VisionChina uses ad boom to lure investors

The out-of-home advertising network operator launches its roadshow with the aim of raising $155 million from a Nasdaq listing.
China-based advertiser VisionChina Media yesterday braved a volatile equity environment and launched the roadshow for an initial public offering and listing on Nasdaq. The offer is being marketed with a price range of $9.50 to $11.50, which will allow the company to raise up to $155.3 million.

VisionChina delivers content and advertising in the form of real-time mobile digital television broadcasts on mass transportation systems, primarily buses. According to the prospectus, the company believes it is running the largest out-of-home advertising network using this mode of communication in China, with a total of 33,000 digital television displays and a network covering 14 cities.

However, disregarding the type of screens and their location, the listing candidate lags larger rival Focus Media which, at the end of June this year, had a network of 89,687 LCD flat panel displays in various commercial locations.

VisionChinaÆs network delivers real-time content provided by local TV stations and it derives revenue from selling advertising time during breaks between these programmes. It also sells soft advertising time embedded in the programmes.

The company has expanded the geographic reach of its advertising operations by purchasing ad time on other mobile digital TV networks in cities outside of its own network, and it also operates a stationary advertising platform at subway stations in Guangzhou and Shenzhen as a supplement to its TV advertising network. As of September 30, the company has placed advertisements in 26 cities across China, and more than 230 advertisers had purchased advertising time on its network.

ôThe company is a play on the advertising boom in China, especially when the Olympics and the Shanghai World Expo are coming soon,ö says a person familiar with the business.

The IPO comprises 13.5 million American depositary shares (ADS), or 19.8% of the company. Each ADS represents one new common share. A 15% greenshoe could further increase the deal size to $178.5 million. Credit Suisse and Merrill Lynch are the joint bookrunners.

The price range values the company 17 to 21 times its projected 2008 earnings, according to a source. This compares with 26.1 times for Focus Media. The latter, which specialises in screen-based advertising in lift lobbies of commercial buildings, is popular with investors because of its consistently strong returns since going public in 2005.

Focus Media completed a combined follow-on and sell-down by existing shareholders in early November on the back of an 80% surge in its share price since mid-August. In a strong show of demand for the stock, the share price also gained 4.3% during the roadshow.

Since the deal, which was priced on November 7, Focus has fallen, however, as the general decline in the US stockmarkets has finally prompted investors to take profit on the US-listed Chinese companies following their general outperformance in September and October. On Wednesday, the advertising firm closed at $50.35, or 22% below the offering price of $64.75. The Nasdaq Composite index has lost 9.3% in the same period.

Another comparable is AirMedia Group, which made its US trading debut on the same day that Focus completed its follow-on. The company, which operates over 2,000 digital TV screens at ChinaÆs major airports and 16,000 digital TV screens on airplanes owned by ChinaÆs three largest airlines, jumped 39.3% to $20.90 on its first day of trading, but the share price has been trending downwards over the past two weeks. WednesdayÆs close of $16.25 represents a 22% drop from the first-day performance, but is still 8.3% above the IPO price of $15.

All three of these companies are benefiting from the same economic growth dynamics, including an expectation that China will be one of the fastest growing advertising markets in the world in the next three years. ZenithOptimedia, a media services group, projects that spending on advertising in China will increase at a compound annual growth rate of 18.2% from 2006 to 2009. China already is the largest advertising market in Asia outside Japan, as measured by total adspend. ZenithOptimedia estimated that $12.5 billion were spent on advertising in China last year, accounting for 29.6% of the Asia total.

The source says VisionChina, which began operations only in 2005, has ample room to grow as it is looking to expand its network both in existing cities and new cities. According to the listing prospectus, the company plans to increase the number of digital TV displays in its network and enter into new placement agreements with other bus companies.

Investors may find it difficult to assess the business performance of the advertiser because of its short track record, however. Although it generated a net income of $3.7 million in the first nine months this year, it suffered a net loss of $4.1 million in 2006. It generated revenues of $17.4 million for the nine months ended this year, compared with the $3.9 million of 2006 full year.

Another concern is that the mobile digital TV networks of the companyÆs direct investment entities, and the digital TV broadcasting infrastructure of its local operating partners, do not comply with the standards recently adopted by the Chinese government regarding mobile digital TV operations. The advertiser and its local operating partners will have to spend significant capital on new equipment to meet the national standards, if they are required to do so.

Li Limin, VisionChinaÆs founder, chairman and chief executive officer who is also a major shareholder, was one of the first private investors to enter into the mobile digital television industry. The companyÆs sales and marketing teams have an average of five years of experience in the advertising industry and have worked for a number of major domestic and international advertising firms in China. Taking advantage of good connections with the Chinese government and an experienced management team, the fast-growing company has been able to establish a national advertising platform in the short time since it was set up.

The company is backed by several pre-IPO investors, including OZ Funds and Goldman Sachs which will own 20.5% and 7.9%, respectively, at the time of listing.

Of the proceeds, the operator plans to spend $85 million to expand its network into new cities and new media platforms, while the rest of the cash will be used for potential acquisitions and other general corporate purposes.

The price will be determined on December 5 and the trading debut is scheduled for December 6.
¬ Haymarket Media Limited. All rights reserved.
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