Xinhua Finance spin-off seeks Nasdaq listing

The diversified media company will offer TV, radio and media content, but will primarily be a play on China's rapidly growing advertising market.
Xinhua Finance Media, a recently created diversified media unit of Chinese financial news and data provider Xinhua Finance, is soon to go public on Nasdaq, offering another opportunity for international investors to participate in ChinaÆs fast-growing advertising market.

The company produces and distributes a mix of business and financial news as well as wealth management and lifestyle programming with the aim of attracting the highest income audience in China. This content reaches an estimated 210 million potential viewers through its nationwide TV network, a potential radio audience of 33 million people in Beijing and Shanghai as well as readers of leading magazines and newspapers, including the Money Journal magazine and the Economic Observer newspaper.

The company does receive some revenues from the sale of programs, but the majority of its top line income comes from media advertising û a market which according to independent research firm ZenithOptimedia is projected to grow to Rmb133.2 billion ($4.3 billion) in 2008 from Rmb80.1 billion in 2005, or at a compound annual growth rate of 18.5%.

The growth is driven by ChinaÆs strong economic performance, the increased affluence of the middle class, the growing urbanisation and more specifically by an anticipated pickup in advertising demand in the run up to the Beijing Olympics in 2008 and the Shanghai World Expo in 2010.

The marketing of Xinhua FinanceÆs story is likely to be helped by the fact that US investors are already familiar with Focus Media, which has seen a 392% rise in its share price since it listed on Nasdaq in July 2005. Those gains have been driven be a steady increase in profits, and although the means of operations are totally different as Focus Media sells advertising space on a network of flat-screen panels in commercial buildings and shops, the potential for a similar development is certainly there.

ôThis is essentially a China concept stock and the buyers are expected to be people who believe in the China story, but the company also offers a chance to participate in the evolution of the broadcasting business in China,ö says one banker working on the deal.

He notes that the high-quality programming that Xinhua Finance has produced so far has had a higher and more international quality than much of the government-type programmes that are available on other channels, which he argues shows it has the ability to deliver on its promises.

ôThe trick is building content that attracts higher ratings and therefore more advertisers, but it will need to do that on a consistent basis,ö the banker says.

The majority of the demand for the offering is expected to come out of the US, which is underscored by the fact that the management will do a full-blown US roadshow, including cities outside New York, Boston and San Francisco which are the usual targets when marketing an Asian IPO. However, during the first two days of the roadshow, which opened last Thursday, there was also said to have been a lot of interest from Asian accounts.

JPMorgan and UBS are acting as joint bookrunners for the IPO.

Xinhua Finance is offering a total of 23.08 million American Depositary Shares û each accounting for two common shares. With a price range of $12 to $14 per share, it could end up raising up to $323 million, which would make it the second largest Chinese listing in the US after Suntech PowerÆs $400 million IPO in December 2005.

Not all of that will go to the company though, as 25% of the offer will be backed by secondary shares sold by existing shareholders. Among those are Fredy Bush, the chairman and CEO, who will sell 1.5 million common shares; a group of directors and executives which will also sell 1.5 million common shares; and Patriarch Partners Media Holdings, which is selling 9 million shares.

The offering accounts for 33.7% of the company, although this could increase to 37.0% if the 15% overallotment option is exercised in full. Selling shareholders will provide shares to cover 6.7% of the overallotment, while the remaining ADS will be backed by new shares. The parent companyÆs stake will fall to 36.6% from 49% following the IPO. At the time of listing, the group of directors and executives will be the second largest shareholder with 17% while Patriarch will hold 8%. Fredy Bush will have a direct 5.8% stake.

Five percent of the ADS offering will be set aside for directors, officers, employees, and associates of the company.

Sources familiar with Xinhua Finance say there is no one company to compare it to as its business spans broadcasting and print content as well as advertising. Investors are said to be looking primarily at Focus Media, but TV broadcasters in other emerging market countries, like Zee Entertainment Enterprises in India, which also have a lot of scope to broaden their footprint in their home market are also watched. ChinaÆs own Phoenix TV is also used as a comparable, even though it has a much smaller audience given that its nationwide network consists mainly of hotels.

The price range values Xinhua Finance at 30.9 to 34.9 times its 2007 earnings and at 18.6 to 21 times its estimated 2008 profit, based on consensus syndicate estimates. As those numbers indicate, the profit growth is expected to pick up significantly in 2008 when the business matures and some investors prefer to look at the company on an enterprise value to Ebitda basis. Syndicate analysts value the company at a 2008 EV/Ebitda of 11.5 to 13 times.

Focus Media trades at a P/E multiple of 33 times for 2007 and 24 times for 2008 and at a 2008 EV/Ebitda multiple of 18 times.

Xinhua Finance has really only been put together over the past 12 months, which will obviously bring a lot of operational risk, but also significant growth opportunities as the company beefs up its content production in order to attract more advertising.

The potential risks should also be mitigated by the fact that the company is the brain child of Fredy Bush, who has a solid track record after serving as CEO and director of Xinhua Finance Ltd. since 2004, and from June 2001 first as vice chairman and then CEO of Xinhua Financial Network, which was the predecessor of the parent. In 2004 she was named one of AsiaÆs top 50 women to watch by the Wall Street Journal and in 2006 she received CNBCÆs Asia Entrepreneur of the Year award.

As part of the group restructuring, Xinhua Finance Media has acquired eight businesses from its Tokyo-listed parent which now form the basis of its five operating groups û media production, broadcasting, print, advertising and research (on products, advertisements and markets). Further acquisitions are also part of the companyÆs strategy going forward and according to the listing document an undetermined part of the $204 million of expected net proceeds will go towards that. About $50 million will be used to repay outstanding debt to its parent.

According to a source, net profit is expected to more than double in 2006 and show significant growth rates of up to 60% in 2007 and 2008, after which it should be able to achieve a long-term net profit growth of around 30%. In 2006 it generated a net profit of $3.34 million on revenues of $59.0 million.

It is currently much cheaper to advertise on Chinese TV stations than on their international counterparts, but as more international companies move in to build a presence ahead of the Olympics rates are expected to increase.

According to ZenithOptimedia, ChinaÆs advertising expenditure as a share of gross domestic product has increased to 0.6% 2005 from 0.4% in 2000, but is still below the 1.3% in the United States and 0.9% in Japan. Similarly, ChinaÆs advertising expenditure per capita increased to $6.5 in 2004 from $3.8 in 2000, but is well below that of the United States at $546.7 and Japan at $309.4 in 2004.

ôWe believe this indicates significant potential for growth,ö the company notes in the listing document.

The final price will be determined on March 8 and the shares will start trading on Nasdaq the following day.
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