Focus Media: Braking for Repairs? High Dividends as the Only Consolation?

Hello everyone, I am Dolphin.

On April 29th, Beijing time, Focus Media.CN released its full-year 2023 and first quarter 2024 performance. Since the first three quarters of 2023 are already known, and the full-year performance forecast for 2023 has been disclosed early in the year, what needs more attention now is the Q1 financial report reflecting the industry environment and internal operations of the company, thereby implying judgment on the growth trends for Q2 and the whole year. Of course, some key information revealed by the relatively detailed operating data in the annual report will also be highlighted for analysis by Dolphin.

Overall, the fourth quarter ended as expected, but the "thunder" lies in the more important first quarter report for the current market. The main issue lies in revenue. Although few institutions specifically forecast Q1 performance breakdown, based on the limited Q1 expectations and the majority of institutions' expectations for full-year performance growth, a mere 6% revenue growth in the first quarter is significantly weak.

On the other hand, although overall costs have slightly increased, with some costs still decreasing, whether looking at cost trends alone or the expansion trend of media placements, it is difficult for total expenses to be further optimized this year. With profit being squeezed from both ends, whether the fundamentals can support the current valuation depends entirely on the revenue side. For Focus Media, as a leader in offline advertising, its market share is relatively stable, meaning that revenue mainly depends on the macro and industry environment. However, given the macro environment in Q1, especially the unexpected situation in March, coupled with a high base, it is hard to be optimistic in the short term.

Therefore, Dolphin predicts that there may be considerable pressure on short-term valuation, and the only slight comfort from this financial report may be the dividend. In fact, the company had already started planning a high dividend payout strategy for the next 3 years at the end of last year. In 2023, the company's dividend payout ratio to shareholders was close to 100%, and the company also promised a maximum mid-term dividend payout ratio of 80% in 2024. Assuming a 10% growth rate in net profit attributable to the parent, the dividend yield can reach 4.2%.

Key points are as follows:

1. 2023 ends without surprises: The fourth quarter revenue and profit of Focus Media were basically within guidance and market expectations, with not much to say about the overall results. However, looking at the whole year of 2023, market expectations actually went through a roller coaster rideThe stock price is also fluctuating between the expected extremes, continuing to oscillate.

2. Back to the Original in Q1? Not optimistic but not overly pessimistic. To be honest, there is no clear turning point in the macroeconomic fundamentals. The strong consumption during the Spring Festival and Qingming Festival in Q1 is more of a "better-than-expected" scenario under extreme market pessimism. However, the sustainability of this "expectation gap" is not strong. On one hand, there are still challenges in the macro environment, and on the other hand, market expectations may continue to rise during this process (some institutions expect a growth of 15%-20% in Q1).

For Focus Media, it may not fully benefit from the offline dividends in Q1. With a longer Spring Festival holiday this year, the wave of returning home is obviously higher than in previous years, and the offline demand is more concentrated in third- and fourth-tier cities rather than first- and second-tier office buildings.

Therefore, when Focus Media only delivered a 6% growth, it is hard for the market not to be disappointed (after all, there is the low base under the high fever of the epidemic + the logic of price increases at the beginning of the year), and the valuation may have to return to a stage of pressure and oscillation. Unless the e-commerce shopping demand in the second quarter can exceed the current not exaggerated expectations, coupled with the increasingly fierce competition between platforms, such as Tencent vs. NetEase in game purchases during the Spring Festival, and Alibaba vs. Pinduoduo in recent subsidy activities, Focus Media may benefit from this.

3. A new round of investment phase? After going through the epidemic, Focus Media's media placements have been maintaining a trend of stable structural optimization over the past two years. However, there was a significant acceleration in the second half of last year, directly leading to a significant increase in operating costs and sales expenses. Although the company tried to control the impact on profit margins last year (layoffs, negotiating lower rents, etc.), the erosion of profit margins from the new round of investment began to be clearly reflected due to the impact of lower-than-expected demand during the shopping festival in the fourth quarter - operating profit margin decreased by 7 percentage points compared to the previous quarter.

