CCME: can you poke a hole?

[jasonw1]

"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."

 

Read the 10K  :-)

 

 

Just got some time to look at ONP as it was mentioned in thread. Does this look like fraud to you?

http://finance.yahoo.com/news/Orient-Paper-Further-Responds-prnews-4256390971.html

http://finance.yahoo.com/news/Orient-Paper-Audit-Committee-prnews-2752970504.html?x=0&.v=80

 

[Packer16]

One potential danger appears to be the exclusive right they have of providing advertising on buses.  What is the impact if they loose the esclusivity?  Wouldn't Focus Media, AirMedia and VisionMedia (that are providing advertising at other venues - airports, subways, etc.) just enter the market?  These guys will also have the aggregating ability.

 

Another potential risk is what has happened to AirMedia.  The airports are charging more for rental space.  Couldn't the bus cos do the same thing?  It appears they have the upperhand in the relationship.  In the latest 10-K it states the concession fees can increase anywhere from 10% to 30% per year.  Given this is the largest cost, do you know how fast these are increasing currently and what CCME plans on doing to prevent these fee increase from collapsing margins?   Do you know how different installing TVs on buses versus at subways or airports?  

 

Just some thoughts.

 

Packer

[jasonw1]

Very good questions, Packer.

 

Wouldn't Focus Media, AirMedia and VisionMedia (that are providing advertising at other venues - airports, subways, etc.) just enter the market?

That's possible but unlikely to happen IMO.

 

There is one time payment (I read somewhere but couldn't find anymore) and installation/equipment (~$1,000 per bus) cost to get started with each bus operator.

The deal they sign with bus operators are 5-8 years which gives them time to strength their lead and relationship with bus operators.

It's possible but in reality if you look at FMCN, AMCN, VISN they tend to hold onto their individual niche very well. I would expect CCME to follow the same pattern.

 

Regarding to concession fees:

The number of buses with CCME's LCD display and concession fees, it averages ~$1200/bus/year

Dec. 2007: 10,053, $10.7 million

Dec. 2008: 15,260, $20.0 million 

Dec. 2009: 20,161, $24.8 million

 

Here is the estimate for next 5 years:

        Total          20 10          201 1          201 2          201 3          201 4   

        (In thousands)   

Concession fee obligations    $  97,868        $  28,760        $  31,636        $  20,183        $  11,034        $  6,255   

 

From the concession fee obligation estimate it also shows they won't have existing buses coming off long term contract until 2012.

 

[jasonw1]

Another potential risk is what has happened to AirMedia.  The airports are charging more for rental space.  Couldn't the bus cos do the same thing?

I think CCME is in a much better position than AirMedia in terms of negotiating ads space cost. The company partners with 45 bus operators so none of the individual operator is big enough to be too powerful. AirMedia has to deal with a handful of ad space suppliers and each of them (airlines) is significant enough and with enough scale that they can drive hard bargains. Classical example for balance of power between supplier and distributor. 

[twacowfca]

It's astonishing to see the interest in this thread.  Where's the margin of safety when astute observers estimate that most Chinese companies cook their books.  Has anyone read the book, Mr. China? It's a humorous but sad story of fraud and deception.  

[Packer16]

Sone more questions from your responses. 

 

Are the numbers you have quoted for minimum or maximum obligations?  If so, it does not seem be consistent with the 10-K statement of a minimum of 10% increase per year.  If we increase the 29.5% of sales consessions are in 2009 by lets say on average 20% per year, if the revenue is flat then after 3 years concesssions with represent and adddtional 21.5% of sales and after 5 years 43.9% of sales reducing profitability considerably.  If we use the minimum of 10% per year we get reductions of 8.6% and 18%, respectively.  Am I missing something with the math?

 

How did you get comfortable that the contracts will be enforcable?  If there is a dispute, to whom can foreign shareholders appeal?  Surely, the folks in China will hose the foreign shareholders first.  How did you get comfortable that management is on the foreign shareholders versus being out for themselves or for the interest of China?  Does management have a sizable portion of its net worth in the foreign avaialable shares?

 

Packer 

[jasonw1]

Are the numbers you have quoted for minimum or maximum obligations?

