CCME: can you poke a hole?

[Myth465]

honestly this is the only thing that really adds much value for me. Even given this I believe there have been Asian fraud with big name auditors.

 

1) Deloitte as auditor.

 

Everything else is everything else. If one of the top value investors in China encounters and invests in frauds from time to time then.....

 

Me thinking it may be a fraud has nothing to do with the title of the thread and more to do with the recent high levels of fraud regarding Chinese US Traded small caps. Either way it seems like you have done your homework so hopefully it works out.

 

http://www.gurufocus.com/news.php?id=121288

 

In May of this year the largest hedge fund manager in China presented at the Value Investing Congress. I am referring to Lei Zhang of Hillhouse Capital Management who started his firm with $30 million in now manages $4 billion. His fund has returned 52% annualized since 2005 and holds a concentrated portfolio typically adding only 3 to 5 positions a year. Part of Zhang’s investing approach involves shorting fraudulent companies. And according to him up to 80% of the Chinese companies listed in the U.S. are frauds to one degree or another.

 

Drink that in for a second. The largest and most successful Chinese hedge fund manager believes 80% of the Chinese companies listed in the United States are frauds.

 

Where there is smoke there is almost always fire. I hope small investors don’t get burned in this case. If I was holding shares prior to learning of these accusations I believe the correct move would be to accept a small loss and get out rather than wait around and risk losing my entire position.

 

 

-----

 

I think evidence and conviction works well till it doesnt. Unless I am on the ground and can verify or have several big name companies involved im punting.

[Tim Eriksen]

FWIW here is my take. As background we made a 10 bagger on the SPAC warrants, unfortunately it was only a 1% position for us.  We also bought the stock at $10 and I touted the stock when it was $12 in an article on Forbes.com.  We sold as it rose in price all the way up to $20.  So we have made good money on the company.  

 

All along I figured there was the possibility of fraud, and that possibility increased over time in my mind due to company actions.  I put the chance at higher than 2%.  More like 5% to 10% initially.  The first interview I saw of the CEO scared me.  My impressions were not favorable.  The minimal dividend announcement created more fear due to its small size, when they had no use for the cash.   The poor way they responded to accusations smelled of incompetence, which made me wonder how they were so successful.  Granted these are all subjective but they matter.  

 

Ultimately though it came down to this reality.  Assuming they were legit, the have zero moat.  Anyone can come along and pay more to the bus owners.  According to economic theory, a company with few barriers to entry should see competition which will drive down the ridiculous margins CCME has.  Anyone with capital would be foolish not to compete in a market with that kind of earnings potential.  Since they only have five year rights, how can I pay much more than 5x earnings plus cash.  Thus I could only come up with a $20 conservative value, a bit more if I asumed they could keep some of the clients.  

 

China is a land of opportunity but it is hard to believe that a company can make the kind of money CCME is/has so easily, with so little capital, and if they truly were making money so easily why go public?

 

Tim    

[biaggio]

"it is hard to believe that a company can make the kind of money CCME is/has so easily, with so little capital, and if they truly were making money so easily why go public?"

 

Great point.

[gokou3]

Myth,

 

Ya my 80%-fraud quote was from Lei Zhang.  Anyways, I don't think you literally put a 2% probability of fraud based on the thread title.. just that you phrased it that way.  Btw, I like your thesis on Petrobank and have entered a considerable position.

 

 

Tim,

Yes all along I am on high alert for fraud.  I will be the first seller if one day Deloitte resigns as auditor or Starr exits their position. 

 

I think the company has some moat, not large but some.  Their large bus network provides a valuable ad distribution network that's not matched by many competitors.  This will allow them to retain the customers even if they lose their monopoly status.  They also seem to have good relationships with governments which are hugely beneficial in doing businesses in China.  I agree profit margin will reduce in future years since concession fees CCME pays to bus operators increases at a high rate annually, but the continued increase of ad rates and number of buses should mitigate this.  Of course all of these hinge on the company is what it claims to be.

[jasonw1]

Tim, can you share a link to the first CEO interview you're referring to? The only English one I'm aware is the one he did with NASDAQ last year.

