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CCME: can you poke a hole?


jasonw1
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I have been following and buying CCME for some time and noticed that there are several people also hold position on this. In summary it's a outdoor advertising business where they display ads on LCD TVs installed in inter-city express buses. Trading at PE=4 with amazing growth rate (200+%, which for sure won't continue), $139 million in cash and market cap of $284 million.

 

This old seekingalpha article outline some basics. http://seekingalpha.com/article/209877-china-mediaexpress-the-most-undervalued-stock-poised-to-profit-from-china-s-emerging-middle-class

 

I think the share is insanely cheap, there are only one thing could explain this: the company is a scam. From all the digging I have done, this is not a scam. It's a pretty straightforward business and makes sense, there are also compaies like FMCN which has done well in another niche. There are also worries of huge dilutions with manager earnout shares and warrents (~15 million), but even factor that in couldn't explain the share price.

 

With all the intelligence on this board, please help poke a hole on this investment.

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I have the stock too. It is weird that everyone focus on macro today and forget about individual stocks. From my reading, CCME is a valid company, but I am not sure about the numbers. Their business model is great. Someone on TXIC board of VIC raised question about CCME. One question was: why CCME issued dividend $100M to the founder before public?

 

Honestly, even though I am Chinese, I do not understand the behaviors of management teams in lots of those companies. In China, there is no culture of treating shareholders as partners. People think stock markets as casinos. The managers will put money into their own pockets whenever they can. It happens that CEO blocks the largest shareholder from attending annual meeting! In public TV shows, CEOs are boasting how hard they did the roadshows in USA and how much capital they received from wall street. Now they need to figure out ways to spend those money as fast as they can. I guess in their mind, those investors are idiots. They do not have the sense that they gave away part of the company for the money. I guess part of the reason is people do not feel secure in China. Today you might be the richest man in China, tomorrow you could be in prison for no reason. So people will grab money as long as they can and run away as fast as they can. 

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Barron had this article " Beware of this Chinese export". It describes the frauds in some US listed Chinese companies.

http://online.barrons.com/article/SB50001424052970204304404575449812943183940.html?mod=BOLFeed#articleTabs_panel_article%3D1

 

A Chinese value investor who knows the problem well said at the Value Investor Congress that 200 of the 350 listed companies are frauds.

 

To me, CCME's numbers are too good to be true. I am not saying that CCME is fraud, but how can you rule it out? If you can not be sure that it is not a fraud, then there is no margin of safety to invest in it.

 

 

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I am not saying that CCME is fraud, but how can you rule it out? If you can not be sure that it is not a fraud, then there is no margin of safety to invest in it.

 

You certainly can't rule it out. But you can't be "sure" that any company is not a fraud, so in that case you should never invest in equities. (Unless you personally are the owner and manager.)

 

It would be extremely difficult (though not impossible) to completely falsify the financial statements RE: high earnings, cash on the balance sheet, etc.

 

CCME's competitive advantage -- which allows it to earn these high returns / high growth -- is the contract they have with the government. Now, how long that advantage will last is the question. This is where the element of fraud could come up: bribery, shady deals behind the scenes, use your imagination. But again it would be hard to completely misreport the figures. The investment from Starr also lowers the risk of fraud.

 

One thing to note is that -- assuming the current 5 year contract with the gov't is legitimate -- the earnings they receive from the contract over the next 2 years plus current cash provides good downside protection at todays price. So if for some reason the contract ends in 2012 and isn't renewed, you won't lose a lot unless management does something else stupid.

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I just don't get it.

 

They have a real auditor and a growing cash pile. If the company was a fraud, there is no way in hell that Deloitte and Touche would not have unearthed the inconsistency in their findings. On the otherhand, the financials look almost too good to be true. The margins are crazy high, cap-ex is tiny and the growth is unreal.

 

I own a tiny position, although it's more to do with morbid curiosity rather than sound investment strategy. Can any experienced accounts throw any light on the legitimacy of the numbers?

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I just don't get it.

 

They have a real auditor and a growing cash pile. If the company was a fraud, there is no way in hell that Deloitte and Touche would not have unearthed the inconsistency in their findings. On the otherhand, the financials look almost too good to be true. The margins are crazy high, cap-ex is tiny and the growth is unreal.

 

I own a tiny position, although it's more to do with morbid curiosity rather than sound investment strategy. Can any experienced accounts throw any light on the legitimacy of the numbers?

 

I think you are right, D&T would catch anything major. Its hard to screw up the cash part of an audit, but is D&T really doing the audit or is it a local partner? I havent looked so I am actually just asking.

