To OTC Journal Members: 

Before diving into the first edition on today's new idea (XSEL), there are two other information resources you should be aware of. First- yes, there's a video. You can simply go to the home page at www.otcjournal.com and the video will begin playing.

Secondly, there's an elearning animated chart. This will give you a much better idea of the technical picture. Please view the content on the elearning chart as well. You'll need your speakers turned on for both the video and the chart.

The chart can be found on the home page or by Clicking Here. The video- just go to the home page at www.otcjournal.com. 
 

Xinhua Sports and Entertainment (NASDAQ: XSEL): The ESPN of China

ESPN- Since I'm a sports nut, I can't imagine there's anyone that doesn't have ESPN in their viewing schedule. Maybe you like cooking shows better. Apologies in advance to International readers and those who don't watch ESPN.

Here's a brief history- ESPN was founded in 1979 by an out of work play by play broadcaster who was doing hockey for the minor league New England Whalers. Getty Oil invested $10 million in the idea.

Here's some great trivia for you. Do you know what ESPN's first live sports broadcast was? You guessed it. It was the World Series. Major League Baseball? Well, almost. It was the World Series of slow pitch softball. The game was played in 1979 between the Milwaukee Schlitzes and the Kentucky Bourbons. I'm guessing there were some adult beverages served at the event.

Today, ESPN is owned 80% by Disney (NYSE: DIS), and 20% by Hearst Corporation. ESPN should contribute about $7 billion in revenues to Disney this year, and Barron's estimates ESPN represents about 40% of the value of the Disney Empire.
 

Xinhua- Evolving Into the ESPN of China

Xinhua opened for trading on the NASDAQ in 2007 at about $11, and in pretty short order traded to its all time high of $13. From there, it was all downhill.

The company made a couple of mistakes in the early going. Armed with $400 million for acquisitions, XSEL went on a bit of a drunken media spending spree- acquiring everything it could and probably over paying a bit in the media arena. They dove into print, radio, outdoor advertising, and TV in a major way. 

The company made the mistake of retaining a US based CFO with a bit of a shady past, and short sellers piled in with the help of some media hatchet jobs.

In 2008 the management and the board of XSEL decided to change course and refocus on a core strategy. XSEL decided to divest itself of non-core assets, and focus all of its energies on becoming the premier provider of sports programming in China- they decided to replicate the ESPN model in a country with a far bigger audience.

Hence, it's difficult to provide a succinct forecast for top and bottom line growth. The company is selling off its non-core media divisions which is making the top line go down, and shoring up the balance sheet.

By the end of 2010 XSEL expects to have divested itself of all its peripheral businesses, and be laser focused on the sports broadcasting in China. At this time, a full 90% of their revenues are coming from advertising and broadcast, so the transformation is nearly mature, and numbers should start to improve from here. 
 

The Three Legs of the Business Model: Content, Distribution, and Customers

Those are fancy words for pretty simple concepts. Let's start with Content. In short- it's sports programming for the most part, and some lifestyle shows. 

Content is just a fancy word for the programming they are broadcasting. XSEL is the number 1 broadcaster of International sporting events in China. The only competition is a government owned sports broadcaster, but they don't do any international events- just local stuff. It's like comparing PBS to the major networks. 

The two most popular spectator sports in China are soccer and basketball. XSEL has acquired the rights to broadcast March Madness, which to me is the premier basketball event. They are working on the NBA. Soccer is similar- they have the Europa League in soccer, and are close to getting the English Premier Manchester league- the holy grail in the soccer world.

The NBA and the Manchester league represent possible catalytic events for higher stock prices. They have the rights to broadcast the NFL- Superbowl included, and it's gaining popularity rapidly.

The fastest growing sporting event of interest to Chinese audiences is Ultimate Fighting- as is the case in the US. XSEL broadcasts about 12 different versions of Ultimate Fighting, and the audience is growing rapidly.