 

This stock is clearly being manupulated, with 10M shares float, it traded average 6M shares daily in the past 10 days, it also had consistent high short interest, with 6M shares shorted as shown.

 

After reading through reports from Citron research and Muddy Water, I don't see convincing evidence of fraud as they apprear to be subjective, there are also errors and false claims in the reports which make them even less credible, I was able to find quite a few and verify the errors, for example the bus counts evidence provided in Muddy Water, which is misleading and completely wrong for several bus operators, I just followed the links they give and checked the sites. They are clearly incentived to bring down the share price and profit from it. I'm not sure why it's been picked out as such short target for pretty much the past year. But it does create the lingering questions and fear for everyone: are the shorts onto something? do they know something I'm missing?

 

A lot of the company's past behavior don't suggest fraud, why would they hire a big 4 auditor? why would the insider buy $1.5M, why would Starr invest $50M+ through a couple of occasions, they are also starting dividend, from past converage in Chinese they're also a credible advertiser with substantial revenue. The biggest mistake the company made is taking the reverse merge route instead of doing an IPO, I'm also disappointed that the company hasn't really bought any shares back by the last earning announcement, although they have announced a $30M buyback program. If they haven't bought any in recen times, I would be very disappointed.

 

 

[king888]

The outflow cash for investing of CCME is very tiny compare to revenue. Why the company made so much money while very little in this figure? I mean this is out-of-home advertising . They must invest heavily to acquire advertising space. In case of CCME, it should be the DVD player in Bus and the exclusive contract with bus operator, right ?  But the capital expenditure is still low. Take a look at FMCN ,the cash out flow in investing in 2009 and 2008 was  -158.25 and -145.79 . But for CCME, it was just -1.88 (2009) and -4.22 (2008). 

 

FYI ,There is another company. It is IDI . Formerly was Ideation Acquistion.It bought SearchMedia,the leading outdoor advertising player in China, in 2009 . IDI paid $170 M for it.  SearchMedia was very compelling .The revenue was growing a lot, the profit margin was great and they used very low captial expenditure to generate these kind of revenue. The managements at IDI including Phil Frost,one of the American richest, were tempted to get these deal. But after the bought it .They found that most of revenue are overstated by fake invoice ,fake receivable from fake clients. They had to restate financial report. And the revenue in 2008 and 2009 for IDI fall almost half.  You can read the presentation here http://www.ideationacquisition.com/investorpresentation_101109.pdf . It was published when IDI was going to buy Search Media.

 

[twacowfca]

The outflow cash for investing of CCME is very tiny compare to revenue. Why the company made so much money while very little in this figure? I mean this is out-of-home advertising . They must invest heavily to acquire advertising space. In case of CCME, it should be the DVD player in Bus and the exclusive contract with bus operator, right ?  But the capital expenditure is still low. Take a look at FMCN ,the cash out flow in investing in 2009 and 2008 was  -158.25 and -145.79 . But for CCME, it was just -1.88 (2009) and -4.22 (2008).   

 

FYI ,There is another company. It is IDI . Formerly was Ideation Acquistion.It bought SearchMedia,the leading outdoor advertising player in China, in 2009 . IDI paid $170 M for it.  SearchMedia was very compelling .The revenue was growing a lot, the profit margin was great and they used very low captial expenditure to generate these kind of revenue. The managements at IDI including Phil Frost,one of the American richest, were tempted to get these deal. But after the bought it .They found that most of revenue are overstated by fake invoice ,fake receivable from fake clients. They had to restate financial report. And the revenue in 2008 and 2009 for IDI fall almost half.  You can read the presentation here http://www.ideationacquisition.com/investorpresentation_101109.pdf . It was published when IDI was going to buy Search Media.

 

 

And fiction used to be such light reading. ???

[cayale]

 

Yes all along I am on high alert for fraud.  I will be the first seller if one day Deloitte resigns as auditor or Starr exits their position. 

 

 

It will be way too late then.  This smells awfully, awfully fishy.

[abyli]

I think this company is a fraud:

 

(1) If the company can generate so much cash as a cash cow, why it need to go public? Why did it sell shares to Starr so cheap? Remember, chinese CEOs are not stupid, they are most shrewd in the world! If you can not figure out, most likely you are cheated.