 

I think too many people have been burned, so Chinese stocks are stuck with low multiples until they get there acts together collectively. It will provide a margin of safety if you can find a credible firm being unfairly punished. As an American / European I would say you are significantly at a disadvantage vs. a Chinese person or shop which specializes in China (they can actually just send someone to the buildings and addresses in the 10k to verify things exist).

 

I am getting burned with financials and risks I understand, so I have plan to pass on plays like these. If I had more time I would do good old fashion scuttle butt, I would make phones calls and things like that.

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Isn't there a Chinese equivalent to a 10-k that is supposed to help us verify the validity of the US reports? What does it say?

 

From the con world:

"If the fish did not bite that's because the lure was not big enough"

 

From everybody's mouth:

"If it's too good to be true, it probably is"

 

BeerBaron

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There are certainly redflags in its financial reports. For one,  CCME's revenue grew more than 24 fold from 2006 to 2009 while its sales force almost remained flat.

 

CCME  reported revenues of $4 million, $26 million, 63 million and $95 million for year 2006 2007, 2008 and 2009, correspondingly. The reported people in sale force  for 2006, 2007, 2008 and 2009 are 58, 76, 63# and 63, correspondingly.

 

#: 63 in 2009 is the reported number on June, 2009. 2008 number is a approximation based on the statement  "There were no significant difference in the size of the sales force for the six months ended June 30, 2009 and 2008" on page 148 of form DEFM14a.

 

One can argue that CCME just charge more per ad as it expands its network. Thus, it can increase revenue without increasing sale force. This is good just for the national advertisers, like COKE or GM. Most advertisers are local to provincial markets. As CCME expands to more provincial markets, it need to add sales force to that market.

 

Anyway, same number of sales people handle sales from 4 million to 95 million. Maybe, it makes sense for certain industries, but it is beyond my knowledge to understand it.  I put it on the too hard pile.

 

 

 

 

 

 

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There are certainly redflags in its financial reports. For one,  CCME's revenue grew more than 24 fold from 2006 to 2009 while its sales force almost remained flat.

They use ad agency to sell most of their ads, who take some cut, so this doesn't look like real problem. Company has said they're moving more business to direct sales where they get 10-20% more money for their ads space, I would expect the number of sales person will increase accordingly as the direct sale portiion increases.

 

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CCME's competitive advantage -- which allows it to earn these high returns / high growth -- is the contract they have with the government.

They don't have contract with government. From what I read it's simply a stamp from an government afficiated entity which says their LCD displays on bus are legitimate and allowed, although it only said this to CCME, there are competitors, even the bus operators can install them and do these themselves, the key is that they don't have the scale and enough weight talking to big ads client.

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They don't have contract with government. From what I read it's simply a stamp from an government afficiated entity which says their LCD displays on bus are legitimate and allowed, although it only said this to CCME, there are competitors, even the bus operators can install them and do these themselves, the key is that they don't have the scale and enough weight talking to big ads client.

 

Well if that's the case, then there you go. "Contract" may not be the right term, but here is the quote from the 10K mentioning it:

 

"In October 2007, CME entered into a five-year cooperation agreement with Transport Television and Audio-Video Center, or TTAVC, an entity affiliated with the Ministry of Transport of the People’s Republic of China, to be the sole strategic alliance partner in the establishment of a nationwide in-vehicle television system that displays copyrighted programs on buses traveling on highways in China. The cooperation agreement also gave CME exclusive rights to display advertisements on the system. In November 2007, TTAVC issued a notice regarding the facilitation of implementation of the system contemplated under the cooperation agreement to municipalities, provinces and transportation enterprises in China. CME believes its status as the sole strategic alliance partner designated by TTAVC and the exclusive rights to display advertisements on the system has facilitated its historical expansion and is expected to continue to provide them with a competitive advantage in the future."

 

The above seems relatively straightforward, but it's still hard to determine exactly what it means without scuttlebutt. That brings up another risk beside fraud -- as mentioned previously it's a completely different culture and unless you're familiar with it things can be misinterpreted.

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Guest HarryLong

When we discuss China and fraud, we need to recognize two realities:

 

I. If managers steal from partially state-owned firms and are caught, they can be executed.

 

II. Although this is a much more severe punishment that that meted out in the U.S., it does not stop stealing entirely.

 

III. Fraud/stealing risk is higher in firms without state ownership.

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They have a real auditor and a growing cash pile. If the company was a fraud, there is no way in hell that Deloitte and Touche would not have unearthed the inconsistency in their findings.

