(Possibly) The World’s Most Profitable Media Company in the World’s Biggest Market

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

I believe this is a short-term correction in the markets, and that they will resume their upward trend after a breather. But, as always, keep a close eye on your stops.

This week’s Global Bull Market Alert pick is a bet on what might be the most profitable company in the in the world’s fastest-growing media market — China MediaExpress Holdings (CCME).

CCME operates a television advertising network on inter-city passenger buses in China. Its network consists of digital televisions that show ads on more than 21,000 buses, many of which travel through some of China’s most populous regions, including five municipalities of Beijing, Shanghai, Guangzhou, Tianjin and Chongqing, as well as nine other provinces.

CCME has no significant competition in this space in China. It also recently has expanded aggressively into the airport shuttle bus market. Thanks to a more exclusive group of passengers, this segment has even higher margins than the inter-city buses. And you can see CCME expanding into a wide range of other public transportation.

As a result, the company is stunningly profitable. In the last quarter alone, the company had $57 million in revenue and only $13 million in cost of goods sold. Selling and administrative expenses were less than $3 million, meaning its central office overhead is astonishingly low. It just might have the highest margin of any media company in the world.

CCME’s remarkable numbers have raised the suspicions of many investors. After all, Chinese small caps have a mixed reputation, and many have turned out to be “too good to be true,” indeed. 

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Yet there are good reasons to think that CCME is the real thing. Unlike almost all of the other U.S.-listed Chinese stocks, CCME has a “Big Four” auditor, Deloitte. And its major shareholder, Starr International, used three outside investigators to look at CCME before investing. CCME’s CEO Zheng Cheng is a devout Buddhist, with famously high ethics. The CFO Jacky Lam is a former auditor with Price Waterhouse Coopers.

Finally, my sources tell me that the reason that China’s Ministry of Transport has given CCME a virtual monopoly with the high-margin, inter-city bus contracts is that the officials trust the company to allow only wholesome TV advertising and not to be culturally “subversive” with its content. That’s the secret behind SINA’s successful “twitter”-like service in China, as well.

Meanwhile, the company is as cheap as can be. After Friday’s sharp sell-off, CCME was trading at a P/E of just 7.0, based on projected 2010 earnings per share (EPS) of $2.58. For 2011, it was trading at an even lower forward P/E of 6.5. Meanwhile, its “peers” in this China new-media-ad space (FMCN, VISN, AMCN) are trading at P/Es of 18-25. Yet, CCME’s EPS for 2011 likely will be greater than all of these peers… combined! The bottom line? CCME could double from current levels and still be undervalued.

So buy China MediaExpress Holdings (CCME) at market today and place your stop at $13.50. For potentially bigger upside, I recommend the March $20 calls. (CCME110319C00020000). Like all Chinese small caps, expect this to be an extremely volatile ride.

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China’s Media Mania

Portfolio Update

Credicorp Ltd. (BAP) fell this past week, even as it announced record earnings. Credicorp’s net earnings for the first nine months of 2010 reached $442 million, up 27.2% from the same period a year earlier. Of the total, $365.2 million came from its main holding, Banco de Credito del Peru, Peru’s largest bank. Peru’s BAP remains a BUY.

iShares MSCI Chile Investable Mkt Idx (ECH) hit a record high of $79.23 on Tuesday before pulling back. ECH remains a BUY.

ProShares UltraShort Euro (EUO) jumped 5% last week, as the threat to Ireland put pressure on the euro. With the dollar likely to rise on the back of risk aversion, and continued pressure on the euro, I am moving EUO to a speculative BUY.

ICICI Bank Ltd. (IBN) dropped back this past week, on the back of a general pullback in global markets. The Indian banking giant remains a BUY.

Market Vectors Indonesia ETF (IDX) hit yet another record high of $92.62 before pulling back under the $90 level on Friday’s sell-off. The “Next BRIC” remains a BUY.

Bank of Ireland (IRE) retreated in the past week. Well, when I recommended Bank of Ireland, I said that you’re buying a stock that behaves like an option. And I’ve been true to my word. Despite the ominous headlines, I am convinced that like Citibank in the United States, IRE is “too big to fail” in the European Union. Grit your teeth and, like the Rothschild’s proverb, “buy when there is blood in the streets.” Ireland’s top banking turnaround play remains a BUY.

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Itaú Unibanco Holding S.A. (ITUB) pulled back this past week. With $370 billion in assets and ranking as Latin America’s largest private-sector bank, ITUB remains a BUY.

Ivanhoe Mines (IVN) dropped this past week after the previous week’s 10% jump. Full-scale construction at the Oyu Tolgoi copper and gold mine in Mongolia is progressing ahead of schedule and there now are more than 5,500 workers on site. Ivanhoe expects to begin initial production of copper and gold at Oyu Tolgoi in late 2012. IVN is a BUY.

Melco Crown Entertainment Limited (MPEL) pulled back sharply during last week’s global sell-off. No worries. October gaming revenue in Macau was up 49.8% from last year to a record $2.37 billion. MPEL remains a BUY.

SINA Corporation (SINA) and a Microsoft Corp. (MSFT) joint venture that operates the U.S. company’s Internet services in China will allow users of SINA’s twitter-like service and Microsoft’s instant-messaging program to link their accounts on both services. “China’s Twitter” remains a BUY.

iShares MSCI Thailand Investable Market Index Fund (THD) pulled back from a record $68.29 this past week. The top-performing market of 2010, THD remains a BUY.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.

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