Taomee Holdings (TAOM): Sights set on dominating the market for the attention of Chinese children

By Paul Goodwin, Editor of Cabot China & Emerging Markets Report
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For those of us who grew up on books and records, there has always been something a little creepy about television and video being used as baby sitters. But there it is. I’m sure that the ready availability of Disney movies, Bob the Builder videos and on-screen friends from purple dinosaurs to big yellow birds and beyond has saved many parents’ sanity and lots of family car trips.

In China, one company is on the cutting edge of the online edutainment for children business, and that’s Taomee Holdings (TAOM). Taomee was founded in 2007 by veterans of TenCent Holdings and clearly has its sights set on dominating the market for the attention of Chinese children between the ages of five and 15.

Taomee’s main asset is its website www.61.com, which offers online worlds for kids to play, interact and meet people. With 27 million in its online user base (online fees produced 94% of 2010 revenue), the company has already shown that it can use characters from 61.com to produce tie-in books, TV shows and toys. Two books based on online characters have already cracked the bestseller list for kids in China.

Taomee is building a platform that can spin off products into many areas, and both revenues and earnings are ramping up quickly. Q1 results featured 150% earnings growth on 90% revenue growth, and both results represent a cooling off from earlier performance. That’s the advantage of a short history. The other genuinely impressive number is the 73.6% after-tax profit margin booked in Q1.

TAOM came public in June, and made headlines mostly because the stock failed to blast off at all. In fact, it slipped slightly from its open at 9 to close its first trading day at 8.2. But since then, TAOM has shown some power, building a short base at 10 for a few weeks, then lifting off a few days ago on heightened volume. It’s now trading at around 13, and will bear watching, especially if the broad market can shake the dust off its shoes.

Right now, the only thing lacking in TAOM is a long enough history to give a clear picture of how investors feel about it. And time will supply that.

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Paul GoodwinPaul Goodwin
Emerging Markets Specialist, Analyst and Editor of Cabot China & Emerging Markets Report

A researcher and writer for over 30 years, Paul Goodwin has been a member of the Cabot investment team and editor of Cabot China & Emerging Markets Report since 2005. Under Paul’s stewardship, Hulbert Financial Digest rated Cabot China & Emerging Markets Report the number-one-rated newsletter of 2006 with a 78.6% gain for the year, the number-one-rated newsletter of 2007 with a 74.1% return, and the top-performing investment adivsory for five years with a 17.9% annual return.