China Marketing Media (OTC BB:CMKM)

We are coding China Marketing Media (OTC BB:CMKM) as a GeoSpecial based on the re-pricing of risk premium and significant development.

My curiosity with the CMKM story was not particularly aroused until I perused its SEC filings. Historically, China Marketing’s core revenue stream has been derived from marketing its magazines and associated print advertising in China. Realizing that the future of advertising is not in print, the story just didn’t seem to be one that could deliver growth within my parameters of 30% EPS growth. However, in mid 2008 the company began a new venture that directly benefits from the increase in appetite of the Chinese consumer for electronic products and use of credit cards.

“To increase our revenue stream, our management began exploring the feasibility of engaging in new business lines in July 2007. Management considered the potential costs and benefits of launching another magazine or acquiring other publishing or advertising assets and determined that such actions require capital outlays that are greater than the company can currently afford and would take several months or years to implement. As a result, management investigated other business types to increase our revenues with lower capital expenditures and shorter ramp up times. During the search for new business opportunities, management noted that credit cards are the fastest-growing consumer credit product in China, and it is widely expected in China that card usage and profitability will experience explosive growth over the next decade.”

The management believes that engaging in online business is beneficial and suitable for small business like ours as it requires significantly lower capital outlay compared with traditional business approaches. In July 2008, we began our new business of online marketing and sales of electronic products by entering into various cooperation arrangements with Chinese banks. These banks' existing consumer communication channel allows us to spend a limited amount of money as the startup cost for advertisement. We have been able to market and sell our products by sending marketing brochures with the banks' monthly statements to their credit card customers and receive payments through the banks' already developed online payment mechanism.”

Taking a close look at the financial break out over the past three quarter reveals an interesting trend:

While its core magazine/advertising business growth has been erratic, China Marketing’s new on-line business has experienced steady sequential growth increasing from 2.58 million in its 2009 first quarter to $6.9 million in its 2009 third quarter. 

Also, EPS growth was finally achieved in the third quarter after two quarters of negative growth:

Source: SEC 10Q Filings 

China Marketing has not issued any recent press releases and appears to have no United States contact. So, I don’t think investors are aware of management’s new focus. It will be difficult to make a final investment determination until I can interview management. For now I will take a chance on the company, since it is profitable and selling substantially below its book value of 54 cents per share. Hopefully, the company will be able to drive EPS growth as it targets an industry segment that should be a direct beneficiary of the economic growth in China.

There are still a few loose ends that investors need to ponder:

• We need to inquire about capital needs.
• Although the company has finally seen an uptick in the EPS growth rate during its third quarter, gross margins and EPS have suffered due to the extra costs with having to carry an inventory.  Additionally, the EPS number was still in line with 2008 first and second quarter figures.
• The company’s magazine/advertising business may not exist at some point in the future:

“Sale and Marketing Publishing House ("CMO"), an affiliate owned by the PRC government, is controlled and directed by a common director and major shareholder of the Company. CMO is not a direct or indirect subsidiary of the Company.

"On October 23, 2003, Shenzhen Media entered into a 10-year agreement with CMO. The agreement calls for the payment of $1,220,930 to CMO in exchange for a right to oversee the operation and strategic planning of advertising, publishing, and staff training for the magazines that are published by CMO. Under this agreement, Shenzhen Media is entitled to collect advertising revenues from customers already existing at the time of the contract, in addition to any new clients that Shenzhen Media can solicit and develop. Shenzhen Media shall bear all the operating costs and receive all the revenues from the contracted businesses.”