Crouching Tiger, Hidden Potential

Submitted by John Persinos as part of our contributors program.

This China-based provider of high-tech advertising billboards is an undervalued play on the Middle Kingdom’s expanding consumer class.

The growing love affair between the Chinese middle class and Western-style shopping is boosting the fortunes of Tiger Media (NYSE: IDI), a China-based outdoor advertising company.

As China’s consumers gain greater affluence and migrate to urban areas, they’re increasingly susceptible to advertising—especially the splashy digital billboards for which Tiger Media specializes.

Tiger Media deploys a network of about 750 outdoor billboards throughout the major metropolitan areas of China, including Beijing, Hong Kong, Shanghai, Guangzhou, Shenzhen, Chongqing, Qingdao, Shenyang, and Hangzhou.

Tiger Media’s billboards are situated in commercial areas with heavy vehicular and foot traffic. The company also places advertising in elevators and inside shopping malls.

Building on this foundation, Tiger Media is now forging a new network of large format LCD screens in major business districts and luxury shopping malls in Shanghai. The company is placing these digital screens in strategic locations, such as subway stations, busy intersections and store entry points.

In late June, Tiger Media announced it had acquired eight leasing contracts from Symbol Media Corp., giving it outdoor advertising dominance of key Shanghai shopping center locations. Tiger Media ponied up USD2.2 million for the contracts, which will be paid through the issuance of 2.05 million Tiger Media ordinary shares to Symbol Media.

By June 30, Tiger Media expects to have finished the installation of 77 LCD advertising screens in Shanghai at 13 different locations within seven highly popular shopping districts.

Tiger Media’s LCD screens range in size from 42-82 inches, with ads that typically run for 10 seconds on a rotating basis. Advertising clients are global retailers and manufacturers of consumer discretionary items, including food, clothing, liquor, watches, jewelry, and footwear.

Demand for consumer discretionary items is soaring in China, as the populace earns more money and China’s authorities put in place policies that encourage domestic consumption. Reinforcing this trend is a government-sanctioned shift away from the economy’s heavy reliance on exports.

According to the China Outdoor Data Corp, an industry research group, the digital display LCD sector in China is on an upward trajectory for growth. The sector’s revenue grew from RMB5.4 billion in 2011 to RMB7.3 billion in 2012, a year-over-year increase of 35 percent. (1 RMB = USD 0.16)

In April, China’s State Administration for Industry and Commerce (SAIC) reported that the country’s overall advertising industry has grown to become the world’s second largest, behind the US.

SAIC’s data shows that by the end of 2012, the number of advertising agencies in China reached 377,800, with 2.18 million people working in the industry and total revenue of RMB469.8 billion. The industry’s revenue has been rising 30 percent on an annualized basis over the past 30 years; a similar pace of growth is expected this year.

Nonetheless, despite its sheer size, China’s advertising sector tends to lack the creativity and technological sophistication of its counterparts in developed countries, which opens the door for an innovative tech firm such as Tiger Media.

In addition to its in-house expertise with LCD technology, Tiger Media also has a foothold in coveted geographic locations in China.

For the full year 2012, Tiger Media’s revenue has been classified as discontinued operations, in the wake of its divestiture last year of SearchMedia International Ltd. The results from these subsidiaries are presented as a loss from discontinued operations and are included in the net profit of the company.

Tiger Media divested SearchMedia to Partner Venture Holdings Ltd, an independent third party private limited company, in exchange for 650,000 options of Tiger Media’s stock at $1.25 per share.

The move enhanced the balance sheet and capitalization of Tiger Media, by eliminating $13.7 million of goodwill, $21.3 million of accounts payable, $5.4 million in remaining acquisition consideration payable and $11.6 million of income tax payable.

By shedding itself of these impediments to growth, Tiger Media now has the resources to pursue better opportunities, such as its recently inked deal for advertising space in Shanghai.

In April, Tiger Media posted a full-year 2012 net profit of $8.7 million, compared to a net loss of $13.4 million in 2011. As of December 31, 2012, the company had $7.2 million in cash and cash equivalents. Stockholder equity stood at $6.5 million, with 30.1 million common shares outstanding.

Tiger’s Tailwinds

Tiger Media now enjoys several tailwinds. China’s latest Five Year Plan has earmarked large sums to develop the country’s urban infrastructure, which in turn will assist China-based advertising companies such as Tiger Media.

This year, Tiger Media seeks to expand its advertiser base and also increase its footprint in China’s metropolitan areas, where the country shows particular room for growth.

These growing cities are increasingly the home of younger, more affluent consumers who clamor for glitzy shopping experiences.

China’s continuing rural-to-urban shift is one of the largest human migrations in history. City populations expanded by 20 million in 2012, mostly into the cities that Tiger Media is targeting.

In the developing world, disposable incomes are rising in tandem with consumer sophistication. Emerging markets also have populations that are younger, and hence freer spending, than those in developed countries.

This boom in the global middle class will translate into a huge increase in spending for consumer items—and by extension, the high-impact advertising for which Tiger Media excels.

And yet, Tiger Media’s shares are trading at a bargain. The stock sports a trailing 12-month price-to-earnings (P/E) ratio of 2.5, compared to a trailing P/E of 13.5 for its industry of advertising agencies.

To be sure, with a small market cap of $29.84 million, Tiger Media faces risks. China’s growth could slow this year and when consumers lose confidence, advertising is one of the first expenses that companies cut.

Moreover, Tiger Media faces stiff competition from several companies, both large and small, that are firmly in the black. They enjoy greater resources and could overwhelm their smaller counterpart.

However, the company is debt free, holds a lock on prime real estate locations and has finally turned a profit.

In another encouraging development, Tiger Media recently completed a private placement of 7 million shares, raising $7 million from investors including Frost Gamma Investment Trust, an entity affiliated with Dr. Phillip Frost, the company’s biggest shareholder.

Dr. Frost is a renowned billionaire and investor, serving as chief executive officer and chairman of Opko Health (NYSE: OPK), a pharmaceutical and diagnostics company with a market cap of $2.3 billion.

For aggressive but patient investors seeking outsized growth, Tiger Media offers a direct play on China’s growing embrace of Western shopping habits.

John Persinos is managing director of Personal Finance and its parent website, Investing Daily.