This is Jim Trippon with your China Market Commentary for Tuesday, December 23, 2008. China stock markets were down today with investors shell-shocked over the $1.3 billion dollar deal between two Chinese media giants, Focus Media (FMCN) and SINA Corporation (SINA). In nutshell, SINA has purchased the very core of Focus Media’s business and paid for it with newly issued stock.

 

As China stock Digest subscribers may recall, SINA is one of China’s largest web portals, much like Yahoo in the United States. Focus Media is an advertising conglomerate that primarily sells space on its brightly lit animated signs in shops, elevators and inside high-end buildings. Focus does have other advertising outlets but the so-called out-of-home advertising business was biggest part of the company’s revenue stream.

 

In our view Focus Media has made a poor deal. Following a top management shuffle several months ago and consistently disappointing returns, we have serious doubts about the company’s viability. The company has already terminated another revenue stream, its wireless advertising which was a kind of “SPAM” broadcast to cell phone users.

 

Both Focus Media and SINA lost more than 15% on North American Markets yesterday on news of the deal. The reason for Focus Media’s loss is clearly an investor perception that the company has lost another core revenue stream and the firm will never achieve its stated aim of becoming the largest advertising business in China. The company’s stock has plummeted almost 90% this year.

 

We see a brighter future for SINA. As one of China’s largest web portals, SINA has demonstrated increasing ad revenues while Focus has been losing focus and business.  Why did shares fall on the acquisition from Focus Media? Part of the reason is that the deal was paid for with newly issued stock and investors are clearly worried about a dilution of their holdings.

 

But Sina has successfully established its presence in China’s explosively expanding web universe. With the purchase of a revenue-generating business, SINA now owns a new mature advertising business that reaches out to the consumer when he or she is on the move. SINA can use this asset to generate cash and increase consumer awareness of its Internet dominance.

Focus Media has repeatedly missed earnings targets and may sell other portions of its business.  As our premium subscribers know, we removed Focus Media from our model portfolio a long time ago.

 

This entire episode reinforces what we have been saying for years. There is absolutely no substitute to having analysts on the ground in China to help you avoid the challenges in this still rapidly emerging market. Next week, we release our January China Stock Digest issue in which we make many predictions for the year ahead. Until then, I remain…

Committed to your PROFITS from China, Jim Trippon, Editor

 

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