Focus Media is embracing the internet and the shift in China towards a consumer-led economy ahead of its planned IPO in Hong Kong.
The company, China’s largest out-of-home advertising network operator, which delisted from the Nasdaq in a leveraged buyout last May, is looking to raise at least $1 billion by listing in Hong Kong, assuming the company floats 20% of its shares and grows at an annual 10% rate, according to sources familiar with the situation.
The Shanghai-headquartered company – which places screens in lifts, buildings’ lobbies, buses and supermarkets – could IPO as soon as the end of this year, the same sources said.
Focus Media, which was founded in 2003 and valued at $3.7 billion when it went private in 2013, will be the first sizable US-listed Chinese company that sells new shares in Hong Kong, signalling that the city is becoming a more attractive listing venue than before for telecommunications, media and technology-related firms.
Kit Low, executive director and chief financial officer of Focus Media, who talked to FinanceAsia in mid-February in his office in central Hong Kong, said Hong Kong-based investors are relatively more familiar with Chinese companies’ businesses and culture than US investors. Valuations could also be higher and liquidity in Hong Kong is ample.
“If the domestic market can provide reasonable valuation as well as a stable regulatory environment for issuers, it’s better to be listed in China than overseas,” said Low.
Focus Media’s Hong Kong IPO may create a template for upcoming deals. A few Chinese companies chose to delist between 2010 and 2012 when US investors were shorting the companies’ stocks following several auditing scandals. Some smaller ones, including dairy producer Feihe International and hotel chain 7 Days which delisted from the US, have already expressed interest in relisting in Hong Kong.
To be sure, it is still difficult for some of these Chinese privatised companies to raise equity capital in Hong Kong. The city’s regulators require a three-year track record of profits and do not allow dual-class share structures, which is widely used by Chinese internet companies including Alibaba.
Many still plan to list in the US. At least two companies, namely online retailer JD.com and training course provider Tarena International, have unveiled plans to list in the US during the first two months of this year.
Low talked cautiously about Focus Media’s IPO plans: “IPO is not the only but one of the many options for us.”
He said the company would wait for the right market conditions before it returns to capital markets. The company could alternatively continue to pay hefty rewards to shareholders and remain private.
The company plans to seize the opportunities before listing that are being created by consumers' growing use of the internet and Beijing’s efforts to build a consumer-based economy.
Focus Media is keen on upgrading its business model to generate faster growth after witnessing the internet’s massive impact on traditional businesses.
Consumers are buying more online and as a result advertisers are spending a bigger part of their budgets online – a lower margin business.
“The changes in the way consumers buy are important. China’s consumers are going online to buy goods more frequently than are consumers in the developed world. The traditional advertising companies really should evolve faster to respond to that,” said Ben Simpfendorfer, managing director with consultancy Silk Road Associates.
Focus Media plans to combat this decline by using the internet to gather data on consumers in order to better target audiences for adverts.
“We need the internet gene,” said Low meaning foster an innovative corporate culture that will seize opportunities created by the internet.
For example, it will launch free Wifi and provide free mobile apps as soon as June to attract customers surfing the internet while they are waiting for the elevator.
After drawing customers to the internet, the company will look to keep them engaged and collect data from them. It plans to cooperate with some community social networks and understand residents’ daily life through the internet.
It is also considering cooperation with some internet services providers via minority acquisitions.
Another way to collect data is “waste sorting”, in which the company figures out consumption habits of residents by hiring cleaners to sort through their rubbish every day and in order to identity their brand preferences and how often they use products.
The company will then conduct data mining and integration to build up “big data”, a massive database with information about customers.
For example, if the data shows one residential district has many mothers with a full-time job, they will put more child products ads at the rush hours. “It is an important part of the endeavour to understand consumers so that the right products and services are offered to them at the right place and right time,” said Low.
Embracing change
Jason Jiang, Focus Media’s founder and chief executive officer, told FinanceAsia that the company wants to be “China’s leading location-based service platform” by 2018.
Focus Media is also seeking clients from new sectors that will benefit from China’s economic reforms.
“Structural changes in China’s economy have created both opportunities and challenges for our company,” said Low. “On the positive side, if the economy shifts from an export-and investment-led economy to a consumer-led one, our business will benefit as advertising and promotion help drive consumption.”
