Incident: Focus Media fell 4.65% in a single day on July 11. We think it is related to Meituan's announcement on the official WeChat account in the morning that it is recruiting elevator media advertising franchisees. The market is worried that Meituan's entry into the elevator media market will compete with the FanZhong Media market. After the market, FanZhong Media responded to Interactive Easy Investors' questions about the Securities Times. Fanzhong Media and Meituan have reached an intended cooperation to give full play to their respective advantages and cooperate to develop and operate elevator video media in downstream cities, including third- and fourth-tier cities, to provide high-quality services to small and medium-sized customers.
According to the WeChat account of “Meituan Takeout Partner City”, the Meituan Sinking Market Development Department is committed to the development and operation of Meituan's core local commercial sinking market. Currently, Meituan plans to recruit elevator media advertising franchisees (video elevator media) in the sinking city. The Meituan side will provide equipment and business support; the franchisee side is responsible for matters such as equipment installation, sales and advertisement production. The franchisee conditions include:
1. Currently engaged in offline advertising business. At least 2 years of experience, experience in ladder-level media is preferred.
2. We have community/business district property resources, advertising sales, advertising sales experience, etc. in any sinking city in the country to rapidly expand the elevator media business.
3. We have sufficient start-up capital and company strength, and are willing to set up more than 500 video platforms in a single city.
According to the Securities Times, Focus Media and Meituan have reached an intended cooperation to accelerate the development and operation of elevator video media in low-tier cities. In the context of speeding up the construction of a domestic cycle, in order to be able to provide high-quality services to more small and medium-sized customers, in line with the actual needs of the current market, Fanzhong Media and Meituan actively explore, give full play to their respective advantages, and cooperate to develop elevator video media in downstream cities, including third- and fourth-tier cities. In order to achieve the path and form of cooperation between the two sides, Fenzhong and Meituan will first select some cities as pilot projects for this cooperation. In the future, they will gradually promote coverage according to the operating conditions of the pilot cities.
We believe that the conclusion of this cooperation will promote collaboration between FanZhong Media and Meituan. Through partners, they can open up online and offline marketing channels in sinking markets, increase their respective penetration rates in low-tier cities, and provide better services to small and medium-sized enterprises in low-tier cities. Audience can also give full play to the powerful advantages of its own content amplifiers, expand the A1 audience, effectively improve online store entry rate, circulation rate and conversion rate, provide high-quality empowerment for small and medium-sized advertisers represented by local lifestyle services, and continue to push up competitive barriers for enterprises in terms of scale and structured advantages.
Comment:
We believe that the follow-up cooperation between Fanzhong Media and Meituan is more reasonable, focusing on medium-term dividend and high-return investment opportunities:
(1) The company announced on April 29 that the interim profit distribution conditions are positive net profit to mother, and the maximum cash dividend limit is 80% of profit. According to estimates, we expect FenZhong Media's net profit for the 24Q2 single quarter to reach 2.36 billion yuan, that is, the net profit growth for the second quarter is expected to be +5.8%.
The net profit forecast for 24 years corresponds to the current market capitalization dividend rate of more than 5%.
(2) We believe that providing points in low-tier cities and Meituan providing advertising needs for small and medium-sized customers in low-tier cities is currently a form of cooperation that makes reasonable use of the advantages of both parties. Compared to Tier 1 and 2 cities, low-tier cities showed lower advertising value in the past. In the current market environment, it is unreasonable to account for the higher CAPEX expenses of both parties. We assume that the single-point cost for low-tier cities is 3,000 yuan/year, which corresponds to the current 0.3 million low tier city operating cost of FanZhong Media.
The audience easily pointed out the strengthening of services for small and medium-sized enterprises, which is reflected in the advertiser structure where KA customers contribute better than that of small and medium-sized customers. According to the Fenghuang Investor Relations Activity Record List, the customer retention rate of the 100 million yuan level invested in the past few years was over 90%, while the customer retention rate of 10-50 million yuan was about 70% or more. There are many small to medium businesses in Meituan's local businesses. Cooperation between the two parties may be better able to transform Meituan's business resources from Meituan's online to mass offline marketing. According to data from CTR Media Intelligence, the advertising market rose 7.5% year on year from January to January 2024. The increase in February was larger than in January. The elevator LCD and elevator poster channels performed well, and the advantage of the mass media channel was stable.
(3) Meituan's open recruitment of franchisees in low-tier cities is part of its sinking marketing strategy. It helps to open up online and offline marketing channels, increase user penetration, especially for groups with low online penetration rates, such as elderly consumers in low-tier cities, and help merchants in sinking markets expand the range of users. At the same time, there is no evidence that Meituan will personally step down as a ladders media, and that the “horse racing field” model where the ladders enter the market will have a large initial capital investment. As of May '23, Xinchao Media, a new entrant to Ti Media, has raised about 9 billion yuan since Angel Round. Among them, investors include well-known companies such as JD, Gujia Home, and Op Lighting. We believe that Ladder Media's business model, which seems to have a high profit margin, also requires long-term stable downstream customer development (points are important, but stable customers are more important) and stable cash flow return upstream channels (short-term cost competition seems to benefit upstream in the short term, but it will cause problems such as contract renewal and default in the long term).
Investment advice: We expect the revenue of FanZhong Media in 2024-2026 to be 13.364/14.616/15.889 billion yuan, respectively, +12.3%/+9.4%/8.7%; realized net profit to mother will be 5.199/5.465/5.922 billion yuan, respectively, or +7.7%/+5.1% +8.3%. As of July 15, 2024, the corresponding PE was 16.55/15.75/14.54 times, respectively, maintaining a “buy” rating.
Risk factors: Offline consumption recovery falls short of expectations, advertisers' spending budgets fall short of expectations