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There was a major scandal that involves FMCN. It was kind of confusing for a couple of days. But after the dust settles, I think I got a pretty good handle.
First some background information:
There are two issues involved, first, was FMCN involved in actually doing SMS spamming? And if so, how did FMCN obtained the mobile phone number of these customers?
On 3/18/2008, China Mobile apologize and said it had block off these 7 companies.
On 3/19/2008, FMCN CEO apologize for doing SMS spamming. Also on 3/19/2008 (
On 3/72006, they purchased Dotad Wireless and convert into a subsidiary of FMCN and called it Focus Media wireless. It has three parts of business, one is to help companies send SMS messages to its members. The second is the new type of mobile business that FMCN talks extensively in it earning conference and they had already signed up big companies such as MSN and KONG. The third type of business is the SMS advertising business and SMS spamming will be within this business.
After the CCTV reporting, FMCN did an internal auditing and found that its subsidiary did committed SMS spamming. As a result, FMCN will completely get out of all SMS advertising business. The other two wireless business categories are not affected. Based on this, they predict they will make 54 to 55.8 million in 2008 (from 47m in 2007). The full affect of getting out of SMS advertising business will start to be felt in the 2nd quarter of 2008.
In addition, they said all companies employees that caught doing this will be fired. They also explained that they obtained the users’ phone number by monitoring when these users browsing on their WAP site. That is legal. The outside Chinese legal experts quoted on various news reports all agreed that this is fine for FMCN to collect these user information because these are public domain information if users willing to give out their phone numbers on these WAP sites.
It took me a while to figure all these out. There are several conclusions to be made.
First, FMCN is just growing too fast. Jason Jiang is probably the most capable executive I had followed. But the pace he is buying companies is just way too fast. The company needs time to integrate. Promoting Dr. Tan Zhi to CEO is an excellent idea. Now it frees Jason for better monitoring of its other far flung subsidiaries. In the earning conference, FMCN talked about getting into the area of digital TV advertising business. I am sure they will probably buy some companies in that area. But I hope they would stop buying any more companies for couple of more years to allow time for better integration and better monitoring. As they focuses on integration and less on acquisition, that shall improve the margin for the next few years.
Second, the company made a correct choice. It came clean and basically just chopped off one of its arm. It is a clean break and it completely stopped the growing story dead on its track. By completely getting out of this business, it becomes immune to whatever China Mobile can do to it.
Third, the Wall Street’s reaction is completely irrational. Even after FMCN completely getting out of the SMS advertising business, it will make 900m to 930m (about 80% year over year) in 2008. It completely trashes the analysts’ estimate of 836m.
Now, lets make it even more extreme; lets assume the worst of the worst, lets assume they will completely getting out of all wireless business. Wireless is expected to be account for 6% of total business in 2008. Without wireless, FMCN expects to make 846 to 874m, or about 70% year over year.
As of now, FMCN share price is $36 and a trailing PE of 32 and forward PE of 17.
All that for an 80% growing company! Are you kidding me?