1H18 beat; expanding its network- Buy
Strong earnings growth, continues to penetrate its terminals in ChinaFocus Media reported its 1H18 results.
1H18 core earnings (mainly excluding government subsidy) increased by34% yoy to RMB2.8bn from RMB2.1bn in 1H17.
Total revenue increased by 26% yoy to RMB7.1bn in 1H18, fromRMB5.6bn in 1H17. This was mainly driven by its inner building business(30% yoy growth in 1H18).
We observe OP margin expansion in 1H18 due to operating leveragedriven by scalability and more orders from FMCG/telecom companieswhose revenue grew by 67%/68.9% yoy, respectively in 1H18.
FM guided reported earnings for 9M18 to be in the range of RMB4.75bnto RMB4.85 billion, which implied Q3 reported earnings growth of0.2-7.4% yoy. The slower growth in Q3 may be due to more aggressiveinvestment of penetrating its terminals in lower tier cities, leading toincreased operating cost, in our view.
Self-owned inner building media terminals (including LCD players andposter frame) were 2.16 million in total, covering more than 200 cities inChina 15 cities in Korea. This is up significantly from Q1's reported 1.59million. (1H17 reported 1.37 million)
More than 1900 cinemas have signed contracts with FM, covering morethan 12,600 screens in China. (1H17 reported cinemas to be 1,610covering more than 10,600 screens).
FM is trading at 13x PE on our 2019 earnings forecast, which we believeis attractive.
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