Shares in the company will cost between HK$2.63 and HK$3.48 each. The base deal consists of 139.4 million shares, which represents 25% of the company. If the 15% greenshoe is exercised, a further 20.9 million shares will be brought into the deal, increasing the maximum deal size to $71 million. Of the shares being offered in the base deal, 90% are primary. The remaining 10% are being offered by Golden Bridge Culture, a private investment company owned by SinomediaÆs chairman Chen Xin and his wife Liu Jinlan, who is the CEO. Golden Bridge will own 36.9% of the company after the IPO. Private equity firm Bain Capital, a pre-IPO investor who is not selling any shares, will hold 21.1%.
The institutional bookbuild started yesterday and the 3.5-day Hong Kong public offering, which accounts for 10% of the deal, will begin today. The final price will be determined after the close of US trading on July 1, which means the institutional offering period will be a lot shorter than the typical one-and-a-half to two weeks û likely because the company needed to get the deal done by the end of June to avoid having to update its financials. Trading is expected to start on July 8. Cazenove and Morgan Stanley are the joint bookrunners.
Sinomedia sells advertising space to its clients on a range of television channels, but with a particular focus on CCTV, China's state-owned television network. It is the second largest underwriter for CCTV overall and the networkÆs largest privately-owned underwriter. In 2007 it acquired the rights to sell advertising on Jiangsu TV City Channel as well as Shenzhen Satellite TV Channel.
Its clients include both international and domestic companies û such as BMW, FedEx, China Unicom and Ping An Insurance. Out of its 300 clients, no single company accounts for more the 10% of its total revenue.
China has the second largest advertising market in Asia after Japan. In 2007, spending on advertising reached Rmb120 billion ($17.5 billion) and is expected to rise to Rmb193.8 billion by 2010, a compound annual growth rate of 17.3%. Of current spending, television advertising accounts for the largest share at 39.2%. It is, however, growing slower than other forms of advertising, with an expected CAGR of 13.8% between now and 2010.
In terms of Chinese companies that can be used as comparables, investors are said to be looking at Focus Media, AirMedia and VisionChina Media, which are all listed in the US and provide advertising through LCD screen networks located in various public places, including office building, airports and buses. According to Bloomberg, Focus Media currently trades at 18 times its projected 2008 earnings, while AirMedia is quoted at 24.9 times.
Based on the price range, SinoMedia is valued at between 11.6 and 15.5 times its 2008 earnings estimates, putting it at a 14% discount to Focus Media at the top of the range, and a 36% discount if it prices at the bottom.
SinoMediaÆs profits have risen healthily in recent years. From 2005 to 2007, revenues increased from Rmb230 million to Rmb364 million ($29.4 million to $46.6 million), and its profit after tax rose from Rmb24.8 million to Rmb42.7 million.
Of ChinaÆs 1.3 billion people, 96.2% have access to television; and CCTV captures 28.9% of that audience. The companyÆs strong relationship with such a large network provides SinoMedia with the opportunity to offer its clients advertising that has a high exposure. At the same time though, the company could be seen as too dependent on one source of revenue û in 2007, 90.9% of its gross revenue was obtained by selling advertising on CCTV alone. This leaves the company vulnerable to changes in CCTVÆs popularity and advertising pricing levels.
CCTV will remain a key part of SinoMediaÆs future plans. Of the proceeds from the IPO, 70% will be used to purchase other media companies, such as companies that can help it to branch into digital media, but also companies that do business with CCTV. Another 20% will be used to gain more advertising resources from CCTV, and other local channels, while the rest will go towards working capital.
Since the deal size is small, after-market liquidity could pose a problem, especially in light of the continued weakness in the Hong Kong market. Over the past four sessions, the Hang Seng Index has lost 3.7% and sentiment for market newcomers remains poor.
But China shares are a good buy again, according to JPMorgan, who has recently revised its rating on China to overweight. ôNow that we are going back to overweight, I think that investors should take the opportunity to buy China stocks. The short term risk is the price of oil,ö JPMorganÆs chief China economist and head of China research Frank Gong said at a media briefing yesterday.
The bankÆs renewed confidence in China is due to a belief that inflation topped out in February at 8.7%; in May it was 7.7%. And this has given the Chinese government room to liberalise the price controls on fuel. Increases in fuel prices, as announced last week, will cause further bumps in inflation, but at the same time, the fact that China is allowing them to go up suggests the government feels that food inflation is now under control, says Gong. JPMorgan also expects the People's Bank of China to raise its benchmark lending and deposit rates by another 27 basis points in the fourth quarter of 2008.
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