 

A few years ago a Chinese company called China Expert Technology (CXTI) was discovered to be a fraud.  They also had a brand-name auditor if I recall correctly (a member firm of BDO Seidman?).  Here is how CXTI did it:  The auditor signed off on their year-end financial statements, for our purposes this might be December 31, 2009.  The subsequent quarterly statements are unaudited, so management can invent them if they wish to do so.  The next audited financial statements for the year ending December 31, 2010 would not be due until March 31, 2011 or June 30, 2011, depending on whether the company files 10-Ks or 20-Fs.  So, management has more than a year to put out fake quarterly financial statements in an attempt to get the share price up while disposing of their own shares in the company (probably without making the requisite SEC filings), and/or stealing the actual cash on hand.  

 

This seems to be what CXTI did -- they disclosed a relatively modest cash number in the yearend audited financials (this was cash from the IPO or something like that).  Then in the unaudited quarterly financials they made it look like cash was growing by leaps and bounds and the company was performing incredibly well.  By the time the next year's audited financials were due, management had stolen the actual cash that was there and was gone without a trace, and U.S. investors (including Jeff Feinberg's fund) were left holding the bag.  There was never any kind of justice nor did U.S. investors see a penny.

 

What's interesting with CCME is that we are also seeing a very rapid increase in cash following the audited financials as of yearend 2009.  At December 31, 2009 cash was $57 million.  Then on March 31, 2010 it was $114 million (unaudited), and on June 30, 2010 it was $139 million (unaudited).

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What's interesting with CCME is that we are also seeing a very rapid increase in cash following the audited financials as of yearend 2009.  At December 31, 2009 cash was $57 million.  Then on March 31, 2010 it was $114 million (unaudited), and on June 30, 2010 it was $139 million (unaudited).

I see that China Marine Food have been at the same carry-on. They made a wonder acquisition in January 2010 that has led to the cash balance mushrooming in the recent quarters. The only thing I don't understand is that insiders are buying, rather than selling - http://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0001099977
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"sleep well test":

Can I sleep well at night if 60% of my capital invested in this stock? With 200/350 fraud rate of these US listed Chinese stocks, I can't. So I do not invest, no matter how attractive the return will be.

 

On the other hand, if you do have real insights about the business and the people involved, you can find wonderful opportunities. Like BYD.

 

Do I have these insights? NO, I do not!

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I see that China Marine Food have been at the same carry-on. They made a wonder acquisition in January 2010 that has led to the cash balance mushrooming in the recent quarters. The only thing I don't understand is that insiders are buying, rather than selling - http://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0001099977

 

This is easy to understand.

 

First, the insider buy is  the response to short seller's accusation of fraud by false acquisition.

 

Second, it can work this way:

 

1. Raise $30 million by selling shares to investors. (Chinese small caps are very good at this.)

 

2. Using $25 million to buy a company that was set up by my brother with 50K initial investment a year ago.

 

3. Using $5 or $10 million to buy shares.

 

If I am the con artist, I do not mind to spend the $5-10 million to show my confidence. That is not my money originally.

And most likely, insider will keep the money and won't buy shares without  being accused.

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I see that China Marine Food have been at the same carry-on. They made a wonder acquisition in January 2010 that has led to the cash balance mushrooming in the recent quarters. The only thing I don't understand is that insiders are buying, rather than selling - http://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0001099977

 

This is easy to understand.

 

First, the insider buy is  the response to short seller's accusation of fraud by false acquisition.

 

Second, it can work this way:

 

1. Raise $30 million by selling shares to investors. (Chinese small caps are very good at this.)

 

2. Using $25 million to buy a company that was set up by my brother with 50K initial investment a year ago.

 

3. Using $5 or $10 million to buy shares.

 

If I am the con artist, I do not mind to spend the $5-10 million to show my confidence. That is not my money originally.

And most likely, insider will keep the money and won't buy shares without  being accused.

 

Your post and succint explanation reminded me to take another look at First Natural Food Holdings Ltd. (seafood).  This was a company that I had investigated a few years ago but had not gotten comfortable with. I just looked and discovered that trading was halted December 2008 and it appears there was fraud here as well.

 

Based on publicly available information, voluntary suspension of trading in FNF shares was effected on 15 December 2008 following the resignations of several directors of FNF residing in the People's Republic of China on 12 December 2008. After further resignations, new directors were subsequently appointed.

 

On 6 January 2009, FNF presented a petition to the High Court of Hong Kong, pursuant to which the High Court appointed provisional liquidators to FNF to take control and possession of the assets of FNF and its subsidiaries. The hearing of the winding-up petition has since been postponed several times to 19 July 2010.