It's estimate with existing bus contracts at the end of 2009, assuming 10% concession fee growth. The increase of concession fee should be offset by CPM increase of their ads space, its CPM is low comparing to other avenues, and there is also inflation. Page 67 of 10K for details.

 

How did you get comfortable that the contracts will be enforcable?

Are you referring to the contract between CCME and the operating company in China? As far as I know it's standard practice for China companies listed in US, BIDU, SINA, FMCN all had similar arrangement to get around the direct investment limitation in certain areas in China. The CEO and founder owns half of CCME, I don't see why he would want to screw up its shareholders.

 

[jasonw1]

It's astonishing to see the interest in this thread.  Where's the margin of safety when astute observers estimate that most Chinese companies cook their books.  Has anyone read the book, Mr. China? It's a humorous but sad story of fraud and deception. 

Other than the frauds for stock trading in OTCBB and pink sheet, do you know any Chinese company listed in Nasdaq or NYSE with a big 4 auditor which is involved in fraud?

[twacowfca]

It's astonishing to see the interest in this thread.  Where's the margin of safety when astute observers estimate that most Chinese companies cook their books.  Has anyone read the book, Mr. China? It's a humorous but sad story of fraud and deception.  

Other than the frauds for stock trading in OTCBB and pink sheet, do you know any Chinese company listed in Nasdaq or NYSE with a big 4 auditor which is involved in fraud?

 

 

 See the recent article in Barrons re: Chinese companies using US shell companies to gain listings on US exchanges.  This article describes some of the many scams between related entities as well as phony bank accounts that are used to trick even big auditors on occasion.  However, most of these companies use Madoff type auditors.

[manualofideas]

Fuqi under investigation by SEC, stock tumbles

http://finance.yahoo.com/news/Fuqi-under-investigation-by-apf-2042096.html?x=0&.v=1

 

Notice the big cash buildup in the latest quarter of unaudited financial statements.  Certainly rhymes with what happened at some other U.S.-listed Chinese companies...

[yudeng2004]

For what it is worth, this is a page in a slide CCME's gives to clients who want to purchase ads.  This slide details the rate charged for the Beijing Capital Aiport bus routes and the Guangzhou Airport bus routes, there are other slides but I am too lazy to post them.  This appears to be the the 2009 rate.

 

http://i411.photobucket.com/albums/pp199/firehelixmedia/CCME/CCME_client_rate.jpg

 

The rate for Beijing is quited in RMB as follows:

5 seconds is 72k rmb/month, 15 seconds is 180k rmb/month, and 30 seconds is 298k rmb/month.

 

Guangzhou airport is 198k rmb/month per 30 seconds.

Fuzhou is 80k rmb/month per 30 seconds.

Nanjing is 90k rmb/month per 30 seconds.

Qingdao is 98k rmb/month per 30 seconds.

 

These are the 2009 routes and the 2009 rates, so for all their routes they get about 764k rmb/month for each 30 seconds (assuming all commercials use the lowest cost/second just to be safe).

 

I don't know how commercials work on these things, but if each month the buses shows say 20 minutes/day of commercials, then we can get like 20 minutes / 30 seconds * 764k = 30 million rmb/month.  That's about 4.5 million USD/month.  So the total annual revenue would be like 54 million USD from the airport buses.  I am not sure how to calculate the other non-aiport bus route revenue.

 

I don't know if 20 minutes/day of commercials shown on airport buses that run from 5am or 7 am to midnight is a reasonable estimate.  These are just all guesstimates.

 

These airport routes are good routes, but it's hard to gauge how many minutes of commercials is shown each day.

 

I found this slide on some random chinese ad broker's website while using Chinese name on CCME and a combination of baidu and google search.

 

You can view these numbers for whatever they are worth and make your own interpretations.

 

[jasonw1]

Great find Yu. I saw some other ad rates quote a while back online and they seem to be consistent

The selling and fraud concern is creating huge uncertainty on Chinese stocks and CCME. Once the smoke clears up, we would know the frauds vs real company. 

[Stove]

Buying back stock - $30 million, or about 10% at current.

