Focus Media, against the macro growth trend?

Recently, Focus Media released its interim report. In the first half of the year, Focus Media's revenue was 5.97 billion yuan, an 8.2% year-on-year increase; net profit was 2.49 billion yuan, an 11.7% year-on-year increase.

Everyone knows that the advertising industry is significantly influenced by the cyclical nature of the macroeconomy. When the economy is good, not only do people have money to advertise, but they also compete to advertise; when the economy is not doing well, advertising budgets are tight.

Therefore, companies like Focus Media are typical pro-cyclical enterprises. In years with a poor overall environment, Focus Media has experienced negative growth. By comparing the monthly average growth rate of China's total retail sales of consumer goods with Focus Media's historical revenue growth rate, it is found that the two have a strong positive correlation over a long period of time. At the same time, the fluctuation in Focus Media's revenue is more pronounced.

This year's macro environment needs no further discussion. Since April, the compound growth rate of social retail sales has been hovering below 3%, indicating a clear cooling trend in domestic consumption since April.

Amid the current macroeconomic downturn, why is Focus Media growing against the trend?

1. Leading in Elevator Media

Focus Media's business is simple, mainly selling elevator and cinema advertising.

Elevator advertising accounts for over 90%, pioneering the core advertising scene of "building elevator".

Building elevators are basic urban infrastructure, with a very special scene where advertisements are placed in a closed space that is essential to pass through, making it hard to ignore.

The building elevator, the most common daily life scene, represents four words: mainstream crowd, essential passage, high frequency, low interference. In other words, Focus Media's business directly targets high-quality audiences, ensuring a high reach rate.

What does Focus Media need to invest?

A piece of advertising space or a screen, along with rental fees for locations and salaries for maintenance personnel, constitute the main cost items.

Therefore, this is a very profitable and easy-to-make-money business. Focus Media's interim report shows a gross profit margin of 65.13% and a net profit margin as high as 41.1%. Such profit levels are rare in the entire market.

Where there is profit, there is likely competition, leading to price wars and a subsequent decline in profit margins. However, why can Focus Media, seemingly an ordinary business with no apparent barriers to entry, maintain such high profit margins? Because this business model, although simple, has a significant first-mover advantage. The core of this model is to seize good resources. There are only so many elevators in good locations, and once you sign a contract for one, it's hard for others to compete for it, they can only look for less desirable locations.

Advertising in top-tier cities covers high-spending consumer groups, and the key competitive advantage of elevator media lies in the dense locations in top-tier cities. Companies that accumulate more high-quality locations can provide advertisers with greater breadth and depth of advertising placements, achieve better advertising results, reach higher-quality audiences, and therefore have higher value.

As the pioneer in elevator media, Focus Media, in the early stages of industry development, rapidly expanded its locations through financing and acquisitions, continuously increasing its market share, and consolidating its leading position in the industry. Focus Media holds a large number of core high-quality locations and continues to increase its presence in top-tier cities; in lower-tier markets, Focus Media supplements its locations through franchising, acquisitions, and equity participation. As of July 31, 2024, the company had approximately 84,000 franchised elevator TV media devices, covering approximately 130 cities in China; and approximately 403,000 elevator poster media devices in affiliated companies, covering approximately 70 cities in China.

Competition with New Trend Media at one point intensified, but even after spending billions, New Trend was still unable to shake Focus Media's position. Focus Media gradually returned to its own pace, with a steady increase in the number of locations, further strengthening its competitive advantage. Currently, Focus Media owns approximately 1.097 million self-operated elevator TV media devices and approximately 1.549 million self-operated elevator poster media devices.

At the same time, Focus Media has replicated its model in other densely populated cities and countries in Asia. As of July 31, 2024, Focus Media's life circle media network covers approximately 300 cities in China, the Hong Kong Special Administrative Region, as well as around 100 major cities in South Korea, Thailand, Singapore, Indonesia, Malaysia, Vietnam, India, and Japan. Currently, overseas revenue accounts for 7%-9% of total revenue.

In an unfavorable environment, small and medium-sized elevator media companies are clearing out. On June 24th this year, Huayu Media announced the cessation of operations, citing the company's operational pressure from the changing economic situation and intensified market competition. For the market leader, this actually improves the competitive landscape. In the risk section of Focus Media's financial reports in the past two years, there was usually a statement like, "Some media may compete for market share by continuously lowering prices." But this year, it's absent. Does this mean that the company also believes that the competitive landscape is improving? 2. Accelerating Sink

Focus Media has a good business, but the market thinks its biggest problem is that it doesn't seem to have much growth, it's not sexy enough, and it's not meaningful when the economy is good, and it's not interesting when the economy is bad. In addition, although it has expanded overseas, the overseas scale is still relatively small for now.

However, as far as the second quarter of this year is concerned, Focus Media's performance is still good. In 2024 Q2, it achieved revenue of 3.238 billion yuan, a year-on-year increase of 10.05% and a quarter-on-quarter increase of 18.62%; net profit attributable to the parent company was 1.453 billion yuan, a year-on-year increase of 12.65% and a quarter-on-quarter increase of 39.74%.

