For the last few days my blog post about China Media Express has been the most visited post on this site. Strange really because China Media Express is a small company that puts TV screens on buses (for advertising) in China. It is not a subject that should garner many readers.
But garner readers it does – and the readers are passionate. My last post talked about the passion (both from longs and shorts) and the pain that short-sellers were taking on the stock. I also went short a very small amount of the stock (roughly one third of a percent of funds under management). I have a dog in this race but I really don't care too much about the prize money.
Anyway the long case is really about the numbers. This company is – at least according to its SEC accounts – frighteningly profitable. It is far-and-away the most profitable display advertising company I have ever seen – the numbers are off-the-scale good. So good that they would make Warren Buffett green with envy. Amazing given it is a relatively innocuous business. Almost from a standing start – the company has placed TVs on buses and wound up with $170 million hard cash in the kitty – cash that represents neat profit. And it remains that profitable – it is growing frighteningly fast – and the stock remains on a low price-earnings ratio. On the face of it this is the best investment you could make. For example Glen Bradford (who runs a hedge-fund advisory business that “focuses on risk averse investing”) has described CCME as “the best stock in the world”. Matt Schifrin – a writer at Forbes – has repeatedly plugged the company.
The short case is also surprisingly simple. If it seems to good to be true it probably is. But the short-sellers will go further – they will argue that the company does not exist – or if it does exist it is a few screens on a few buses to convince gullible American stock pickers to buy the company – not a real business capable of generating a cumulative $170 million in cash profits.
The short case an amazing slur really: the company does not exist and that the entire thing is fake. It is also the strongest and most passionately (albeit until today privately) stated short case I have ever heard.
In science I would normally follow the dictum: extraordinary claims require extraordinary evidence. And I would apply it to both sides of the argument. The longs argue that they have found one of the most extraordinary businesses in the history of capitalism. The shorts claim they have found one of the most brazen frauds in the history of capitalism.
As I said – passion.
And so far nobody has the extraordinary evidence.
But the longs have a point. If this is a fraud they have pulled the wool over some very prominent eyes. The biggest shareholder is Starr Asia (the company associated with Hank Greenberg of AIG fame). They are presumably competent enough at basic due diligence in China not to miss something this blatant. Moreover Starr has purchased more – suggesting they are getting deeper into this.
Further the auditor is Deloittes rather than than some two-bit bucket shop. A big name auditor is hard to defraud – especially when some things (such as the massive cash balance) are dead easy to check. That said – if you can convince a big-name auditor to sign your fraudulent accounts it will help you continue to perpetrate the fraud. If you really want to steal a lot of money from the stock market start by fooling a big-name auditor.
And the shorts have a point too. The numbers really are extraordinary.
I said which side I am on. I am short. But I don't have the evidence that supports a notion of fraud (nor for that matter do I have the evidence that suggests this business even makes sense at the published numbers) and hence my position is tiny. [My short position is so small that you cannot construe it as evidence either way or as a strongly held opinion. I have a dog in this race – but from my perspective it is a low prize money event.]
Citron Research – a short-shop that is right a surprising proportion of the time – has published on CCME today finally stating in public the short case. They describe it as a “phantom company” (they do not go as far as stating it is a non-existent company but that is a distinction without much difference). The stock only fell 17 percent – which – if the allegation is right means that it has only begun falling. They do a stirling job of presenting the numbers on the public data. This is the data that I used to go short – data that looked almost nonsensical it was so much too good to be true.
They also promise to reveal what on-the-ground research in China tells them. I would love to know early – but I will have to wait. I have not kicked the tires of 20 thousand buses – nor talked to advertisers and content suppliers in China. If you did that you would find out whether they have even heard of the company. If they haven't you probably have a “phantom company” – but even then it is hard to prove the non-existence of something – and so you would be left with some doubt. China is a big place and it possible not to have heard of all the players.
I am wating for Citron's next post.
Meanwhile however it is entirely open for the SEC to do some due diligence of its own and prove that they are an investigative agency. The company recently put out a release in which it claimed contracts with Apple, Sony, Toshiba, Adidas, Nike, Samsung and others. This is a pretty brazen thing for a fictional company to do and is being used by the longs (with some justification) to disprove the short case. Certainly the release made me more nervous.
But there is a simple check now: ask Apple, Sony, Toshiba, Adidas and Samsung. (It would not surprise me if Citron has done precisely that.)
Anyway, both Nike and Apple are SEC reporting companies and I am sure – in response to a polite request from the SEC they would confirm or deny whether such a contract has been signed. If they have been signed then the SEC can leave this alone. If the contracts have not been signed then – hey – the SEC can suspend this and claim (justified and enormous) kudos for stopping a genuine fraud by work of their own initiative.
Obviously though if nothing happens then short-sellers will be none-the-wiser. The company will go on – and short – albeit only 30bps I would have to take my lumps.
The drama it seems continues.
Tuesday, February 1, 2011
Posted by John Hempton at 2:21 PM
The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.