Focus Media - Focus On Moving Painting Screens

I am obsessed every bit to what the due-diligence on Focus Media done past times the someone equity firms mightiness facial expression similar too what it mightiness find.

Lets start out amongst the slowly stuff.

Probably the easiest house to hit due-diligence on Focus Media is the theatre concealment business. Focus Media claims to display advertising on roughly a quarter of the painting palace screens inward China - but this is silent a relatively pocket-sized number of painting palace complexes (316 at terminal annual report).

It is almost impossible to audit to a greater extent than than 100 one k LCD screens - at to the lowest degree without a pocket-sized soil forces too a sampling method. But checking out whether the numbers brand feel inward 316 theatres is relatively simple. Influenza A virus subtype H5N1 sample could include a large proportion of the total without existence prohibitively expensive. Those 316 theatres in all probability direct keep solely 30-40 owners (most owners ain chains). That volition brand the testing easier still.

And I holler back the someone equity bidders in all probability volition exam this (as purpose of their due-diligence) because the theatre work organization raises red-flags which animate the bears inward this stock. The key number seems to locomote the number of theatres too the size of the multiplexes - nevertheless I holler back Focus direct keep largely cleared upward that story.

But I should run you lot through it anyway.

The contestation around the number of painting palace screens Focus places adverts on

You would holler back that counting painting palace screens too number of theatres is easy. They are large things. They don't run away. If I said I was opening a cinema on 270 screens you lot would know what I mean. These statistics direct keep good defined meanings - too those meanings don't seem to modify much.

Except inward the representative of Focus Media.

Here is a disclosure that mentions number of theatres focus runs adverts inward (from a 20F for the yr ended 2009.)

Net advertising service cost-movie theatre too traditional outdoor billboards. We incurred advertising service damage of $56.9 meg inward 2008, a 99.6% increment from $28.5 meg inward 2007. The increment is primarily due to (1) our acquisition of Huaguang, the subsidiary operating the traditional billboard work organization inward 2007. We consolidated Huaguang’s results of functioning solely afterwards the acquisition was consummated, spell inward 2008 nosotros consolidated their total yr costs of revenues; (2) the increment inward the number of billboards leased from 492 inward 2007 to 542 inward 2008 inward answer to greater client demand; too (3) increased leasing costs associated amongst fourth dimension nosotros rent on motion painting theatre screens as a number of an increment inward the number of theaters nosotros leased inward our network from 10,930 inward 2007 to 27,164 inward 2008.

The bold department is pretty clear... a number inward the increment in the number of theatres nosotros leased inward our network ... to 27,164 in 2008.

This number too similarly large numbers are laced throughout Focus Media's filings. It is non a one-off number.

There is a work amongst this number.

Influenza A virus subtype H5N1 large problem.

There are non that many theatres or screens inward China!

In March 2011 the LA Times did a story on the painting palace edifice binge inward China. At that indicate in that location were 6,200 screens inward all of China upward real sharply since 2008. According to Government statistics there were solely 1545 screens inward all of China at the destination of 2008. 

Focus media says they had 27,164 screens. The regime says in that location were solely 1,545 screens inward the country.

Unsurprisingly Focus has amended its numbers. Here is what they tell inward the latest annual filings:

Movie house advertising network

We operate our motion painting house advertising network past times selling leased concealment fourth dimension every bit fourth dimension slots to advertisers. We direct keep the correct to concealment fourth dimension prior to the screening of each motion painting shown inward the theater. As of Dec 31, 2011, nosotros had rights to lease advertising fourth dimension on screens inward 316 motion painting theaters (consisting 2,190 screens) inward cities across China.

How did they reconcile these numbers?

Well they said that they counted every bit a "theatre" a "screen inward which an advertiser had agreed to purchase space". That agency if 10 advertisers had chosen to exhibit advertisements inward a theatre amongst i physical concealment they counted it every bit 10 theatres.

As of Dec 31, 2010, nosotros had rights to lease advertising fourth dimension on screens inward 260 motion painting theaters (consisting 1,553 screens) inward cities across China too Hong Kong SAR. Prior to 2009, nosotros calculated the size of its motion painting house network past times calculating the number of screens on which each of its advertisers had purchased advertising too and thence summing the concealment count for each advertiser to hit an aggregate number of screens. With a modify inward management inward belatedly 2008, nosotros changed the method for calculating this operating metric showtime inward 2009, basing it instead on the number of motion painting theaters for which nosotros had rights to lease advertising fourth dimension every bit of the relevant period, regardless of the number of screens inward such theaters or the number of advertisers that had purchased advertising on each such screen. The large decrease inward concealment count for the motion painting house network over this menstruum was a reflection of this modify inward calculation methodology.

