .  The paid the upfront cash for only $73,000. And the rest will be paid in next 24 months by stock and cash based on performance of the acquired entity. The $19.7 million can be less . And IDI can terminate the contract if the found the something wrong when they will be working together in next 2 years.

 

And being the company run by American board and management, it provide better access to "actual people who are controlling advertising dollar" .If they deal with foreign companies that is in China also.  I mean when you are abroad in the country that are full of fraud and scam. Isn't it better to trust somebody from the same countries or culture as yours ? Their connection to people who controls advertising dollar might not as good as JCDecaux or other major worldwide players. But being a listed companies run by foreigner might get them some advantage in China.

 

The management also knew that in China, it uses a connection to obtain the good concession deal to obtain good advertising space. That's why they choose strategy to grow by acquisition. They said the Chinese in acquired parties has a good local connection with the landlord in their cities/areas. And IDI sale team will work on selling this advertising space to advertising dollar.

 

 

[king888]

Hi King, I truly liked your ideas. They are original and unique. Just like you, I am walking in the swamps of neglected and unwanted small caps. And I understand why most of the board members did not respond. Personally, I like the idea even better when there is zero response. You should be happy because zero response meant your idea has a better chance to play out. At least this is what I think.

 

I think I understand what this business is about and I can ask friends in China for references. However, a few questions:

 

1. What is the worst case scenario or in other words, margin of safety?

2. How do you think the business will evolve over 3 years? For example, do you have any projections of financials?

3. Since IDI is short in cash, there will be huge dilutions. I try not to bias against acquiring by issuing shares. However, since the stock is cheap, why issue equities then?

4. Can you give us an idea what is the value of the current business without counting the expected growth?

 

I'd also like your current opinions on Weiji Films. Thanks in advance.

 

Fan

Hi Fan,

Regarding the Fuwei Films ,I don't follow it anymore. But at this valuation, another  BOPET film producers are also cheap. You can look at Polyplex Thailand (PTL:BAK) which is trading at only 3x PE. The Film industry last year was very special case. The film price raise very fast in 3-5 months due to short supply. That was made them a good short-term play. But it is not anymore. We won't see that kind of profit margin in normal situation.

 

1. The margin of safety is fair value of EV. I think the reasonable multiple is 1x EV/Sales. Same multiple as VISN, AMCN and MACO:BAK (a leading OOH company in Thailand) .  You can look at my post replied to packer16 for my calculation. The problem is the Sale can be varied if they terminate the acquisition contract on some of their current holdings. But at this price there is about 20-30% discount.

2.I don't have the financial projection in the next 3 years.But if the revenue can grow like 10-15% for the next 3 years .And the costs stay the same .It will be very cheap at this price.  The profit margin will be improved if the occupancy rate goes up. Like I said in my blog post . The occupancy rate in 2010 for IDI  is 80% for billboard, 60% for in-elevator and 30% for bus and subway. If the rate improve or they just terminate some unoccupied media space. They can improve the profit easily.

3.I think they will need to issue new equity when they want to acquire new subsidiary. If they decide to delay it, $8 million cash is sufficient to continue their current business.  And they have to issue a lot of new stock to pay for Continental acquisition. At current stock price, it will be huge dilution for current major shareholder. Especially , Dr. Frost and his circle.Because their average cost is around $6. I think will try to make the stock price higher before that payment come due.  Either by finishing the the dispute case with former SM shareholder or stock buyback. But at this current price, even if the dilution come ,it is still cheap in my opinion.

4. Same as answer no.2

 

Threshold Capital also has their short thesis on IDI also. I believed they bought the share in 2010 and still a shareholder. 

http://thresholdcapitalcorp.com/LinkClick.aspx?fileticket=DNHYvLkrzpA%3d&tabid=380&mid=922