Wednesday, February 28, 2007

Calls of Note Part 1

- Citigroup notes Focus Media (NASDAQ:FMCN) had the unfortunate timing of reporting solid 4Q results and good FY07 guidance just as the China A share market fell on speculative concerns. Bad for Focus, but a better opportunity for investors to buy Focus at a price below the recent secondary with a far better risk-reward, e.g. 1Q and FY07 guidance have now been given.

China's advertising market not likely to be affected by A Shares sell-off? Focus's core business is Brand Advertising. As discussed on the 4Q call at the start of the year, advertisers set yearly budgets, giving Focus visibility into its FY numbers. These budgets shouldn't be affected by short-term market moves.

Sell-off in China A Share market due to speculation? With the market recently hitting new highs, firm's China Strategist Lan Xue notes that China's (domestic) A-share market has come under severe selling pressure spurred by 1) reporst the CSRC chairman is leaving; 2) a potential interest rate hike; and 3) a potential capital gains tax. However, they don't believe these hold much weight.

Valuation appears highly attractive ? Focus is trading at P/Es of 28x 07E and 22x 08E, highly attractive for a company that enjoys monopoly or near-monopoly status in its markets and the leverage of a fixed-cost model, benefits from the booming China Advertising market, can benefit from possible M&A in the Internet space in 1H, and has increasingly highly recurring revenue.

Reits Buy and $100 tgt.

Notablecalls: Do check out NC comments on FMCN from yesterday. The stock never even got close to the $86 level suggested but rather declined to around $78 and change on open. It was there where it bounced almost $5. I hope non of you got hurt buying the stock too high in pre mkt but were flexible enough to wait for the open. That's what trading is all about - flexibility.

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