Monday, May 21, 2007

Xinhua Finance Media (NASDAQ:XFML): Much ado about nothing?

- CIBC is out with some comments on Xinhua Finance Media (NASDAQ:XFML) noting that last week, XFML shares declined 18% during a strong week for China Media stocks. Firm believes weakness in the shares is due to peripheral factors, including the reoccurrence of a nine-year old lawsuit related to the former CFO and management departures at a subsidiary of the parent company.

Over the weekend, the company announced that Mr. Shelly Singhal resigned from its board, after being moved from the CFO to Exec Dir, Corp. Dev., on May 15. Additionally, Barron's reported that two senior staffers at Glass Lewis, a subsidiary of XFML's parent company, had resigned.

The trading pattern of the stock last week suggests that concerns over these two matter were already in the marketplace, even though the news was reported over the weekend.

While these type of events call into question the character of the current and prior mgmt at XFML, CIBC believes these issues have no impact on current fundamentals, and that weakness provides a good buying opportunity ahead of seasonally strong 2Q results. Maintains $14 tgt and Sector Outperformer rating.

Notablecalls: First, let me tell you that XFML isn't a company I know too well. Yet, chewing through some of the initiation notes it certainly looks interesting. The chinese ad industry is in a secular growth phase and it looks like XFML is in a good position to benefit from it. I especially like the co's exposure to the financial media side as numbers coming from China show the chinese people are opening brokerage accounts at a healthy clip.

The news coming over the weekend look bad at first glance but I'm not so sure the impact is as bad as suggested by the decline in XFML's stock price. Also, it looks like a rather large short line was put out over the last week. Trading around 16x 08 EPS, the stock's not exactly expensive.

I would put XFML on my bounce play radar today.


Xianming said...

I believe the market way over-reacted to whatever happened to its ex-CFO. I value stocks based on the fundamentals. And in this case the fundamentals of XFML have not changed. One has to ask how this sensational event changed the rapid growth of the business. Nothing much. Here I highlight some key points.

Thank you for starting this topic. I am an investor/trader/speculator using fundamentals and I can not find any other Chinese company that is more attractive than XFML right now. (So I long XFML.) Here are some fundamentals:

Business -- provide diversified advertising services and sell advertising slots across all platforms, online, TV broadcasting, radio, billboards, and print. It actuallu has only minor to do with "finance." Think this way, Sina holds advertising slots and XFML is the party who provides the services to fill the slots. It is just in a different segment of the advertising chain. And better, its business position is more defensible. No matter whether BIDU wins (vs. GOOG) or Sina wins (vs. BIDU content business), XFML is not affected. It has some exclusive deals with Beijing TV station, CCTV (Central TV, the most prestegious) and Shanghai Radio. In China, the bulk of money is in TV, not online. And XFML is well positioned.

Some complained about the tight regulation in this business. To me, it is an added advantage. Tight regulation is an entry barrier to potential competitors but a protection to incumbents.

Management -- seasoned managers and deep management pool. I like the CEO's (Fredy Bush) straight forward presentation in CC. And in this current event, I think she is communicating well. Regarding to internal control, at least XFML has already set up the structure and is improving on it.

Growth -- revenue grew y/y 133% in Q1, 25% above its internal projection. For 2007, it projected $110m revenue, compared with $59m for 2006.

Leverage -- costs of revenue in Q1 increased only 102% (excluding intangible asset amortization). So EBITA grew to 36% of revenue, in comparison with 13% for 2006. And this number should definitely go much higher as the revenue grows.

EPS -- the projected ESPs are $0.38 (2007) and $0.62 (2008).

Valuation -- for this high growth company in the booming advertising industry targeting the high wealth demographic, I assign a moderate 30 p/e for 2008 earnings (BIDU is traded at 43 times 2008 earnings). That would put a target stock price of $18.6. As the market comes to recognize this company and if ESP continues to be strong, its p/e will further expand.

Disclaimer: I long XFML and may buy or sell at any time. said...

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