Market Overview

Invest in China's inland empire


As stated in the last paragraph on my article (Plenty of Hiring - Just not in America), China's manufacturing base is gradually shifting away from coastal and southern tier 1 cities to more inland tier 2 cities. While it is still being debated how fast this transition can be, and whether the inland cities can really rival their coastal counterparts in terms of resources and efficiency, the more important point is that this is indeed happening, and that the inland cities are growing quickly and getting more prosperous.

This trend does not mean that investors should flee the coastal cities, because while labor intensive manufacturing jobs are gradually moving from those cities to inland cities, intellectual property intensive jobs for design, analysis, etc. are shifting from developed countries to China at the same time. The shift, however, could mean that inland cities may have a faster growth rate than the more developed coastal regions.

One of the pure play strategies to capture on this shift is to invest in media companies with strong presence in the 2nd tier cities. Two Chinese media/advertising companies: China MediaExpress Holdings, Inc. (NASDAQ: CCME) and VisionChina (NASDAQ: VISN) might provide the investment vehicle on this.

China MediaExpress Holdings provides advertising on transportation vehicles such as Intercity buses, airport express buses, and tour buses in China's various cities. The company covers large municipalities such as Beijing, Shanghai, Guangzhou, but it also has coverage in inland cities such as Chongqing, and inland provinces such as Sichuan, Hubei, Shangxi, etc. CCME has a strong balance sheet with essentially no debt, and is currently at its all-time high of ~$17/share.

VisionChina provides advertising in digital TV displays in buses and subways. While covering Shanghai, Beijing, Shenzhen, and Guangzhou, its major coverage is in the 2nd tier cities such as Chengdu, Wuhan, Nanjing, etc. The company had been making acquisitions to expand its footprint across China, and its most recent large acquisition was to acquire China's Digital Media Group in Jan 2010 for $160 million. Like many serial acquirers, it ran into acquisition digestion problem, and the company had been reporting losses for the past year. In the process, it also assumed debt, and its balance sheet is not nearly as strong as CCME. Its stock reached the low of $2.51/share in June 2010, and ramped up to $5.1/share last week, but dropped more than 20% to now trade at $3.93/share after reporting that it narrowed its loss to $2 million in the last quarter but revenue guidance missed estimate.

For investors with longer term horizons who believe that China's tier 2 cities could outstrip growth elsewhere, they should keep China MediaExpress Holdings and VisionChina in mind. CCME has demonstrated the momentum on this already, and if VisionChina can turn around its P/L situation, investors could be very well rewarded.


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Posted-In: advertising Beijing ChinaLong Ideas Guidance Global Media Trading Ideas