1-4-10 - Explosive Chinese Ad Growth Makes China New Media Corp (CMDI.OB) Perfect

This will be my first perfect stock post of 2010. Fortunately, I had far more hits than misses in 2009. Last year was a period of recovery for economies throughout the world; as a result, I suspect the perfect stocks will be much more difficult to find this year. My first pick in 2009 was Pier One (PIR) at $0.16/ share. It now sits at over $5.00/share. I don't think I'll be able to match the success of that one, but I'll be equally satisfied if my first choice of 2010 reaches anywhere near my goal of 80%-100% returns in 30 days or less. For this selection, I'll venture back into the Chinese market. Small cap Chinese stocks have been smoking hot of late. As most traders and investors move their attention back to the market after their holiday slumber, I believe the stock I have chosen will catch the eye of those looking for the next big gainer. China New Media Corp (CMDI.OB) is the next perfect stock.

China New Media Corp is a fast growing advertising provider in China. Since their business began in 2000, they have become one of the largest outdoor advertising companies in China with a dominant position in Dalian, the commercial center of Northeastern China. Currently, they are expanding their outdoor media platform into two of the most populous cities in northern China, Tianjin and Shenyang. Each city has approximately 10 million people. CMDI.OB provides comprehensive advertising services such as art design, ad publishing, daily maintenance and technical upgrading. They also have a proprietary, web based advertising platform call City Navigator, which they feel will revolutionize the urban viewing experience. Some of their largest advertising clients in terms of revenue include leading international brand names such as Coca-Cola, Pepsi, UPS, HSBC, Sony, Canon, HP and leading domestic brands such as China Mobile, Ping An Insurance, China Unicom, CITIC Bank, and China Merchant Bank..

CMDI.OB began trading on 12/28/09 at an opening price of around $2.00/share. The stock was the product of a reverse merger between Dalian Vastitude Media Group Co., Ltd. and Golden Key International (formally GKYI.OB).

Fundamentals

China has the second largest outdoor advertising market and is one of the fastest growing in the world. Also, China's overall ad spending has kept a double digit annual growth the last 10 years. The company's expansion into other populous regions and China's consistent high levels of economic growth, should power China New Media's immediate and future growth.

Some of CMDI.OB financial highlights for their fiscal year ending 6/30/09 include the following:

-- Total revenue increased 58% year-over-year to $8.42 million

-- Net income increased 268% year-over-year to $2.84 million

-- Gross profit was $4.9 million, or 59% of sales

The statement that really caught my attention by CEO James Wang was, "We expect to maintain a minimum 35% annual growth rate in the next five years."

Low floater

One general result of a public company that has come about through a reverse merger is heavy insider ownership. CMDI.OB is no exception. China New Media Corp has approximately 27 million shares outstanding fully diluted. However, approximately 22 million shares are held by the following:

Directors and Executive Officers - 9.65 million shares

Chuk Chung Fuk - 7.15 million shares

China Reinv Partner, L.P. - 5.5 million shares

This only leaves around 5 million trading shares to the public. Such a small float can be key in a stock achieving quick, significant gains.

Undervalued

Based on the earnings from the fiscal year ending 6/30/09 and the 2009 year ending share price of $2.35, CMDI.OB was trading at a PE of a little more than 20. However, this trailing PE number doesn't take into account the company's earnings the entire 2nd half of 2009. If you consider the company's growth prospects, the current trailing PE assuming better results the latter part of 2009 is probably closer to 15. Because the stock market places far more emphasis on earnings going forward, a better measurement for determining this stock's value is its Price/ Earnings to Growth ratio (PEG). At a 35% annual growth rate, which the CEO expects at a minimum, CMDI.OB's PEG would be around 0.4. Generally, stocks with a PEG < 1 are considered undervalued. Stocks with a PEG < 0.5 are considered to be extremely undervalued.

Technicals

As I've mentioned before, CMDI.OB just started trading on 12/28/09 . So, there's not much data available from a technical standpoint. See a candlestick chart below of the stock's progress thus far:

As you can see, the stock has traded up the last three days on modest volume. Admittedly, this chart doesn't convey a strong technical argument for CMDI.OB, particularly with so many traders away for the holidays. However, when a stock is brand new like this one, limited data can carry some weight to potential shareholders. I've seen a number of stocks turn public via a reverse merger that trade lower out the gate as holders dump shares looking to cash out as quickly as possible. Although, it is still early, this does not appear to be the motive of China New Media's shareholders based on the trading thus far. Many of the shares are owned by upper level management and per SEC filings company executives have stock purchasing incentives based on achieving certain yearly fiscal targets. Many investors will look at the chart along with the overall make up of the company and conclude that CMDI.OB is justifiably trending up.

Conclusion

China New Media Corp is a fast growing outdoor media company just popping up on the radars of most investors. The biggest concern most typically have with Chinese companies is credibility. I believe the strong international and domestic client list China New Media maintains goes a long way in legitimizing the company and its future prospects. CMDI.OB has great fundamentals, a low float, is extremely undervalued, and appears to have some upward momentum. Also, there should be no opportunities for shorting because the stock is so new. I believe all these factors will result in this stock heading higher at a rapid pace. I'm not going to say that the CMDI.OB will go straight up without there being some dips along the way. However, I do believe the company will reach at least $4.00/share very quickly as long as insiders don't do an about-face and all of a sudden go on a selling spree. Sure, there's a risk in purchasing an OTCBB stock that most people know nothing about, but I think the potential reward of finding a hidden gem is too good to pass up. If you want to read the filing regarding this reverse merger and company's origin, read the 8-K at the following link: http://www.sec.gov/Archives/edgar/data/1080627/000107997309001163/dvmg_8k-112009.htm. China New Media Corp (CMDI.OB) is the next perfect stock.