 

(2) In its presentation, it says the bus riders are mid-to-high income group. Any one live in China know this is NOT true. China has one of the best public transportation system in the world. You can take flights, trains, taxi, buses, metros to any corner of China. For long distance, mid-high income will take flight; for shorter distance, take trains or taxi; or you can drive yourself. If you are mid-to-high income group, you should already own a car today!

 

(3) I asked two friends in FuZhou (where CCME is located). They have NEVER heard of this company. How many chinese have not heard of FenZhong Shanghai?

 

(4) I think 80% frauds are underestimates. Other than those famous names like Sina, Baidu, Sohu, Alibaba, Tecent, Shengda, FMCN, etc., I have not found one company that is valid. Just last year, how many fraud stocks? Fuqi, Oriental Paper, CEU, RINO, Lihua, Bwow, TSTC, DYP, UTA, CHBT, CVVT, CMFO. I found one company that is valid: TXIC.PK. You know what, the CEO China bought a subsidiary from a relative previous year and he did not think he need get board votes! Yes, his company is public but he runs as a private company. So they could not file 10K for 2009 and CEO and CFO in US got fired!

 

(5) I have a friend who is doing APO for those small-cap companies. One company he worked with for 5 years was CMFO, so he must have known the CEO and company very well. When CMFO's high-power acquistion was questioned by some analysts last year, even he was not sure whether CMFO is fraud or not. Think about that, how could we figure it out 10 thousand miles away?

 

(6) I only have conclustion: stay away from chinese small-cap stocks.

 

 

 

 

 

[given2invest]

"(1) If the company can generate so much cash as a cash cow, why it need to go public? Why did it sell shares to Starr so cheap? Remember, chinese CEOs are not stupid, they are most shrewd in the world! If you can not figure out, most likely you are cheated."

 

Bingo.  Been saying this long before this stock become a hot topic.  They raised money numerous times at completely absurd valuations with no need for the capital.  If that's not the biggest red flag of all time, what is???

 

 

 

 

[gokou3]

"(1) If the company can generate so much cash as a cash cow, why it need to go public? Why did it sell shares to Starr so cheap? Remember, chinese CEOs are not stupid, they are most shrewd in the world! If you can not figure out, most likely you are cheated."

 

Bingo.  Been saying this long before this stock become a hot topic.  They raised money numerous times at completely absurd valuations with no need for the capital.  If that's not the biggest red flag of all time, what is???

 

 

 

I wouldn't say this line of thinking doesn't have any merits, but that seems to be analogous to arguing that the market is efficient (i.e. this stock can't possibly be cheap cuz otherwise it would have been bidded up, etc)?

 

There are occasionally times when some stocks are traded at "absurd valuations"... the members on this board can readily come up with examples of post-bankrupt reorgs, spin-offs, forced selling, etc. 

 

It may be true that CCME does not need capital at all.  On the other hand, the founders may crave the prestige of owning a US-listed company.  Sounds stretched, I know, but I know many people in China want these kinds of status symbols after having accumulated wealth.

 

I think we can see which side is right in a month or so when the company reports 2010 earnings.

 

[fuluvu]

"(1) If the company can generate so much cash as a cash cow, why it need to go public? Why did it sell shares to Starr so cheap? Remember, chinese CEOs are not stupid, they are most shrewd in the world! If you can not figure out, most likely you are cheated."

 

Bingo.  Been saying this long before this stock become a hot topic.  They raised money numerous times at completely absurd valuations with no need for the capital.  If that's not the biggest red flag of all time, what is???

 

If I were the CEO, I would keep all the profit to myself and wouldn't share with others.

[twacowfca]

Smart observers of the market for shares of Chinese Companies that have acquired US shell companies say that virtually all of these are frauds.  Therefore, the correct mindset should be: prove that one of these companies isn't a fraud.  Proving a negative like this is practically a near impossibility, and an absolute impossibility using Popper's logic.  Therefore, a prudent value investor shouldn't even kick the tires of these companies for the same reason that a mathematician should not try to multiply something that likely is a zero.

