Focus Media: Short-term pressure is not a big issue, a new story is on the way

Hello everyone, I am Dolphin Research!

On August 29th, Beijing time, $Focus Media(002027.SZ) released its 2025 semi-annual report. Since the Q1 results have already been released, we mainly focus on the marginal changes in Q2 and the outlook for Q3. Overall, compared to expectations, the second-quarter revenue was slightly below expectations, but the profitability was quite impressive.

Specifically:

1. Continuous optimization of locations: Compared to the first quarter, the second quarter continued to reduce elevator media poster locations while slightly increasing smart screens in first- and second-tier cities, but the total number of locations also began to show a downward trend. Smart screens can achieve more real-time and dynamic advertising effects compared to posters. Additionally, with the future acquisition of 700,000 smart screens from New Wave, duplicate locations need to be quickly organized.

2. Struggling revenue growth: Second-quarter revenue grew by 0.5%, slowing down compared to the previous quarter, mainly due to environmental turbulence (tariffs, sluggish consumption, budget shifts in the food delivery war, etc.). Additionally, the decline in the number of media terminal locations may have somewhat affected revenue. However, despite the pressure on revenue, the customer payment cycle improved, with the accounts receivable turnover days in the second quarter decreasing from 74 days in the first quarter to 69 days.

3. Cost reduction against the trend: The direct effect of location optimization is a 10% reduction in costs (mainly rent), with a quarter-on-quarter net decrease of 70 million yuan and a year-on-year decrease of 100 million yuan, raising the gross profit margin to 71.4%, almost at the level of the glorious period before the fierce competition with New Wave in 2018.

With lower costs, achieving stable or higher revenue is actually a manifestation of increased competitiveness. Although the merger with New Wave has not yet been completed, advertisers have already partially shifted their original New Wave budgets due to concerns about product effects during personnel adjustments in the acquisition period. As a result, Focus Media benefits, and its bargaining power in the industry chain, both upstream and downstream, will relatively increase, such as negotiating more favorable rent prices, reducing rate card discounts, and increasing publication rates.

4. Profit margin approaching historical peak: Like costs, operating expenses are also strictly controlled, with the total expense ratio remaining stable, but personnel salaries decreased by 11%. In the future, with the merger of New Wave, there will inevitably be a significant personnel adjustment. Ultimately, the operating profit margin of the core business reached 47%, an increase of 5 percentage points year-on-year, rapidly approaching the historical peak of 50%.

According to Focus Media's future higher market competitive position, returning to the peak of previous years is only a matter of time. However, whether the acquisition will proceed smoothly requires cautious optimism, as the market share of Focus Media will reach 17% after the merger, and whether it will pass the relevant regulations on operator concentration needs to be continuously monitored.

5. Stable dividends, high return advantage somewhat weakened: In the first half of 2025, the company expects to distribute dividends of 1.44 billion yuan, or 1 yuan per 10 shares. This is the same as the first half of last year, with the dividend accounting for about 60% of the profit margin. If we refer to last year's situation (full-year dividend rate of 100%), the dividend in the second half of the year will expand. However, with the increase in market value, which reached 120 billion yuan after the close on August 29th, this dividend return is expected to slightly decrease to 4.6%.

6. Key performance indicators compared to market expectations:

(Due to the limited number of institutions making separate quarterly performance forecasts in public reports, there is some deviation between BBG consensus expectations and actual expectations.)

Dolphin Research's View

Although the second-quarter report has some flaws, the biggest surprise is the early release of acquisition benefits, confirming the logic of further profit margin expansion after Focus Media acquires New Wave. Therefore, Dolphin Research believes that the market is unlikely to be too harsh on the revenue miss, as there is already a new story of growth on the revenue side—touching on advertising and acquiring New Wave (pending regulatory approval).

Last quarter, we reviewed Focus Media's logic, which was still based on the dividend base and the expectation of acquiring New Wave, leading to direct revenue expansion and the opening of the profit margin ceiling as competition among peers slowed down. For this quarter, Dolphin Research believes that the main logic for Focus Media is to penetrate more TAM through the cooperation with Alipay's "Touch" feature, essentially increasing new inventory and new advertisers.

In other words, the biggest benefit of promoting "Touch" through cooperation is helping Focus Media penetrate the performance advertising market, compensating for the bug of difficult tracking of conversion rates for elevator media brand ads, increasing the confidence of existing advertisers in placing ads, and lowering the threshold for placement with a CPS pricing model based on performance conversion, which is conducive to attracting more small and medium-sized advertisers.

For Alipay, "Touch" helps improve the data and link of offline consumption scenarios, increasing the frequency of offline payment usage (increasing payment penetration rate), and can also be linked with neighboring e-commerce, food delivery, and other businesses, adding a new traffic entry point. This rare and valuable user consumption data can be used as a tool to upgrade the advertising delivery system behind Alibaba and Focus Media, truly achieving an integrated marketing solution for online and offline scenario linkage.

Given the initial good results, such as the conversion rate of "Touch" being higher than traditional performance advertising, and the emergence of outstanding cases like "Suntory" (achieving cross-regional brand awareness and user penetration through "Touch"), both companies have the intention to continue cooperation.

This means for Focus Media that this is by no means a one-time increment, but a foreseeable long-term fundamental change. Although the acquisition of New Wave and "Touch" advertising, the two major benefits, have not yet been reflected in the short-term financial reports (the acquisition of New Wave requires a shareholders' meeting and regulatory approval), when we look at the Q2 performance alone, it mainly reflects Focus Media's big beta logic—although in the second quarter, due to tariff issues at the beginning of the quarter, driven by the shift from export to domestic sales, domestic advertising placements increased significantly, but the 618 performance was poor, and the end of the quarter was somewhat dragged down.

