PortFoLio • CHINa MaSS MEDIa, SKyPEoPLE FRuIT juICE China Mass Media
The television ad agency should diversify its business to counteract dwindling profits
tionships: with state TV provider China Central Television, from which it buys advertising slots; and the clients it sells the slots to, including Samsung, Mc- Donald’s and China Mobile. China Mass Media generates more
C
than 90% of its revenue from swaps of this ad space; the remainder comes from producing programs, CCTV public ser- vice announcements, for example. In the past few years, China Mass
Media’s net income has dropped off sharply. Meanwhile, competitors Sino- Media Holding (no relation to China Economic Review’s publisher) and Charm Communications posted fairly steady growth in net income since 2007 – excluding a downturn in 2009 during the financial crisis. Te cause of China Mass Media’s
dwindling profits was once the com- pany’s greatest strength: its relationship with media behemoth CCTV. China Mass Media’s CEO, Wang Shengchang, was previously employed at CCTV, and his personal contacts generate most of the company’s business. But these con-
hina Mass Media (CMM. NYSE) is essentially a middle man, reliant on a few key rela-
nections have become less vital as CCTV has systematized some of its ad business. From 2008, for example, CCTV
started selling China Mass Media ad slots in blocks at a fixed rate, rather than based on client demand. Te company began recording the purchase of these slots as a cost of revenue, causing its an- nual profit to plunge. In 2009, CCTV then switched to
an auction-based sales system that left its former favorite China Mass Media scrambling to compete. Te next year, China Mass Media was outbid for the 2010 New Year Gala program, the coun- try’s most-viewed program, for which it had been the exclusive ad agency from 2004 to 2009. Tis single contract had previously accounted for almost 10% of its annual revenue. China Mass Media has also seen an
increase in prices for ad slots – in 2009, the media fees for CCTV4 programs rose by over 40%. However, intense competi- tion among agencies means they are un- able to pass on all of these costs to clients. SinoMedia Holdings and Charm
Communications were able to keep growing their profits in this new world order. So why not China Mass Media?
SkyPeople: Potential for fruitful returns
Investors don’t appear to be looking kindly on SkyPeople Fruit Juice (SPU. NASDAQ). Given the company’s strong market position and undervalued share price, perhaps they should reconsider. SkyPeople is a fruit juice manufac-
turer with exposure to a profitable niche market. While most of its competitors make apple juice concentrates – China produces 60% of the world’s supply – SkyPeople turns higher margins by pro- ducing apple, kiwi and pear juice. The company makes roughly equiva-
lent amounts of each juice, but generates a markedly different revenue yield on each. In 2009, kiwi juice accounted for the
18 China Economic Review • May 2011
largest share of company revenue, 36%, followed by pear and then apple. And kiwi juice was far more profitable: In the first
Stock snapshot Stock price
52-week range
Outstanding shares Avg.daily volume ('000) Dividend yield Market cap
Enterprise value Current ratio D/E ratio
As of April 15, 2010 US$3.88
US$3.40-US$7.12 25.69 m 192 0%
US$99.68 m US$61.07 m 4.27 0.24
three quarters of 2010, it generated a gross margin of 61%, compared with 18% for apple juice concentrate. Annual fruit beverage consumption
per capita in China is only 10% of the av- erage world level and 2.5% of the level in most developed countries. That implies upside potential, especially given high expectation of rising disposable incomes. In addition, the company’s price-to-
book ratio is the lowest of its competitors. Although it has experienced a few minor accounting irregularities, SkyPeople out- performed most of its domestic competi- tors in terms of revenue growth, gross margin and profit margin in 2009.
Stock snapshot Stock price
52-week range
Outstanding shares Avg.daily volume ('000) Dividend yield Market cap
Enterprise value Current ratio D/E ratio
As of April 13, 2010 US$1.96
US$1.13-US$3.62 25.82 m 38
0%
US$50.60 m US$-54.24 m 2.49 0.62
One major factor has been the com-
pany’s failure to diversify its business. Charm Communications has gained footholds into satellite TV, internet and outdoor advertising, while SinoMedia Holding recently announced an agree- ment to sell ad space for MediaCorp, Singapore’s largest media company. China Mass Media benefits from a
healthy balance sheet – it currently holds just over US$100 million in cash and short-term investments, with little or no debt. To boost revenues, the company should reconsolidate and diversify its business.
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