That is a mess. At minimum it is a Definition of theatres that I was previously unfamiliar with. But Focus similar a shot enjoin us what they tell are the truthful numbers on measure definitions - numbers that I direct keep no powerfulness to prove, nor disprove, but that I would await would locomote purpose of the due-diligence brief that the Carlyle too others volition undertake.

The size of this business

Even on the amended numbers this work organization is large. In both 2010 too 2011 the number of screens is most a quarter of all screens inward China. It is a work organization that should locomote highly visible too fairly slowly for the PE funds buying Focus Media to hit due diligence on. Here is a trend to hit it:

Ask them to enjoin you lot a listing of all screens. Pick a concealment out-of-town. Ask them to enjoin you lot what adverts are on it. They should direct keep records because they ask to mouth the advertiser (if they claim no records you lot know they are fraudulent). Then direct keep yourself to the cinema. Have some popcorn. If you lot actually desire a proficient fourth dimension hit it on a sample-basis - banking concern fit 5 screens too choose handgrip of upward all the films you lot missed out on.

Who said existence an investment banker or PE guy you lot don't direct keep fourth dimension to acquire to the flicks!

Sustainability of Focus Media's margin

Focus Media's theatre concealment work organization has a fatty margin. According to the terminal annual filing the revenue associated amongst this work organization was USD50.8 million. The costs USD25.7 million. This is a gross margin a footling over fifty percentage - considerably larger than display advertising businesses exterior China. Indeed this is a fatter margin than any non-Chinese display advertising work organization I tin find.

I gauge that is possible if Chinese concealment operators are real stupid too lease infinite to Focus Media at rents that are besides low. (Relatively dumb local governments direct keep long been the explanation for JCDecaux's relatively fatty margin inward street article of furniture advertising...)

But the margin has been that fatty for years. And the multiplex developers are almost past times Definition large belongings developers used to screwing every bit much revenue out of projects every bit possible. Moreover this companionship is on-the-numbers real heavily into multiplexes. Between 2010 too 2011 they added 56 theatres too 637 screens. The incremental theatre seemed to direct keep something similar eleven screens.

An explanation that large-scale belongings developers are to a greater extent than stupid than local governments looks hard to sustain. Maybe they are - but local governments don't remain that stupid (the renegotiated street article of furniture terms are never every bit sweet) too Chinese multiplex owners volition larn too. The largest Chinese multiplex possessor similar a shot owns AMC in America. AMC in all probability know a few things most maximizing the revenue on their screens.

Unless I am false - every bit the concealment owners wise-up (just similar local governments wise-up) the margin inward this work organization is going to come upward down. Unless in that location is some magic-secret-sauce inward this work organization I don't understand. Sustainability of margin is probable to locomote a problem.

Revenue per screen

The number of screens started 2011 at 1553 according to the disclosures above. They ended at 2190. Influenza A virus subtype H5N1 elementary arithmetics average suggests the companionship averaged most 1870 screens.

Revenue for the yr was USD50.8 million. That is revenue per concealment of USD27,144.

I spent a lot of fourth dimension trying to run out whether this number was plausible - and found that it was high but silent plausible. I flora an American media executive familiar amongst this manufacture who told me that the revenue per concealment inward the U.S. was most USD20-30 thousand. Focus Media is on the high-end of that but silent inside the range.

Advertising rates inward China are usually a fair fleck lower than the U.S. - mayhap painting palace screens are an exception. On these numbers rates facial expression to locomote most the same every bit the US.

That Focus Media hole-and-corner magic sauce

I direct keep no item argue to dubiety the novel number of screens that Focus Media claim to run. The sometime number was faux - but according to Focus Media the work was i of counting methodology - non fraud.

The novel number of screens is most a quarter the total inward China - that would for certain brand them i of the major players.

And they are real multiplex focused amongst average screens per theatre trend higher than average too climbing sharply.

Usually I would assume that multiplex owners were a sophisticated lot who did non locomote out a fatty margin on the tabular array for a thespian similar Focus Media. But in that location is a fifty percentage margin hither inward a work organization you lot would unremarkably await to direct keep a sparse margin. After all the eyeballs belong to the theatre possessor too non to Focus Media.

They must locomote doing something special. Some magical hole-and-corner sauce if you lot will.

If I were the someone equity buyers I would similar to run out what that is - because without knowing you lot can't assume that the hole-and-corner sauce is sustainable. (My bet is that it would non locomote sustainable.)

Oh, to locomote a fly-on-the-wall

As I said inward the foremost postal service I wishing I were a fly-on-the-wall whilst due diligence is done on that company. I desire to empathise that hole-and-corner sauce. It is clearly a trend of making coin too that is what my clients pay me for.



John