[Myth465]

Smart observers of the market for shares of Chinese Companies that have acquired US shell companies say that virtually all of these are frauds.  Therefore, the correct mindset should be: prove that one of these companies isn't a fraud.  Proving a negative like this is a near impossibility, practically, and an absolute impossibility using Popper's logic.  Therefore, a prudent value investor shouldn't even kick the tires of these companies.

 

Exactly. You seem rather dismissive of any point raised. I think we just have to wait and see. Only time will tell. Eventually there will be an I told you so and a huge capital gain or capital loss.

[given2invest]

"(1) If the company can generate so much cash as a cash cow, why it need to go public? Why did it sell shares to Starr so cheap? Remember, chinese CEOs are not stupid, they are most shrewd in the world! If you can not figure out, most likely you are cheated."

 

Bingo.  Been saying this long before this stock become a hot topic.  They raised money numerous times at completely absurd valuations with no need for the capital.  If that's not the biggest red flag of all time, what is???

 

 

 

I wouldn't say this line of thinking doesn't have any merits, but that seems to be analogous to arguing that the market is efficient (i.e. this stock can't possibly be cheap cuz otherwise it would have been bidded up, etc)?

 

There are occasionally times when some stocks are traded at "absurd valuations"... the members on this board can readily come up with examples of post-bankrupt reorgs, spin-offs, forced selling, etc.  

 

It may be true that CCME does not need capital at all.  On the other hand, the founders may crave the prestige of owning a US-listed company.  Sounds stretched, I know, but I know many people in China want these kinds of status symbols after having accumulated wealth.

 

I think we can see which side is right in a month or so when the company reports 2010 earnings.

 

 

I disagree.  This is nothing like a spinoff, post-bankrupt reorg; and nothing like when a stock sells off too much after a bad earnings number.   The crucial difference here is you have owners of a private business who are presented with a decision.  Should I go public?  If you can't answer ANY reason why the answer to that question should be yes (without it being nefarious such as it's a fraud) then I think you seriously need to step back and question what's going on.  

 

You go public to:  Raise capital for growth/acquisitions; diversify away from your concentration in 1 company; cause you think your valuation has peaked and you want to cash out.   That's essentially the only legal/logical reasons to do it.  

 

These guys sold stock numerous times at 2-4X earnings while they were growing at 50-100% a year.  Either they are the world's stupidest people or this is a giant fraud.  There was/is nothing inefficient about it.  

 

I'd like to add that they are generating 10s of millions of cash a year, with no need for this capital, yet they are not returning it to shareholders.  Why?  Also a red flag.

[gokou3]

Your points are noted.  Again, time will tell.  ;)

[given2invest]

Your points are noted.  Again, time will tell.  ;)

 

I'm not short and have never been.  I can't wait to see how this plays out though.  Cause if it's not a fraud, it will go up 5x.  But me thinks fraud.  I just can't figure out how Starr is wrapped up in it.

 

 

[twacowfca]

Smart observers of the market for shares of Chinese Companies that have acquired US shell companies say that virtually all of these are frauds.  Therefore, the correct mindset should be: prove that one of these companies isn't a fraud.  Proving a negative like this is a near impossibility, practically, and an absolute impossibility using Popper's logic.  Therefore, a prudent value investor shouldn't even kick the tires of these companies.

 

Exactly. You seem rather dismissive of any point raised. I think we just have to wait and see. Only time will tell. Eventually there will be an I told you so and a huge capital gain or capital loss.

 

Prehaps, but there is no margin of safety here, just the suspension of critical thinking, replaced by wishful thinking that, like a prisoner on trial, the company is innocent until proved guilty, even though observed at the scene of the crime, performing the same actions as others who have already been convicted. This isn't a trial. This is like Buffett's no called strikes baseball game.  Why would any batter concerned with having a good average even think about swinging at a pitch that looks like it could be a wicked screwball?

[maxprogram]

Why would any batter concerned with having a good average even think about swinging at a pitch that looks like it could be a wicked screwball?

 

Ah, but in investing your batting "average" means little. If you invested in 3 of these type of opportunities and 2 of them became worthless while the third returned 5x, you'd have done well. Don't know if that will be the case with these Chinese small-caps, but Buffett knows this well re: his basket bet on South Korean equities.