Although the first quarter saw pressure on revenue, the company may have also implemented flexible operations (expenses fluctuating with revenue expectations, negotiating favorable rents, etc.), so the overall operating profit margin did not continue to collapse.

4. Maintaining high dividend expectations: Guided by policies and the global macro environment, some funds currently prefer high-dividend dividend stocks. Since its listing in mainland China, Focus Media has consistently made dividend decisions. Over the years, the dividend payout ratio relative to net profit attributable to shareholders can exceed 50% on average. During periods of performance pressure, the dividend scale does not completely follow actual profit performance, leading to situations where the dividend payout ratio exceeds 100%.

The company is expected to distribute dividends of 4.77 billion RMB in 2023, with a dividend payout ratio reaching 99% of net profit attributable to shareholders. At the same time, the company plans to set the upper limit of the dividend payout ratio for mid-2024 at 80%, maintaining high dividend expectations.

5. Pay attention to the guidance from the conference call: Neither of the two financial reports provided guidance for this year, but the outlook and response strategies for the next two years are crucial. Also, since the beginning of 2024, the actual changes in expectations of advertisers in various industries, it is recommended to pay attention to the performance conference call6. Key Performance Indicators vs. Market Expectations:

(Due to few institutions providing individual Q1 performance expectations in public reports, there is a certain deviation between BBG consensus expectations and actual expectations. In the following analysis, Dolphin Jun will focus on comparing the actual performance of Q1 with the expectations of 2-3 top institutions.)

Dolphin Jun's Viewpoint

With the gradual increase in online traffic affecting advertisers' budgets shifting online, and the offline media competition slowing down towards stability, the investment logic for Focus Media in the short to medium term tends to focus on beta opportunities brought by macro fluctuations and alpha opportunities brought by expectation differences.

At the beginning of the year, the market had a very poor outlook on consumption, which also suppressed expectations for Focus Media. Similarly, when actual consumption exceeded expectations after the Spring Festival, leading to a rebound in expectations, Focus Media returned to a stable scale of 100 billion.

Looking at the recent trend in stock price changes, the weaker-than-expected performance in the first quarter may have already been partially priced in the stock price. However, considering the marginal weakness in macro data in March and the current valuation leaning towards reasonable, the company has entered a new investment period, leading to limited upward momentum in valuation.

At the same time, Focus Media's high dividend can only be seen as a consolation within expectations, providing a bottom for the decline. In fact, the company announced a plan in December last year to maintain an 80% dividend rate for 2024-2026. However, in the context of very poor consumption expectations at the beginning of the year, the positive impact of high dividends did not support the valuation.

If we ignore short-term marginal fluctuations, there may not be much room for valuation expansion in the long run. Currently, a market value of 100 billion corresponds to a 2024 net profit of 5.5 billion at 17-18x P/E ratio. Looking at the future cagr growth rate of EPS we expect (revenue 5-10%, profit 10-15%), it is clear that this valuation does not provide enough safety margin. Even with the potential premium of a 4% dividend yield, it still seems relatively unattractive. Conversely, if there is no macro turning point and further investments affect short-term profitability, there is potential to quickly create an attractive opportunity.

Detailed Analysis of This Quarter's Financial Report

I. Revenue: 2023 Ended Steadily, But Q1 Disappointingly Below Expectations

In the last quarter of last year, Focus Media's total revenue was only 3.23 billion, with a year-on-year growth of 57% due to a low base, which was within expectations. However, the revenue growth in the first quarter was only 6%, significantly lower than the market's general expectation of 10-15%, not to mention some institutions being more optimistic and expecting growth of 15-20%Institutional expectations are not low mainly due to 1) a low base; 2) a 10% price increase upon reopening; 3) good Chinese New Year consumption. However, the actual growth rate of only 6% indicates that offline dividends at the beginning of the year did not benefit the masses too much. Dolphin believes that this year's Chinese New Year holiday is longer, and the wave of returning home is apparently higher than in previous years. The offline demand is more focused on third and fourth-tier shopping malls and scenic spots rather than the more advantageous first and second-tier office buildings for the masses.