However, starting from the third quarter, we expect the revenue from "Touch" advertising to be directly reflected: Based on research information, assuming 2 million devices are deployed by the end of Q4, with 10 million daily active users for "Touch," assuming a coupon redemption rate of 80%, a verification rate of 50%, a single coupon value of 0.5-2 yuan, and a comprehensive revenue-sharing ratio of 60% for Focus Media, the annualized revenue from the deployment by the end of the year can reach 1 billion yuan. Based on the promotion pace this year, it is expected to add 200 million yuan in revenue scale.

Therefore, compared to the Q1 expectations, Dolphin Research needs to make some adjustments: 1) Increase the 2025 revenue expectation by 200 million yuan; 2) Increase the 2025 profit margin to 45%; 3) Due to the expectation of acquiring New Wave, calculate the valuation based on a slightly higher than 20x valuation center, i.e., 22x-25x P/E, corresponding to a neutral to optimistic valuation of 128-145 billion yuan, which still has a 7%-20% upside compared to the current level.

Below is a detailed interpretation of the financial report

I. Revenue Overview: Slight Increase Under Pressure

In the second quarter, Focus Media's total revenue was 3.25 billion yuan, flat year-on-year, below market expectations. Recently, due to the two benefits of acquiring New Wave and "Touch" advertising, the valuation has not much reflected the current performance pressure.

Social retail data shows that consumption in the third quarter is still flat, so the industry pressure is still significant, and policy stimulus is expected to be on the way.

II. Segment Performance: All Show Quarter-on-Quarter Recovery

In terms of segment performance, elevator media grew by 2.3% year-on-year in the first half of 2025, and cinema advertising, due to good performance during the Spring Festival, also recovered from a significant decline to a 3% growth.

However, the film industry slumped again in the third quarter, with disappointing summer box office, which is expected to affect cinema advertising. At the beginning of the year, Focus Media estimated to temporarily sign nearly 600 new cinemas to cope with the popularity of "Nezha," but terminated them immediately in the second quarter, returning from 2,459 to 1,853 cinemas.

In June, Focus Media announced a cooperation with Alipay's "Touch," where Focus Media installs Alipay's "Touch" blue ring next to elevator screens. Users can tap with their phones' NFC to receive Alipay cash red envelopes, Taobao discount coupons, merchant membership coupons, etc. After users redeem them, Focus Media receives a share of the single coupon revenue (50-70%).

In the cooperation between Focus Media and Alipay, Focus Media bears the equipment cost, while Alipay provides customized chips and technical solutions, along with 1 billion yuan in cash red envelopes and 10 million flash sale free coupons. The value of a single coupon ranges from 0.5 to 2 yuan, with a 60/40 revenue share between Focus Media and Alipay.

In addition to the CPS quote based on actual redemption, merchants can also choose a comprehensive marketing solution combining traditional smart screen CPD and "Touch" advertising CPS. This means 50% of the traditional smart screen display fee plus CPS incremental revenue share (if the redemption rate exceeds 15%, the excess part is calculated at 1.2 times the CPS unit price), allowing merchants to achieve a "double marketing" effect of dynamic brand ad display and coupon distribution, not only facilitating faster transactions but also compensating for the drawback of Focus Media's brand ads not capturing real conversion value.

According to the planned progress, Focus Media has completed the deployment of 400,000 devices by early August and is expected to complete the deployment of 2 million devices by the end of the year. Institutions predict that "Touch" advertising is expected to bring Focus Media an incremental revenue of 500 million to 1 billion yuan annually.

III. Customer Structure: Internet Rebound

From the customer structure perspective, as consumption declined, the proportion of the internet rebounded, which may be related to the initial stage of the food delivery war, with JD.com, Meituan, and Alibaba consecutively placing brand ads.

The income contribution from different regions remained basically stable, but with the expectation of merging with New Wave, the income structure between regions is expected to continue to change.

IV. Profitability Returns to Peak, Reflecting Acquisition Benefits in Advance

The direct effect of location optimization is a 10% reduction in costs (mainly rent), with a quarter-on-quarter net decrease of 70 million yuan and a year-on-year decrease of 100 million yuan, raising the gross profit margin to 71.4%, almost at the level of the glorious period before the fierce competition with New Wave in 2018.

Like costs, operating expenses are also strictly controlled, with the total expense ratio remaining stable, but personnel salaries decreased by 11%. In the future, with the merger of New Wave, there will inevitably be a significant personnel adjustment. Ultimately, the operating profit margin of the core business reached 47%, an increase of 5 percentage points year-on-year, rapidly approaching the historical peak of 50%.

Ultimately, the net profit attributable to the parent company in the second quarter was 1.53 billion yuan, meeting the target despite revenue significantly below expectations. For example, the fourth quarter is originally a peak season, and sales expenses usually rise seasonally, but last year's fourth-quarter sales expenses actually decreased quarter-on-quarter.

However, we found that first-quarter sales expenses did not show a seasonal decline quarter-on-quarter, so it is likely that some expenses were deferred to the first quarter. But overall, expenses remained relatively restrained across the two quarters.

Excluding non-operating gains and losses, focusing only on the profitability of the main business, the second quarter achieved 1.513 billion yuan, a year-on-year increase of 12%, with a profit margin of 46.5%, accelerating the return to the historical peak.

If the cost of acquiring New Wave can be absorbed, the short-term comprehensive profit margin will be diluted and weakened, as New Wave's location resources, rent discounts, rate card quotes, and publication rates are not as good as Focus Media's.

However, this does not mean an absolute decrease. According to research information, New Wave has already turned profitable last year, so acquiring New Wave is at least not a drag. Through the integration of location resources and the enhancement of market position, Focus Media's long-term profitability space will further open up, and the second quarter has already reflected this in advance.