The first-quarter reports were quite impressive -- revenues were up more than 246% year over year. Net income was up similarly, to $9.4 million, which equates to roughly 29% net margin. Given that this was the seasonally weak quarter -- the two-week Chinese New Year holiday had many office buildings closed for part of the quarter -- the results were strong.
The mature directly operated commercial buildings, which carry higher margins than the relatively new in-store networks (63% versus 25%), were the major business driver, growing at 127% year over year to $21.5 million. Keep in mind, though, that margins for the in-store network rose 2,000 basis points from 5% in the fourth quarter of 2005, and management expects them to reach the 40% range in the near future.
Finally, the company strengthened its competitive positioning by acquiring its largest competitor (and number two in the market), Target Media. The deal, worth $325 million in stock and cash, closed last quarter.
However, none of this has gone unnoticed by investors, who have awarded the company a rather jaw-dropping $2.9 billion market cap. This places the company at a forward 2006 P/E of 56, and a price to sales ratio of 15. Needless to say, this prices in considerable growth for some time to come, and there may be some cracks in the armor already. The company already controls 70% of the market in Shanghai, but as of December 2005, wholly foreign-owned advertising companies has been allowed to enter China, exposing the market to companies like Viacom
With the very low barriers to entry (namely the cost of the LCD screens), and the lack of exclusive contracts in the space, Focus Media could end up in the dumpster in a hurry. For example, Inside Value pick Wal-Mart
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