Event:

The Company announced to purchase a 100% stake in Advisionmedia with cash and issued shares.

Comment:

Acquiring Advisionmedia to build a cross-media integrated marketing platform

The Company planned to purchase a 100% stake in Advisionmedia for a consideration of Rmb450mn (Rmn87.4955mn in cash, and the rest will be paid by placing 33,196,374 shares to the latter at Rmb10.92 per share). Advisionmedia promises to deliver earnings of Rmb46mn/56.83mn/68.70mn in 2013E/14E/15E. The total consideration equals to 9.78x/7.9x 2013E/14E PE.

The Company will increase its investment by Rmb80mn within two months after completion of the M&A transaction, to support Advisionmedia′s expansion and resource integration. Advisionmedia promised a no-less-than-7% ROE and an increase of at least 1ppt in the annual ROE each year in the commitment period.

After the M&A, the Company will strive to keep the independence of Advisionmedia′s employees and operation. To guarantee a stable employee team for Advisionmedia, the Company has signed a no-less-than-60-months labor contract with Advisionmedia′s major senior executive, Mei Ye.

Advisionmedia was among the three major outdoor LED media network operators in China. The M&A transaction is the first external expansion adopted after the new management took office. After Advisionmedia is incorporated into the Company, a cross-media integrated marketing platform will be built, and it will give full play to the Company′s brand value, enormous media resources, abundant offline activities, mature marketing system, huge customer group and outdoor LED new media marketing networks.

As the leading LED media operator, Advisionmedia boasts great potential for organic and horizontally acquisitive growth.

Advisionmedia′s core business is development and operation of outdoor LED media services. Since its foundation in 2003, Advisionmedia has proposed to construct national outdoor digital media network. Based in Shanghai, Advisionmedia has three subsidiaries (in Beijing, Guangzhou and Tianjin). Its outdoor LED media network covers 30 provinces and 97 cities in China, and it has 167 outdoor LED screens, with a total size of 26.5k㎡. Advisionmedia has become one of the three leading drivers in Chinese outdoor LED media market.

After its entrance into outdoor LED media market since 2006, Advisionmedia has been expanding LED media resources. Among the 167 outdoor LED screens in operation, 23 are operated indenpendently by the Company and 144 through agents. IOf Advisionmedia′s outdoor LED screens, the supersized screens are generally located in the absolute prime sites in first/second-tier cities and golden locations in third/fourth-tier cities.

Advisionmedia′s customers mainly come from enterprises from sectors such as automobile, food & beverage, digital home appliances, cosmetics, finance & insurance, international 4A advertising companies and domestic advertising companies. Its customers spread over China but most are located in first/second-tier cities. The penetration in third/fourth-tier cities is growing steadily.

Advisionmedia promises making earnings of Rmb46mn/56.83mn/68.70mn in 2013E/14E/15E, implying growth rate of 24%/21% in the coming two years. Core driving force of Advisionmedia′s organic growth include a) increasing coverage rate of self-owned screens, b) advertising price hike due to the scarcity of core outdoor LED resources and c) expansion in agent-operating screen resources, etc.

In LED screen operation, small/mid-sized media operators are in disadvantaged positions due to relatively high cost to gain core location resources, and the hefty spending on LED screen building and maintenance. Operators with large-scale media networks can provide cross-regional services to their customers. With noticeable advantages in resource and operation, the Company has great potential for horizontal expansion, and is expected to benefit from it.

New management wishes to develop the Company into a comprehensive culture & media group through acquisitive development.

The Company′s new management took office in 2H12. It aims at transforming the Company into a comprehensive culture & media group, and is actively getting access to fields like internet, mobile internet, outdoor new media, etc trough acquisitions. It integrates the various media resources based on the interactive marketing platform, and strives to build a one-stop integrated marketing service system.

After the M&A, Guangdong Guangzhou Daily Media and Advisionmedia will be able to share and integrate their customer resources, give play to the synergic efect of multiple media and promote the construction of customer-oriented and integrated marketing service system.

Potential risks:

Slow organic growth; and downbeat economic climate undermining growth in the advertising sector.

Investment advice:

In reference to the Company′s 2013-14E Pro-Forma Earnings, we project the Company′s 2013E/14E/15E pro-forma consolidated net profit attributable to shareholders to be Rmb323.28mn/336.27mn/353.08mn, respectively, equivalent to diluted 2013E/14E/15E EPS at Rmb0.45/0.46/0.48 per share. Considering the comparables’ valuation, we assign the Company with a 30x 2013E PE and set our mid/long-term target price at Rmb13.5 per share. Factoring in the relatively slow growth in the Company′s core newspaper business, and that new drivers mainly come from the implementation of transformation and M&A strategy, we assign the Company with the OVERWEIGHT rating during the initial coverage.