From the industry performance perspective, the growth rate of elevator media in January and February is around 25%, which is actually quite good. Comparing with the masses further confirms that due to the difference in consumption scenarios between the first quarter and usual times, although the masses are the leader in offline media, the marginal drive is not significant.

Looking ahead to the second quarter, although it is a shopping festival, Dolphin's expectations are not optimistic mainly due to the fact that macroeconomic data has not yet shown a clear turning point for the better (marginal weakening of March economic data, such as the decline in social zero growth rate), and the high base effect from just fully recovering from the impact of the epidemic last year.

However, we will not be overly pessimistic because of this. Compared to Q1, there is a trend of marginal improvement in both advertising volume and price in the second quarter. On one hand, it is the shopping season itself, and the competition between e-commerce platforms has not slowed down, so the discount on the rate card may not need to be as high as in Q1, allowing for a greater extent of enjoying the price increase dividends and accelerating the expansion of ad placements.

Therefore, whether it is due to seasonal effects or the advertising expectations of businesses themselves, the absolute value will definitely be better than in the first quarter. In addition, after the recent stimulation of the real estate market in some first-tier cities, transaction volumes have shown some increase. Considering the situation of the past two years, it is expected that further policy stimulus may be introduced.

Overall, with cautious optimism, Dolphin expects a growth rate of around 5-10% in Q2, which is a certain acceleration compared to Q1 given the high base, but lower than our expectations at the beginning of the year.

II. Segment Performance: Increase in the Proportion of Elevator Media, Cinema Advertising Doubles

In terms of segment performance, in the second half of 2023, elevator media saw a year-on-year growth rate of 35%, while cinema advertising grew by 168% on a low base. However, compared to normal operations in previous years, there is still room for further recovery. Nevertheless, in the first half of the year, the contribution of elevator media revenue continued to increase by nearly 1 percentage point.

In the unrestricted epidemic year of 2023, cinema advertising has not fully recovered to the level of a normal year due to issues in film content supply, reflected in the mediocre box office performance. On the other hand, cinemas are also shrinking under the impact of the epidemic. Although Focus Media has been optimizing and adding escalator media over the past three years, with recent accelerated additions, the number of cinema screens under contract has remained unchanged or slightly decreased (maintaining coverage of 13,000 screens over three years, with a net increase of 4 cinemas from the second half of last year to the first quarter of this year, reaching a total of 1831 cinemas, lower than the 1927 cinemas at the end of 2021). Therefore, even with price increases, the overall decrease in display volume will still affect the recovery of cinema advertising.

III. Stable Customer Structure, Rebound in Pressured Sectors

In the second half of 2023, the largest industry for Focus Media's top customer remained in consumption, but the proportion decreased from 61% in the first half of the year to 53% in the second half. This is mainly due to several previously pressured sectors in the second half of the year showing some signs of recovery, such as the internet, entertainment, home furnishings, and communications. Dolphin believes that with the marginal relaxation of policies and the technological transformation of AI, the revenue contribution of sectors such as the internet and entertainment is expected to continue to recover some market share.

In different regions, East China continued to recover in the second half of the year, followed by the South China region also regaining the share that declined in the first half of the year, but the North China region is still fluctuating with a continuous contraction in market share.

IV. Expansion of Investment Period Costs, Stable Cost Control

Last year, as profits rebounded with the recovery of revenue, the full-year gross profit margin returned to 65%, with a core operating profit margin of 41%. Although it has not rebounded to its historical peak, overall it has returned to a relatively normal level of profitability under normal operations.