 

http://finance.yahoo.com/news/China-MediaExpress-Announces-bw-2470497420.html?x=0&.v=1

 

[twacowfca]

Great find Yu. I saw some other ad rates quote a while back online and they seem to be consistent

The selling and fraud concern is creating huge uncertainty on Chinese stocks and CCME. Once the smoke clears up, we would know the frauds vs real company.  

 

 

Not necessarily.  Most of the frauds are not pump and dump-- take the money and run scams.  More frequently they involve transactions with related parties that siphon off or overstate economic value.  Thus, assets are inflated on the BS and income may be overstated.  This may go on for some time before it all comes out in the wash.  Sometimes, most of the cash will leave by the back door immediately after a reporting period closes or even before, but it still shows on the books.  Some of the cash may remain and be used for a buyback, thus "proving" that they are rolling in dough.  

 

Some Chinese companies are certainly honest; some US companies are certainly fraudulent.  The Chinese companies that have merged with US shell companies are reported to be especially problematic-- mostly frauds that extract money from naive US shareholders.

 

 

[Ballinvarosig Investors]

The buyback could just as easily be used to buy back shares held by company insiders.

[gokou3]

For what it is worth, this is a page in a slide CCME's gives to clients who want to purchase ads. 

 

Here's the link to the slides for those who are interested:

http://www.allchina.cn/exchange/zhuanmai/userupfile/Media_attach/newmedia/20105255311159183236.ppt

[jasonw1]

Starr investment bought another 1.5 million shares at 9$, which increases their investment from $30million to $43.5million. They certainly don't think it's a fraud.

 

http://finance.yahoo.com/news/Greenbergs-Starr-ups-stake-in-apf-1132677641.html?x=0&.v=1

 

Stock has gone up from $8 to $13, since we first discussed this.

[JAllen]

To (hopefully) add to the knowledge base.  A couple of years ago I briefly owned CHCG.  I sold it because I thought their webpage was weak, to say the least.  I also thought it was weird that they put pictures of INSIDE their supposed stores and a company meeting on the website.  I couldn't think of another company that did that. 

 

Here's their website now (mostly the same).  It appears they stopped filing a while back.

 

http://www.china3cgroup.com/index.asp

 

I lost money in CXTI.  Definitely makes it hard to own a non-blue chip Chinese stock.

[gfp]

Seems Mr. Greenberg caused a bit of a short squeeze for you there!

[Myth465]

I owned CHCG and CXTI. Made money in CXTI lost quite a bit in CHCG (at the time, now it seems small). Learned my lesson.

[beerbaron]

Starr investment bought another 1.5 million shares at 9$, which increases their investment from $30million to $43.5million. They certainly don't think it's a fraud.

 

http://finance.yahoo.com/news/Greenbergs-Starr-ups-stake-in-apf-1132677641.html?x=0&.v=1

 

Stock has gone up from $8 to $13, since we first discussed this.

 

You do know that you are relying on other's analisys to validate your's right? What if they don't know more then you...

 

BeerBaron

[gokou3]

The stock has been hammered in the past couple days, primarily due to a unsubstantiated and error-proned article by a questionable firm (Citron Research) accusing the company of fraud.  It may be a good opportunity for those of you looking for a good entry point.

 

FWIW, there are analyst reports from Global Hunter securities and Northland securities on CCME, updated today:

 

http://www.megaupload.com/?d=7VJFGGSX

https://ghsecurities.bluematrix.com/docs/pdf/4b261a09-1768-43bc-ad28-8c669e92e678.pdf?co=Ghsecurities&id=ghsresearch

 

 

Disclosure: I am long the stock and short put options.

[king888]

Stock down 33% today with exposed report from muddy waters

 

http://www.muddywatersresearch.com/research/ccme/initiating-coverage-ccme/

[Myth465]

The stock has been hammered in the past couple days, primarily due to a unsubstantiated and error-proned article by a questionable firm (Citron Research) accusing the company of fraud.  It may be a good opportunity for those of you looking for a good entry point.

 

FWIW, there are analyst reports from Global Hunter securities and Northland securities on CCME, updated today:

 

http://www.megaupload.com/?d=7VJFGGSX

https://ghsecurities.bluematrix.com/docs/pdf/4b261a09-1768-43bc-ad28-8c669e92e678.pdf?co=Ghsecurities&id=ghsresearch

 

 

Disclosure: I am long the stock and short put options.

