Three industry characteristics you must know about Focus

I have been following Focus Media for more than a year. In the process, I found that the market’s views on Focus Media are extremely polarized. People who are short-sellers believe that people will not watch advertisements when riding in elevators. Toutiao Sooner or later, Douyin will kill the elevator media.

There are also some bullish voices, the most typical of which is Xinchao Media. Its chairman Zhang Jixue said: "Ladder Media is a very big track, big enough to accommodate two companies worth hundreds of billions. Elevator advertising revenue will reach 60 billion in the next five years. "Also optimistic are Alibaba, Baidu and JD.com, which have successively invested in the industry.

In fact, many people in the market are bearish on a company just because the company's stock price has fallen. When the market reverses and the company's stock price rises, people who were once passive bearish people immediately turn into active bullish people.

In the process of investing, we should focus more on studying the business model, rather than judging the gains and losses of investment by staring at the rise and fall of stock prices every day. The following industry characteristics can help us better understand this business.

The first one is the behavioral characteristics of customers.

Tang Chao summarized Focus Media’s core competitiveness in his public account as large, accurate, strong, provincial and specialized. Even though the stock price has halved, he said his views on the company's competitiveness have not changed. And he admitted that the biggest misjudgment when investing in focus was the misjudgment of the behavioral characteristics of advertisers.

Lao Tang said that in the past, he believed that when the macroeconomic downturn or some kind of conflict caused a setback in exports, companies should pay more attention to the domestic market and increase advertising budgets to compete for consumers. Therefore, Focus may even benefit from this, or at least be protected from too much impact.

But the reality is that when advertisers face a downturn in the industry, they do not take the initiative to attack. Instead, they follow the principle of conservatism and protect raw materials and asset-related expenses first. The first thing to cut is advertising fee. Among them, priority will be given to performance ads that can bring short-term direct effects, and then it will be the brand's turn to display ads.

Focus Media’s main form of advertising is mainly brand display. Therefore, when the economy declines, Focus’ performance declines far exceed market expectations.

When the macro-economy declines, users will first cut off advertising expenses. Following this logic, we can also deduce that when the macro-economy improves and company performance increases, more advertising expenses will definitely be spent. Advertising costs. I have seen a research report before, saying that the U.S. advertising industry has fallen more than GDP every time during an economic downturn, but every time the economy reverses, the rate of increase will also be much higher than the economic average. Therefore, when the macro-economy improves, Focus will definitely receive a larger economic bonus than other industries.

The second is the business model with fixed costs.

Unlike traditional manufacturing industries, Focus Media’s operating costs change positively with revenue. Focus Media's business model has high fixed costs and low variable costs. The annual rental cost is fixed, and changes in operating income will be magnified on the profit side. If operating income improves in the future, profits will double. This is what we often call operating leverage.

We can see this change by making a simple table. Based on the data from Focus Media's 2018 income statement, 100 yuan of revenue includes a cost of 34 yuan, a sales expense of 16 yuan, an administrative expense of 3 yuan, and a 17% income tax.

In the first case, when revenue increases by 20%, since the cost is mainly the rent paid to the upstream properties, this part has already been paid, and the expenses remain unchanged. It can be assumed that sales expenses increase by 10% year-on-year, administrative expenses remain unchanged, and financial expenses are 0. In the end, the company's net profit was 5 billion yuan, a year-on-year increase of 39%. In this case, we can see that if revenue grows by 20%, the growth rate of net profit is basically twice the growth rate of revenue.

In the second case, when revenue drops by 20%, the same costs have been paid, and this part remains unchanged. Sales expenses will not increase here, but this part will basically not decrease with the decrease in revenue. Other fees remain unchanged. In this case, the company's net profit becomes 20.5, and the net profit drops 49% year-on-year, which also far exceeds the change in operating income.

This is the business model of Focus Media’s track. Fixed costs remain unchanged, so changes in operating income are transmitted to net profits, which will double the changes. This year's semi-annual report saw a 79% decline in net profit, which shocked many people. Many people even shouted that Focus was going to be finished.

The essence of this is that the company's revenue dropped by 25%, because the costs caused by point expansion increased by 65% ??year-on-year, which ultimately translated into a tragic 79% drop in net profit. When the economy improves in the future, this kind of operating leverage will inevitably make the growth rate of net profit significantly higher than the growth rate of revenue.

The third characteristic is that companies have different negotiating positions in different environments.

Focus’ operating income can be roughly simplified to a formula, that is: revenue = number of points * unit price * listing rate * discount

From this formula, we can see that Focus Media’s Performance, listing rates and advertising discounts are closely related. When the economy is booming, advertisers are more willing to advertise.

Then Focus Media's advertising rate is relatively high, and advertisers often have to make reservations long in advance. At this time, Focus Media's negotiating position is relatively strong, and the discounts are also very small. And when the economy is in recession, advertisers are less willing to advertise, so the company's listing rate is low and the discounts given are more.

Therefore, when the economy improves, Focus will have a strong advantage in listing rates and discounts, which will further strengthen the company's performance recovery.

The above three characteristics of the elevator media industry can help us better understand this business. At present, Focus just lacks signals of economic improvement. Whether it is from the behavioral characteristics of advertisers, changes in Focus Media's negotiating position and the amplification effect brought about by operating leverage, when the economy improves, Focus' performance will definitely show greater flexibility. .

What we need to do at this time is to wait patiently and wait for the flowers to bloom.