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Growth equals profits for you. It could happen tomorrow, or it could take a year. Growth and profitability is where you will make money. Today's idea, Legend Media, is likely to deliver very high growth over the coming year, and the stock is cheap, cheap, cheap right now.
Here's some eye opening numbers:
All these are stats that suggest the radio advertising business in China is in its infancy and ready for explosive growth. Here's why:
Advertisers are always searching for lower cost and more targeted ways to get to the consumer. In China, 646 million listen to radio, and they are the most affluent consumers.
It's all about CARS- there's about 2 cars per driver in the US. In China, only about 20% of drivers own 80% of the cars, and they represent the most affluent consumer in the Chinese society.
There's 1,000 new cars sold in Beijing
everyday. There's 20 cities in China where 1,000 cars are sold every day.
There were 1.1 million new cars purchased in China in March. These buyers
are the more affluent end of society, and all have radios to listen to
while waiting in the ever growing traffic jams.
Radio advertising in China has never fully developed because the government owns most of the stations and controls all of the content. There has never been a push to generate ad sales, and until recently, much of the content has been informational- traffic, weather, news, etc. In the last few years a few stations have been allowed to start playing pop music.
The station managers are assigned the task of selling advertising, but have never functioned like their US counterparts.
Enter Legend Media. They make the radio station's advertising sales simple. They just buy 100% of their advertising air time. On an annualized basis, they lock it all up, package it, and resell it.
Over the past year, they have acquired all the ad space for the following 3:
And now, here's the really good news: They've owned the rights to this time for less than a year. At 100% sell through, the total possible proceeds from radio sales for the company as it stands today is almost $17 million. If they could sell it all, they would have $13 million in gross profits.
Last quarter the company achieved
$2.6 million in revenues- a double over the same quarter the previous year,
but only half way to where they can go as sales continue to improve. They
have the inventory- it's paid for, so there's lots of room for improvement
as they become more entrenched in their advertising markets.
Legend Media's laser focus on the high end consumer does not end with radio. Aside from owning cars, there's another captive audience for the affluent in China.
Airlines- only the affluent fly, and there's plenty of commercial air traffic. The map you see here represents 11 airlines logging 4200 flights per week, and serving over 20 million passengers per year. It's the 4th largest airline group in China.
LEGE owns the rights to the 80 pages of ads in the airline magazine that appears at every seat on every flight. In the December quarter, LEGE had a 60% sell through rate on the ad space with 65% margins- a great business.
Over the coming quarters, LEGE
will maximize this asset by moving towards 100% utilization of the ad space,
which will drive their numbers through the roof.
LEGE delivered 100% top line growth from 2008 to 2009.
Here's what I really like about this
company. For starters, the margins are huge. They've only owned the radio
time for about 8 months, and with the Q1 slow down only delivered about
a 30% of the radio advertising to purchasers. They still had gross profits
of 45%. They can increase sales considerably without having to add
any inventory, and when they do both gross and net profits will go through
FY '01 starts July 1 for LEGE, and they have formally forecasted $40 million in revs for FY'10- up from an estimated $11 million in FY '09. If they can achieve their targets, it represents 263% growth.
Unlike the US, consumer demand is growing rapidly in China.
In case you can't read this chart,
I'll fill you in. Domestic consumption was 10.8 trillion RMB in 2008. It
is estimated to be 13 trillion RMB in 2009- 20% annual growth vs shrinking
GDP in the US, and that's a slightly lower growth as compared to the past
five years. It will accelerate again in 2010.
The stock is about $.35. I&O- 110 million- $38 million market cap. 50% gross margins and accelerating. The value proposition- what are the Radio and Airline Magazine assets worth? I'd say no less than $50 million, considering they have a low cost way to communicate with 55 million of the most affluent consumers in China. Really, it's worth far more than $1 per consumer as you can send repetitive messages.
Therefore, assuming the asset alone is worth $50 million, LEGE has immediate upside to $.50.- About 66% from today's open.
Trailing losses, but should become profits in CY '09- certainly the company should be nicely profitable in FY '10, which starts July 1.
Here's a big picture chart. As you can see, last year LEGE was trading at considerably higher levels. In fact, LEGE was a $3 stock a mere 9 months ago.
I'm not saying there's a 10 fold return in this stock in the short term. Unlikely. Over the next 12 months, they would have to sell through 100% of their inventory and probably pull off another acquisition or two to get back to the $3 level. It's possible, but not likely.
However, the stock has been perking up of late as interest is just starting to appear once again. The world investment community is talking about China. I believe it will be the best place to find growth globally over the next 10 years.
Consider how much money you would have made if you had invested in radio assets in the US in the 1950's or '60's. With a little patience, you would have made an absolute fortune as Clear Station, Viacom, and Infiinti came along.
It won't take 10 or 20 years in China. On the industrial side, they only took 20 years to achieve what we needed 150 years to achieve. Radio will be the same. This is going to be huge.
Here's the forecast. Immediate price target by year's end: $.75 to $1. Much higher longer term. SSL: $.25. Consider selling for preservation of capital if it slips down to or below $.25, and come back another time. Upside- a double or triple. Downside: 20%.
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