 

I have no dog in this fight but you seem convinced its not a fraud. Why do you think the report is wrong? Even looking at the title of this thread tells me there is at least a 2% chance its right.

[gokou3]

The stock has been hammered in the past couple days, primarily due to a unsubstantiated and error-proned article by a questionable firm (Citron Research) accusing the company of fraud.  It may be a good opportunity for those of you looking for a good entry point.

 

FWIW, there are analyst reports from Global Hunter securities and Northland securities on CCME, updated today:

 

http://www.megaupload.com/?d=7VJFGGSX

https://ghsecurities.bluematrix.com/docs/pdf/4b261a09-1768-43bc-ad28-8c669e92e678.pdf?co=Ghsecurities&id=ghsresearch

 

 

Disclosure: I am long the stock and short put options.

 

I have no dog in this fight but you seem convinced its not a fraud. Why do you think the report is wrong? Even looking at the title of this thread tells me there is at least a 2% chance its right.

 

Well, I am at least 98% convinced that the company is legit. :)

 

Not trying to sound offensive but it's interesting that you assign a 2% probability of fraud simply by looking at the title of the thread.  It's not surprising then a lot of CCME shareholders rushed for the exit yesterday when a second bearish report is released on the company.  (First by Citron Research, second by Muddy Waters Research).  The MW report is actually quite long and I believe most of the stock sales were done before the shareholders even had a chance to download the report.

 

Let's first look at the background of these two research houses.  Citron Research is run by an ex-con, Andrew Left.  Muddy Waters released 3 "strong-sell" reports so far, with one success (RINO) and one not-so (ONP).  So their batting average is 0.500 excluding the CCME one for which the verdict is still out.

 

There are some interesting commonalities for the two firms.  Both are new and very obscure - you can't find any phone number, office address, or even email addresses on their website.  The only way that you can contact them is through a web-based form.  Both firms listed in their disclaimer that essentially say they can hold whatever positions in the stocks they write a report on, including short sales.  I have nothing against people/firms who put money where their mouth is, but this is another food for thought.  Another thing: these firms apparently don't seem to be looking for clients.  There are scant evidences on their websites that they are seeking clients to purchase / subscribe to their reports.  So, I would conclude that the only way the firms can make money from their "research" is to profit from their own trading.

 

Now, compare the credibility of these firms against the ones on CCME's side:

 

1) Deloitte as auditor.

2) CV Starr private equity of the Hank Greenberg fame

3) Recent CFO market purchases of 100k shares

4) Significant insider ownership

5) "Strong buy" from two sell-side research firms (who at least have contact info, fwiw)

 

There are a few more bullet points that I don't remember, but you get the point.  Any US companies that satisfies all of the above points would undoubtly be cleared of fraud accusations.  But of course, for chinese reverse-merger company, that's a different story and I understand that.  I am aware of the quote that 80% of chinese RTO are fraudulent.  However, look at the above list of credentials.  There are people who say, "oh even top-notch auditors can be fraudulent!".  Yet those are the same people who don't hesitate to trust Citron/MW and the latter's 0.500 success rate.  For me, I think it's very unlikely that these auditors/private equity/sell-side analysts/management are simultaneously and grossly wrong.  I think CCME is in the other 20%.

 

Now, onto the actual reports by Citron/MW.  They are inaccurate and misleading at best, and likely fraudulent at worst.  Instead of listing them out here you can check out these links which have refute most, if not all, of their accusations convincingly.  I should also mentioned that they seem to be released in a well-coordinated manner, and timed right on Chinese New Year for maximum impact.

 

http://ccme-info.xanga.com/

http://www.facebook.com/#!/pages/Friends-of-China-MediaExpress-Holdings-Nasdaq-CCME/143661355689140

http://seekingalpha.com/article/250498-china-mediaexpress-groundwork-research-and-videos-to-disprove-allegations?source=qp_article

 

 

So, with all these info, is there a possibility that the company is fraudulent?  I wouldn't say no, there's always a black swan hiding somewhere.  However, if the financials are to be believed, the intrinsic value of this company is at least $30/share.  Would I take a chance that the stock will 98%-likely to more than double?  You bet.