VisionChina operates more than 130,000 digital TV screens on buses and subways in 21 cities across the country. The company airs content through partnerships with local TV stations and makes money by selling ad time to clients, roughly half of whom sell fast-moving consumer goods.
The company was something of an investor darling in 2008, when its share price climbed more than 200% to peak at US$22.70. By the end of the year, however, its stock had declined to around US$5, and it has remained mostly below that level ever since.
Although the company’s price-to-book ratio is below the industry average, this stock seems unlikely to see much action in the near future. VisionChina continues to post impressive gains in revenue – total revenues were US$45 million in the second quarter, up 42% from the previous year. However, rising costs and impairment charges keep its balance sheet mired firmly in the red. VisionChina attributes much of its ill fortune to a regulation that limited certain types of ads and the total length of ads in each program beginning from January 1, 2010.
But while this undoubtedly affected its business, the more likely cause of VisionChina’s troubles is a series of recent acquisitions, including of three ad agencies and subway ad network operator Digital Media Group, on which it has recorded hefty impairment charges.
VisionChina acquired DMG for US$160 million to eliminate a competitor in the Beijing subway system and acquire new lines in Shanghai and Hong Kong. It was not a happy marriage. Last December, VisionChina announced that it was suing DMG’s selling shareholders for misrepresenting their financial condition. As evidence, VisionChina cited discrepancies between the financial report DMG had presented for the first eight months of 2009, and one later presented by Ernst & Young. VisionChina discontinued payments for its acquisition, prompting a countersuit from DMG.
Fiddling with financials may seem to be the norm rather than the exception in small Chinese companies. However, there are reasons to doubt VisionChina’s accusations. VisionChina waited more than a year to publicize the discrepancies between the two reports – during which time it continued to make payments to DMG shareholders. And when the architect of the acquisition, VisionChina’s former CFO, resigned in mid-2010, the CEO gave his work nothing but glowing commendation.
For these reasons, some claim the lawsuit is merely VisionChina’s attempt to extract itself from what now looks like an overpriced acquisition. It’s not hard to imagine that VisionChina might rush into such a deal. Because the company deals solely with public transport systems, it has more difficulty expanding than a competitor like Focus Media, which signs contracts primarily with property companies. In Shanghai, for example, Shanghai Oriental Pearl Mobile TV, part of Shanghai’s state-owned media conglomerate, has blocked VisionChina from the city bus system.
VisionChina’s business has some upsides. Its utilization – an all-important metric that measures ad minutes – is steadily improving. And it recently received a vote of confidence from Focus Media, which bought a 15% stake last December, and from CCTV, which now offers its advertisers the option of airing ads on VisionChina screens.