In Q2, Focus Media's revenue increased by 10%, significantly exceeding the market's expected 4%. However, as mentioned above, the social retail growth rate in the second quarter is significantly lower than that in the first quarter. Last year, the first quarter was a low base, but the second quarter can be considered a high base. Based on the performance in the first quarter, coupled with the pessimistic social retail growth rate, linearly deducing, Focus Media's Q2 performance, even if not pessimistic, is still average.

But the result exceeded expectations, so where did this growth come from?

In fact, the advertising market in the first half of the year was still good.

According to CTR data, calculated based on the rate card, domestic advertising spending in the first half of 2024 increased by 2.7% year-on-year, with elevator LCD and elevator poster advertising increasing by 22.9% and 16.8% year-on-year, respectively. Looking solely at industry performance, the advertising market for elevator media actually grew well, even outperforming Focus Media's performance.

The data of the advertising market contradicts the macroeconomic situation, which is relatively rare. Should the macroeconomic situation be more optimistic than imagined, or should advertising be more pessimistic than imagined?

First of all, the biggest impact should be the 618 promotion in the second quarter. This year's 618 started earlier and ended later, extending the overall promotion period, leading to an increase in advertising spending for various brands.

Secondly, regarding the remarkable performance of elevator media, it is highly probable that from July last year to this year, Focus Media raised prices, resulting in a significant increase in CTR calculations for the elevator media market. However, in terms of performance, Focus Media did not achieve such significant growth, indicating that the actual transactions were made at a certain discount after the price increase.

Furthermore, the overall performance of the advertising industry usually lags behind the macroeconomy, and if there is no boost from the Olympics in the third quarter, expectations may decline.

Of course, from the interim report, we can see that Focus Media's own business also performed well.

Focus Media is focusing on elevator TV media. As of July 31st, compared to the end of last year, Focus Media has grown by 11% in elevator TV media, with growth in all regions.

Among them, the domestic sinking market and the densification of overseas media placements are continuously increasing. It can be seen that there are 93,000 elevator TV screens in third-tier and below cities, a 45.30% increase from the end of 2023. In the past, the sinking market that the industry looked down upon also needs to be developed under the consumption downgrade trend Due to the limited value and volume of sinking markets, the industry has always adopted a cooperative franchise model. Many sinking locations of Focus Media are also operated through franchise cooperation, and it can be seen that franchise locations are growing rapidly. Previously, the company reached a cooperation plan with Meituan for lower-tier cities, which may spark new opportunities.

Internationally, as of the end of July 2024, there were a total of 175,000 screens (an increase of 15.13% from the end of 2023); among them, elevator TVs accounted for 156,000 screens (an increase of 14.70% from the end of 2023), and elevator posters accounted for 19,000 screens (an increase of 18.80% from the end of 2023). In terms of overseas asset returns, in the first half of 2024, Hong Kong outdoor advertising, Singapore elevator TV, and other overseas assets achieved positive profits. The Southeast Asian regions such as Thailand, Malaysia, and Indonesia showed rapid growth, while the Japanese market expanded slowly but with proper cost control. In the future, the company plans to further expand into markets such as Brazil and Mexico.

Overall, the macro environment is as generally perceived, but when it comes to the elevator media field, there are multiple factors at play along with some of Focus Media's own expansions, which contributed to a good performance in the second quarter.

From a business structure perspective, we can also perceive some insights, mainly focusing on the core building media segment.

The largest proportion of business revenue comes from daily consumer goods, reaching 59%, with a year-on-year growth of 11.66%, which is the core of revenue growth. There are factors of some price increases, as well as the resilience of daily consumer goods to economic cycles. In 2021, consumer goods accounted for 35.4% of revenue, while the internet accounted for 30%. Now, the internet's share has significantly decreased to only 8.53%, partly leading to a substantial increase in the proportion of consumer goods.

In the broader context, there has been a significant reduction in internet advertising spending, which is considered reasonable.

Apart from the internet, advertising revenues from industries such as entertainment, leisure, and business services have seen double-digit declines year-on-year, reflecting the lack of confidence in optional consumer companies and ordinary commercial companies. Meanwhile, industries such as real estate, home furnishings, transportation, and communication, which are more essential, have all contributed to double-digit revenue growth year-on-year.

Currently, Focus Media, which mainly relies on locations in first and second-tier cities, is still closely tied to the overall environment. Looking ahead, with the approaching global interest rate cut cycle and more room for domestic policy operations, the expectations for the macro environment may also change.

Conclusion

There have been many concerns in the market about Focus Media, including the competition from New Trend Media and the rise of Douyin. Douyin, with its algorithmic recommendations and strong advertising conversion effects, now even has signals in elevators. When people enter elevators and lower their heads to use their phones, they may not pay attention to advertisements However, as time goes by, companies that want to occupy consumers' minds with their brands will still advertise on Focus Media, while those who want to quickly convert and monetize will tend to use short video and other effective advertisements, gradually dividing into different advertising directions, complementing each other.

In terms of the industry, Focus Media remains the relatively dominant player in the segmented field and is optimizing its structure. The profitable Focus Media has also arranged to distribute cash dividends not less than 80% of the non-deductible net profit attributable to the parent company over the next three years, making it a high-yield stock in the cyclical growth category