There’s no question… China is getting richer. Its economy is booming. Its middle class is growing. But that doesn’t mean everything is going so smoothly. Take commuting for instance.

According to a UC Berkley study, urban population in China jumped from 80 million to 560 million in the past 30 years. On top of that, the number of registered private automobiles grew sevenfold from just 200,000 in 1991 to 1.4 million in 2002. Those numbers are only going to continue to rise.

That sounds like a good thing, but the problem is planning, which the Chinese central government is only now getting around to. In the same Berkley study, researchers noted that the average travel speed on Beijing’s major arteries fell from 45 kph to 12 kph in less than a decade. Simply put, China’s cities have too many people.

Recently, the central government of China is making an enormous effort to correct the problem. They are doing it in a very European fashion…public transportation.

Twelve of China’s largest cities currently have urban rail systems, and there are plans for installing similar systems in 15 other cities. The use of buses is also growing rapidly in many Chinese urban areas. Both of these public transportation systems are presenting many opportunities for investors.

The Future of Advertising

VisionChina Media, Inc. (VISN: NASDAQ) is in the fast-growing “out-of-home” advertising business. It installs digital displays in China’s subways and buses, then sells advertising on them.

This is the frontier of advertising in the 21st century. I recently re-watched the Tom Cruise hit, Minority Report. In this future-based movie, Cruise’s character interacts with digital display advertising in just about every building he walks into. Now, VisionChina is not scanning your eyes to pick which advertisements to play — like in the movie — but the similarities are still there.

Whether you agree with me about the future of advertising or not, VisionChina already has over 48,719 digital TVs throughout China’s urban public transportation systems. With 26 million viewers in 16 of the largest cities in China, it’s worth noting.

Another consideration is the growth left for Chinese advertising. While advertising expenditures have grown over 200% in the past seven years, there’s still tons of room to grow. According to VisionChina’s fact sheet, China’s advertising expenditure in 2005 was only 0.45% of its Gross Domestic Product. The U.S.’s ad costs were 1.33% of its GDP. China won’t likely see as much advertising as the U.S. But, you still have to consider the room left to grow is in the hundreds of percent.

Backing up a minute, the amount of money flooding the advertising market in China comes right as its transportation infrastructure is getting a facelift. Could be great for a company like VisionChina. The only way to tell is to see how it’s done so far…

Questioning VisionChina’s Potential

Using this quick list of questions, we’ll be able to see where it stands:

Q. Does the company have any large clients?

A. Yes, over 594 companies have used VisionChina’s advertising network to market products and services. Fortune 500 companies like McDonald’s, Coca-Cola, and Procter & Gamble are on this list.

Q. Does the company have any secure, long-term contracts?

A. Yes. Interested advertisers can sign up for an exclusive agency contract, which gives VisionChina Media full rights on advertising the client’s products in the network. Those contracts are good for up to 12 years.

The second option for an advertiser is for a direct investment contract — good for up to 50 years — which gives VisionChina a stake in a larger advertising campaign.

Q. We know what the industry’s growth looks like. But, what about the company?

A. Revenue grew 659% last year and 1,234% the year before. The company also went net positive in 2007 for the first time, and has continued to grow its earnings per share every quarter since.

Q. On the company’s balance sheet, has it been able to grow shareholder equity?

A. Yes. In fact, without diluting shares since Q4’07, the company has grown shareholder equity 15%.

Q. How is the company’s cash position? Do they have any debt?

A. VisionChina has $124 million in cash and no debt.

Searching For a Time to Buy

While the rest of the market has gone through some of the toughest conditions since the post-9/11 correction, VisionChina’s shares have increased 72% year to date. Many investors are think it’s overpriced.

The market reacted to this concern in the past month. Shares have fallen from a high of $25.60 on August 1 to just $14.60 as I write. Investors are running out of this stock as fast as they can. We think it might be an overreaction.

While not exactly a penny stock, you may be looking at great small-cap steal. We’ll be sure to keep our eyes on this one.

If you have any comments, please let us know at jim@pennysleuth.com.

[Disclaimer: Remember, we cannot give individual investment advice. But your comments may be brought up in future articles.]

Sincerely,
Jim Nelson
September 17, 2008

Jim Nelson

Jim Nelson is the managing editor of Penny Sleuth. He has been playing the stock market since he was 14, always with a preference toward smaller companies. He has honed his stock picking skills at Agora Financial since 2004, effectively combining a growth and value approach. Like Greg Guenthner, Jim also contributes to Penny Stock Fortunes on top of bringing you the Penny Sleuth every weekday.

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