However, the recovery of profit margins is not simply achieved by reducing absolute expenditures. In fact, during the accelerated expansion period of media placements in the second half of last year, both costs and sales expenses showed a synchronized acceleration in growth. However, during this process, Focus Media exercised some control over expenditures (with cost and marketing expense growth rates lower than revenue), leading to a year-on-year decline in research and development and management expenses through layoffs, thereby maintaining the trend of profit improvement. From the perspective of gross profit margin by segment, although the expansion of point locations accelerated in the second half of the year, the gross profit margin of ladder media still showed a significant improvement compared to the first half of the year. Cinema media, on the other hand, continued to experience fluctuating gross profit margins due to incomplete revenue recovery.

In the end, the net profit attributable to the mother in the fourth quarter of last year and the first quarter of this year were 1.23 billion and 1.04 billion respectively, basically within the guidance range and expected range. The net profit margin has fallen slightly, remaining at around 38%. Excluding the pressure in the first quarter, it is expected that the net profit margin attributable to the mother can be maintained at 40% in a stable state. Although 40% is still a distance away from the historical peak of over 50%, if the strategic reinvestment and trends are further confirmed, the recovery of profit levels will temporarily come to a halt, unless there is a significant turning point in the macroeconomic situation.

Excluding non-operating gains and losses and focusing only on the profitability of the main business, a profit of 1.06 billion was achieved in the first quarter, a year-on-year increase of 13%, with a profit margin restored to 39%. Compared to the overall net profit, the growth rate of core operating profit is slightly higher, but the overall trend is similar, showing a significant slowdown after going through a recovery cycle.

Historical research on "Focus Media" by Dolphin:

Financial Report Season

October 19, 2023 Financial Report Review "Focus Media: Solid Recovery of 'Ladder Media'"

August 10, 2023 Conference Call "Focus Media Aims to Ride the AI Wave (1H23 Earnings Conference Call Summary)"

July 12, 2023 Earnings Forecast Review "Profit Surges Over 150%, Is Focus Media Turning the Corner?"May 12, 2023 Conference Call: "Progressive Recovery" Does Not Mean No Recovery, Optimistic Outlook for Q2 (Focus Media 2022 Performance Exchange Meeting Summary)

April 29, 2023: Focus Media: Disappointing Results? Wave Goodbye to the Past and Look to the Future

October 31, 2022: Focus Media: Walking through the Darkest Times, But Can't Escape the Fate of the Cycle

August 17, 2022 Conference Call: Consumer Goods Resilient, Focus on Cost Control While Waiting for Real Recovery (Focus Media 1H22 Conference Call Summary)

August 16, 2022 Financial Report Review: Internet Collapses, Focus Media "Falls Apart"

July 14, 2022 Financial Report Review: Profits Plummet by 70% in the Second Quarter, Focus Media Faces Another Performance "Pitfall"

April 29, 2022 Conference Call: March Revenue Drops by 45%, Focus Media Facing Tough Times (Conference Call Summary)

April 29, 2022 Financial Report Review: Focus Media "Bleeding Rivers"? Opportunities Arise After Desperation

November 4, 2021 Financial Report Review: Starting with Focus Media: Expectations for Internet Advertising Keep "Lowering and Lowering"

August 26, 2021 Conference Call: Shrinking, Disappearing, Standardizing, Business Not Easy in the Second Half of the Year (Focus Media Summary)

August 25, 2021 Financial Report Review: Focus Media: Looks Good? Actually a "Landmine"April 23, 2021 Telephone Conference "Incomplete Focus Telephone Conference Minutes"

In-depth

December 21, 2023 "Is the Consumer Market Warming Up or Cooling Down? The Unstoppable Spring of Advertising"

August 2, 2022 "Into the Gold Pit Again? Focus Media: 'Gold' or 'Pit'?"

July 12, 2022 "Focus Media: The 'Desperate Fighter' Changing Fate Against the Current"

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