One quick note on programming- As many of you know, the Chinese government controls all programming in the country. It's not really much different than the US. Here, we have the FTC- the government agency that controls the use of the public airways. In the event of a transgression, the FTC is reactive. In China, the government is proactive and is involved ahead of the programming. All programming must be pre approved by SARFT- the governmental agency for approving TV, Radio, and Film. Sports is considered non controversial, so for the most part sports programming enjoys immediate approval.

One more note on programming- it is estimated there are 300 million Chinese basketball fans, and 500 million Chinese soccer fans. MLB is popular as well. These are the largest single audiences on Planet Earth, and their ability to buy products from advertisers is growing day by day. Major professional sports organizations cannot afford to ignore this audience, and the only programming outlet they will find that fits their needs is XSEL. 
 

Distribution

Distribution is another fancy word that means how do they get their sports on TV? Let's start with cable. All the major cities in China have cable TV, and it's free. There are two free stations- NNTV and SXTV with audiences approaching 650 million viewers- three times the population of the US.

Here's one area XSEL has over ESPN in the early days. ESPN was a cable channel you had to turn on. Nothing ESPN produced appeared on ABC, NBC, or CBS. All their programming was on one channel. XSEL provides programming for both of the free channels, so Xinhua already has better distribution than the early versions of ESPN.

Then, there's the model of pay TV- ESPN had a cable channel, and viewers paid the cable company to see it. XSEL already has four pay digital channels, and two of them are currently being "repositioned" for exclusive sports programming. 24 hour sports news- as with the ESPN model, is planned for these channels.

And- it doesn't stop there. There's two more ways XSEL is able to distribute programming- the internet and cellular. They broadcast sporting events to all the University networks in China- University students do not have TV, but they do have unlimited high speed internet access, and one entity controls the network. 

XSEL also has access to mobile devices, and 3.8 million people are already subscribing to XSEL content on their mobile phones.
 

Customers- The Almighty Revenue Stream

Customers are the end result of great programming. The customers are the advertisers, and ad revs come commensurate with the size and demographics of the audience.

XSEL already has relationships with 30 major multi national brands- names like Sony, Kodak, Proctor and Gamble, UBS, Sony, and Nokia. The list goes on and on.

However, of far greater interest is the mix of advertising revenue sources at the present time. Currently, 70% of their ad revenues come from Chinese companies- 30% from multi nationals.

Chinese companies have not been as affected by the global recession. As the recession winds down, advertising budgets will come back, and the ratio of Chinese to multi national advertisers should evolve to 50/50 with the numbers growing.

Between advertising and production fees, XSEL was able to generate $24.5 million in revenues in Q1- 90% or $21.8 million of that revenue stream was advertising and production.

As I stated in the introduction- XSEL is divesting assets, so top line numbers are actually moving down as they sell off the subsidiaries. Next year the company will stabilize and start growing.
 

Conclusion

ESPN on steroids. That's the growth potential for quality sports programming in China. Before XSEL, there really wasn't any. Based on the way this stock has been trading, I have no idea where it will be by the time you read this.

However, I believe there are a number of strong arguments to support a $5 stock down the road. This stock trades in ADS's (American Depository Shares). Each ADS or share you can buy actually represents 2 shares of a Chinese company, but it doesn't matter because all reporting is done in ADS's.

There are about 75 million ADSs Issued and Outstanding- so somewhere between $1.50 and $2 we're looking at a market value of $110 million to $150 million.

Within three years the world will view this company as being worth $1 billion. Your upside for long term investors is about 6 times your money. Short term is a much tougher call, which is why I've provided an animated, narrated chart for your review.

The stock is trading down today after making a spectacular two week run from $1 to nearly $2. Back to $1.50, which is just great as far as I'm concerned.

The bigger issue- how do you put a value on the premier sports broadcaster in China? It's certainly not a mere $125 million- by stock market standards that's nothing.

I've included an animated chart to discuss the possibilities on the short term trading side. Watch and listen, and then develop your own strategy.

Go to the home page at www.otcjournal.com for the video presentation.
Click Here for technical comments.

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