Morgan Stanley:(Target price:
Bull case:$20
Base Case:14
Bear Case:4

Earnings topped: Sales of US$30.8mn was in line with
the company’s guidance. Diluted EPS of US$0.10 was
12% above our expectation on better cost control.
What we liked: 1) VisionChina reiterated its full-year
guidance of US$121-124mn, implying 4Q sales to
reaccelerate 4-14% QoQ (vs. flattish in 3Q). 2)
VisionChina’s mobile TV market share has risen from
low-40% last year to ~50% now and is forecast to
exceed 60% post its merger with DMG (Analysys). It
expanded its mobile TV network by securing new
contracts in Xiamen and renewing the contract in
Hangzhou. 3) VisionChina has seen signs of adv
rebound, according to its initial discussion with adv
clients for their 2010 budgets.
What concerned us: Media cost surged 48% YoY to
US$12.6mn, accounting for 41% of revenues (vs. 24% a
year ago), partly due to network expansion.
Reiterate OW on advertising recovery: VisionChina
trades at ~16x our 2010e P/E with earnings growth of
~50% in 2010e. Our DCF value of US$14.4 implies over
60% share price upside potential from current levels. In
our view, VisionChina will be a key beneficiary of the
likely adv rebound in China. We highlight that: 1) the
recent acquisition of Digital Media Group (DMG) has
changed the competitive landscape in China’s mobile
TV adv market and will enlarge VisionChina’s market
share by 10-15ppts to over 60%, 3-4x that of its closest
rival, on our estimates. 2) It will likely resume adv price
hikes next year, as VisionChina used to raise its adv rate
by 20-30% every six months. Notably, its adv rate
(CPM) is only ~10-20% of the levels of local TV stations,
implying significant upside. 3) VisionChina should enjoy
operating leverage as its overall utilization rate stands at
low-30%, vs. ~40% a year ago. On our analysis, a mere
5ppts utilization rate improvement would lift earnings by
20-30%