The consumer sector only accounts for 30% to 35% of the gross domestic product in China at the moment but economists expect this proportion to increase to 50% to 60%.
“We like Focus Media because advertising expenditure is a close proxy to China consumption growth, which has been one of our key investment themes,” said Matilda Wong, head of investor relations with China-focused private-equity firm FountainVest.
The company is already benefiting from growth in the consumer services and retail industries including mobile gaming, electronic products, daily cleaning goods, baby products and healthcare products. It expects more to come.
China is also encouraging private enterprise by offering policy support. “For example, the government has introduced measures that significantly strengthen the payment infrastructure for the e-commerce sector. This makes it much easier for companies to sell products online,” said Silk Road’s Simpfendorfer.
The government has granted licenses to third-party payment companies and allowed non-financial institutions to operate online payment business.
As an entrepreneur working for a privately-owned company, Low hopes that economic reform will give his company a fillip. “A desirable outcome of the economic restructuring will be the increased importance of private enterprises’ contribution to the future growth of the China’s economy.”
Focus Media went to the US for a listing because it was the best choice at the time. Firstly, Asian investors were not as familiar with high-tech companies as US investors. Secondly, Hong Kong needs a three-year track record of profits for issuers. Thirdly, Focus Media was two years old and in urgent need of funds for growing; it couldn’t wait.
In six months after listing, the company acquired its largest rivals in China Target Media and Framemedia.
However, when Low joined Focus Media in 2010, market conditions had changed.
US-listed Chinese firms’ shares were hit by the global financial crisis in 2008 and by investors’ wariness after a series of accounting scandals in 2010 and 2011.
A batch of companies chose to go private because they considered their shares undervalued. From 2010 to 2012, at least 45 US-listed Chinese companies had proposed privatisation plans, according to company statements on the website of the US Securities and Futures Commission.
Some of the biggest companies with take-private transactions include online gaming firms Shanda Games ($1.9 billion) and Giant Interactive Group ($850 million), fork producer Zhongpin ($800 million) and hotel chain 7 Days ($688 million).
In contrast, Hong Kong looked inviting for Chinese internet companies since Asian investors are familiar with China’s high tech-related companies and would give them reasonable valuation.
“Internet-related stocks with a China consumer story angle listing in either Hong Kong or in the US are likely to continue to be well supported attracting a combination of emerging-market focused investors, the tech-specialist community from around the world as well as global growth managers,” said Alex Abagian, head of Asia Pacific ECM syndicate at Morgan Stanley.
Capital management
After Focus Media was founded in Shanghai, the company soon secured investments of $50 million from top venture capital firms and institutions within one year. Big investor names include Soft Bank, United Capital Investment, 3i, Goldman Sachs and global alternative asset fund manager CDH.
In the first three years since listing, the company completed more than 50 acquisitions. The M&A deals helped expand its business and boosted its share price.
But then trouble hit. In November 2011, Muddy Waters released a report which alleged that the company overstated the number of screens. Focus Media has denied all the claims of the report. But its shares slumped as much as 60%.
“Short selling is a natural phenomenon in many capital markets; it (short selling) in a way helps liquidity,” said Low.
Investors have the right to enquire into listed companies’ business. However, “market activities somehow need to be regulated, if they may increase opaqueness and unfairness in the market.”
Low added: “Focus Media’s business model does not exist in meaningful scale outside of mainland China. Cultural differences add to the difficulty for foreign investors to understand our business model.”
In December 2012, a consortium led by global investment firm Carlyle Group, China-based FountainVest, Citic Capital, China Everbright, Fosun International and the CEO Jiang announced a $1.725 billion acquisition, the largest Chinese leveraged buyout financing ever.
The deal was followed by a $500 million of refinancing within six months.
One breakthrough is that Chinese privately-owned banks who were not as sophisticated as the US and European peers in such lending participated for the first time. China Minsheng Banking took a total of $875 million or half of the LBO financing.
Low believes that Chinese banks will become a stable and reliable source of funds: “Chinese banks will likely continue to grow and be an important source of funding for future offshore Chinese companies M&As. They are likely to increasingly compete with international banks.”
“We can not be satisfied with the status quo; we need to continue to innovate. If we do not get ahead of the curve to pre-empt challenges, sooner or later challenges will dawn upon us,” said Low. FA
Additional reporting by Alison Tudor-Ackroyd