 

On 26 March 2009, the provisional liquidators announced that, among other things, a HK$84 million withdrawal from FNF's accounts maintained with Xiamen International Bank was not recorded in FNF's books and records and had not been made known to the existing board of directors. Attempts to reach the Executive Chairman and director of FNF, Mr Yeung Chung Lung, were unsuccessful. The provisional liquidators have since commenced legal proceedings against Mr Yeung.

 

On 10 May 2010, FNF announced, among other things, a very substantial acquisition under Chapter 14 of the Listing Rules of the SEHK. In addition, FNF is required to submit a viable resumption proposal to SEHK at least 10 business days before 20 October 2010 before its listing status is cancelled by SEHK.

 

At no point in time has Mr Li been the subject of any investigation in connection with the above events.

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They have a real auditor and a growing cash pile. If the company was a fraud, there is no way in hell that Deloitte and Touche would not have unearthed the inconsistency in their findings.

 

A few years ago a Chinese company called China Expert Technology (CXTI) was discovered to be a fraud.  They also had a brand-name auditor if I recall correctly (a member firm of BDO Seidman?).  Here is how CXTI did it:  The auditor signed off on their year-end financial statements, for our purposes this might be December 31, 2009.  The subsequent quarterly statements are unaudited, so management can invent them if they wish to do so.  The next audited financial statements for the year ending December 31, 2010 would not be due until March 31, 2011 or June 30, 2011, depending on whether the company files 10-Ks or 20-Fs.  So, management has more than a year to put out fake quarterly financial statements in an attempt to get the share price up while disposing of their own shares in the company (probably without making the requisite SEC filings), and/or stealing the actual cash on hand.  

 

I believe this is also similar to what happened with ETLT.

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So I get the message there is high risk for investing in China stocks, I personally encountered 2 frauds but got out early after things look suspicious, they're not that hard to detect. I'm interested in any actual problems/facts you can find with CCME which is a big turnoff, anything?

 

There are also many China stocks people seem to comfortably bidding up the price like BIDU. If you look at FMCN which has similar business model, people are OK pay 15 forward P/E. 

 

 

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So I get the message there is high risk for investing in China stocks, I personally encountered 2 frauds but got out early after things look suspicious, they're not that hard to detect. I'm interested in any actual problems/facts you can find with CCME which is a big turnoff, anything?

 

There are also many China stocks people seem to comfortably bidding up the price like BIDU. If you look at FMCN which has similar business model, people are OK pay 15 forward P/E. 

 

 

 

BIDU has been in the Journal and the Economist, everyone knows they exist. Not sure about the other one.

 

People have realized that reading a 10k for a $100 million dollar company halfway across the world (when fraud is rampant), doesnt tell you much. My guess is 95% of the weakness in the shareprice is due to people thinking it might be a fake. If its not then you would be handsomely rewarded. If it is you loose out. I think the company is fine if its real, and I think most others do as well.

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Not that I want to defend CCME, I'm geniuely interested in finding anything fishy with this company. I'm not as well-versed in accouting and financial analysis as many of this board, I thought I would throw this out and get people's view.

 

Agreed perception is probably the biggest factor, but it's also why the opportunity exists, IF it's real  :)

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Not that I want to defend CCME, I'm geniuely interested in finding anything fishy with this company. I'm not as well-versed in accouting and financial analysis as many of this board, I thought I would throw this out and get people's view.

 

"How are you going to screw me?"

 

 

In the book "big short" by Lewis, there is a story about Eisman who was the first to identify and short the mortgage market. This is not the exact quote. But the story goes like this.

 

A Japanese business man went to meet Eisman and want to raise capital for his business. He showed Eisman sheets of beautiful financial  of the firm. But there is no details like its top customers or suppliers and so on. Eisman throw the sheets to the trash can and tell the Japanese. Just tell me "How are you going to screw me?".

 

Now come back to CCME. It is equally or more important what is not said in the 10ks than what is said in the 10k or 10Qs.

Is there enough disclosed? Read the earnings releases and reports of CCME and compare it to other companies in the industry. Is there similar disclosure as other companies?  What is the ad rate it charged to customers? How much total ad times available to sale? What's the proportion  ad slots sold? so on and on.

 

Without these details, nobody can do an intelligent or even a reasonable analysis on it. Jason, if you find these details and do an analysis, please share with us. You are right. Risk comes with opportunities.

 

Without these details, only question people can ask is "How are you going to screw me?."

 

 

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