[twacowfca]

Why would any batter concerned with having a good average even think about swinging at a pitch that looks like it could be a wicked screwball?

 

Ah, but in investing your batting "average" means little. If you invested in 3 of these type of opportunities and 2 of them became worthless while the third returned 5x, you'd have done well. Don't know if that will be the case with these Chinese small-caps, but Buffett knows this well re: his basket bet on South Korean equities.

 

Yes, but those were apparently good companies, not very likely worthless ticking time bombs where the only value that could be received would be by passing the counterfeit to someone else before the time is up.  There are more ways than stock price appreciation for a sound  business to return value to shareholders: dividends, share repurchases, liquidations, take outs.  Plus, no sucker is left holding the worthless bag as in the classic con game.  

 

If I buy something, knowing that it is likely to be a fraud, with the intention of selling it to someone else at a higher price, then I become an accessory to the crime.  

[gokou3]

If I buy something, knowing that it is likely to be a fraud, with the intention of selling it to someone else at a higher price, then I become an accessory to the crime.

 

I was gonna leave this thread alone until there is further development, but I can't help responding again after reading your multiple posts that pretty much say CCME is a certain fraud.  Could you briefly lay out your reasons why you think so?  I don't see any specific points from you regarding the company, other than a link to a Barrons article that shows most Chinese RTO are fraudulent.

[twacowfca]

If I buy something, knowing that it is likely to be a fraud, with the intention of selling it to someone else at a higher price, then I become an accessory to the crime.

 

I was gonna leave this thread alone until there is further development, but I can't help responding again after reading your multiple posts that pretty much say CCME is a certain fraud.  Could you briefly lay out your reasons why you think so?  I don't see any specific points from you regarding the company, other than a link to a Barrons article that shows most Chinese RTO are fraudulent.

 

 

No thanks.  The point is that an investor doesn't have to be a Bill Ackman, dedicating a large portion of his life to uncovering and then proving that a particular company is a fraud.  The point is that as in Buffett's no called strikes baseball game, all the prudent investor has to do is decline to play in a card game where the deck probably is stacked or even in a game where the deck MIGHT be stacked.

[hyten1]

gokou3,

 

i am new to ccme and don't know all the details. But the thing that trouble me the most are the financial.

 

1. capital expenditure why so low?

2. if generate so much cash why raise money, i could understand why you want to go public (prestige, liquidity etc) but subsequent money raising is puzzling to me. I mean even addition money raising can be due to strategic partnership reason, but is Star strategic?

 

now these things above doesn't means its fraud (there are way to can explain them). But I would like these question ask to management point blank and get a straight answer (maybe they already did, i am just not aware of it?)

[gokou3]

gokou3,

 

i am new to ccme and don't know all the details. But the thing that trouble me the most are the financial.

 

1. capital expenditure why so low?

2. if generate so much cash why raise money, i could understand why you want to go public (prestige, liquidity etc) but subsequent money raising is puzzling to me. I mean even addition money raising can be due to strategic partnership reason, but is Star strategic?

 

now these things above doesn't means its fraud (there are way to can explain them). But I would like these question ask to management point blank and get a straight answer (maybe they already did, i am just not aware of it?)

 

1. I think this is a valid concern, so I go back to the 2009 10k.  Page F-21 ("6. PROPERTY AND EQUIPMENT, NET) shows that Display network equipment has a gross value of $19.2M (all figures in USD).  At the end of 2009 CCME had about 20k buses.  So, $1k worth of equipment on each bus, which likely consists of two LCDs, one hard drive and player, sound system, and wirings.  This figure may be low but not totally out to lunch.  If you saw the videos of such a system on a CCME-equipped bus, you can tell that it's not a fancy system by any means.  Btw, 2010 run-rate capex is comparable to 2008 and 2007 and is much higher than in 2009.  I believe some people made conclusion on the low capex based on the 2009 numbers.

 

2. I have nothing further to add.  :)

[king888]

Here is a discussion on Chinese message board.You can use google translate to read it. Even Chinese investors are not sure about CCME.

http://brk.b.bbs.imeigu.com/viewthread.php?tid=6362&extra=&page=1