Earnings Preview: China MediaExpress

China MediaExpress (CCME), a stock I have been in since I wrote on it at $7.50when the symbol was still TMI, will report financial results for the fourth quarter and year-ended December 31, 2009, on Tuesday, March 23, 2010 before the stock market opens. Following is what I think the results may look like and is my opinion only based on facts that are available.

Being a new listing by way of a SPAC, it is important to note that CCME does not have any analyst estimates to hit or miss right now. So that headline risk does not exist for them on March 23rd. They do however, need to show growth and have a bullish outlook on 2010. Then I believe the analyst coverage and upgrades will follow.

Let's address both the growth and then potential for a bullish outlook.

Growth 2009 vs. 2008:

The last earnings information was the Q3 report for the CCME business.Revenue and Net Income for the first 9 months of 2009 exceeded Revenue and Net Income for all of 2008.

Financial Highlights – Third Quarter 2009 vs. Third Quarter 2008

• Net revenues increased 65% to $26.1 million in the 2009 period compared to $15.8 million;
• Gross margin for the 2009 period was 67% of net revenues;
• Operating income increased 83% to $15.5 million in 2009 compared to $8.5 million; and,
• Net income increased 83% to $11.7 million compared to $6.4 million.

Financial Highlights – Nine Months 2009 vs. Nine Months 2008

• Net revenues increased 38% to $64.0 million in the 2009 period compared to $46.2 million;
• Gross margin for the 2009 period was 64% of net revenues;
• Operating income increased 45% to $37.2 million in 2009 compared to $25.6 million;
• Net income increased 43% to $27.4 million compared to $19.2 million.

Now as far as Q4 2009, the Company has an internal target of $42mfor which management has incentive to hit both because they will receive 1m shares if they hit it and they will be penalized if they miss it due to the recent financing deal they signed with Starr International.

Since this Starr International deal was signed after 2009, I am going to make the assumption that CCME made more than 42M net income for 2009 and did not sign an agreement that they knew would penalize them because the net income target was already a miss. That would mean 14.5M+ net income in Q4. The net income comparison for Q4 2008 is 7.2m(see page 56 for 2008 numbers). That would mean 100% year over year net income growth for Q4 2009 over Q4 2008! That would be a strong headline, whether they strongly beat the 42m target or even come close to it.

In the Q3 press release the CEO made this comment about Q4 --- Mr. Cheng concluded, “Historically, our fourth quarter is seasonally our best quarter. It appears that the 2009 fourth quarter will be no exception.”

And in a press release on Feb 8, 2010, the CFO said this about Q4 - Jacky Lam, CME’s Chief Financial Officer stated, “As anticipated, we believe our 2009 fourth quarter was exceptionally strong."

CCME had approximately 24m shares outstanding and approximately 10m warrants with a strike price of $5.50 at the end of 2009. Estimated, fully diluted shares outstanding according to GAAP using the treasury method will be approximately 29m at the end of 2009. EPS for 2009 should be approximately $1.45 if they hit the 2009 $42m net income target. CCME was a SPAC and they acquired the CCME business in Q4 2009. Recently another SPAC reported earnings and used the GAAP treasury method to calculate EPS. (CCME has approximately 38.5m shares outstanding here in March 2010 so it would be approximately $1.09 EPS if you choose to look at it in a non-GAAP manner for comparison.)

Growth 2010 v.s. 2009:

The 2010 net income target for management is $83.5m. This would represent 99% growth over 2009 net income assuming they hit the 42m target. Management has strong incentive to hit this target as they would receive 7m shares! The penalty on the Starr deal would be if they have less than 55m net income in 2010.

On March 8, 2010 (last week), the CFO said they expect to have 50% organic growth and then seek an additional 50% growth from acquisitions with their cash war chest of $100m. Listen to webcast at 22:40 into it. Just last week the CFO said 50% organic growth in 2010 and another 50% growth from acquisitions. Does that sound like a Company about to warn for 2010?

No, the outlook for 2010 was given at that conference and it was bullish 50-100% growth. CCME should have approximately 39.5m shares outstanding (assuming they hit the 42m net income). If they hit just the 50% organic growth that would be approximately $1.60 EPS for 2010. (42 X 1.5 / 39.5m). If they achieve the $83.5m net income target that would be approximately $2.11 EPS for 2010. (83.5 / 39.5)

Reasons why CCME deserves a high P/E multiple of 15 - 20 :

1) Growth - 100% YOY Net income growth 2009 over 2008 and potential to do 50-100% again in 2010 over 2009.

2) Barriers to entry - CCME has an exclusive license from China's Minestry of Transportation to install in-vehicle television systems on buses traveling on highways nationwide. (Page 12 of the March 9 presentation)

3) Extremely high Gross Profit and Net Income margins - 64% Gross Profit and 43% Net Income for first 9 months of 2009.

4) Strong cash flows - $30m cash flow generated from operations for first 9 months of 2009.

5) $100m of cash and no debt.

CCME with only 50% organic growth in 2010 and EPS of $1.60 :

• 10 P/E would be $16 price per share (would be very low P/E for this type of growth - shown to illustrate that CCME is currently undervalued).
• 15 P/E would be $24 price per share.
• 20 P/E would be $32 price per share.

CCME with 100% targeted growth in 2010 and EPS of $2.11 :

• 10 P/E would be $21 price per share (would be very low P/E for this type of growth - shown to illustrate that CCME is currently undervalued).
• 15 P/E would be $31.65 price per share.
• 20 P/E would be $42.20 price per share.

Lastly, here is another Chinese bus competitor (although they are more inner-city and not public in US) and this is how they are doing and what they said for 2010.

Disclosure: I am long CCME.