Focusmedia just released their 3rd quarter results. It was the 4thquarter in a row that the company had bad news to share with investors. The stock price reached a 5 year low (6.5) after completing 90% decline from top price (65) in October 2007. So what happened to one of China most promising media giants? The purpose of this short article is to provide insights about the concerns that led the investors to throw the stocks and to show the opportunities the company has to recover the severe mistakes the management performed in the last 18 months.
The concerns:
Running too fast and merging 4 companies in 18 months– Focus acquired 4 companies in a very short period (Mobile marketing company, In store Ads Company, China’s leading internet agency – All YES and Poster AdsCompany). The first 2 new businesses appear to be very bad investments and the companyalready writes off the mobile company and plans to restructure the 2ndwhile they write off 50%, because the in store advertising business is losing money. The 3rd seems to be medium investment compared to the traditional business and only the forth is a very good one. Research shows that most mergers will fail (75%). Merger is a very complicated move that can confuse a company and create cultural conflicts. Trying to do four mergers in 18 months was a crazy idea and now we can see the results. TEVA, the biggest generic drug manufacturer is a good example of a company that proved they can constantly merge companies and maintain healthy growth rates.
Loss of Focus – Focus media grew extremely fast by creating a leading indoor advertising business that offered a unique solution to advertisers in China – Reach high end customers in office buildings and residential areas. It worked really well and the profits surged, but the growth rate was not enough and the company tried to grow too faster by expanding to 3 new media segment they knew little about.
Constant changes in senior management – the entrepreneurs that built the company in a very impressive way made crucial mistakes and decided to leave the company. This is a shame, since they created impressive results in 2004-2006. They kept providing very good results to investors and detailed reports to enable investors understand their business.
The opportunities:
Return to Focus – One of the things I learned in navigation course in the army is that if you lost your way, go back to where you started, or got lost… Focus new management main challenge is to go back on track. The indoor advertising business is still a very good business and they need to put a lot of focus on it. They need to provide more conservative growth goals to All Yes and enjoy the booming trend of China’s internet. Regarding the In store advertising business, they should close all the losing points of sale and transform this business to become profitable. It can become profitable, only if given the right time to learn from business models the company used successfully in the past in the indoor advertising business.
Build a strong management team – The current CEO was very successful in the poster frame business. Now his challenge is much bigger –he needs to fix mistakes that were done prior to his period. By building a very strong management team that will stay for a long term in the company he will be able to solve all the problems. Focus image in the market got hurt from the bad trend in the company, but the current global crisis makes it easier for Chinese companies to recruit and retain good team.
Plan long term and grow in a steady manner – Focus has a great example – The Chinese government. They plan for long term and keep a very nice growth rate for 30 years already. 10-15 percentof growth per year will be enough for Focus to become a giant in 20 years.The former management grew too fast for 4 years and they thought they need to maintain that growth rate instead of stabilizing the business on healthy growth rate. In 2007 the company reported 144.43M$ net income. If the company will maintain an average 15% growth in the next 20 years,the annual profit in 2027 would be 2.36B$. Based on a future P/Eof 20, this will lead to a market cap of 47.2B USD (5,200% compounded growth). This makes sense based on China’s bright economic future and Focus strong market position and would make every investor in the company very happy.
Build a strong Financial and IR team and reporting mechanism – it seems like the current management need to improve their IR.They keep failing to stand in their predications unlike the years 2005-2006.They should maintain a fixed annual growth, like the biggest global Generic drug manufacturer TEVA.This will lead to higher investor satisfaction and confidence and will enable the company to stay very stable even during global world crisis. TEVA stock in the last 12 months was very stable (Only 13% down from last peak reached in March 2008).
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