Friday, February 4, 2011

China Media Express: what disconcerted me when I read the accounts

China Media Express is a tiny company about which there is – as I have noted – major passion and drama on Wall Street.

My last post indicated that it was either (a) one of the best businesses in the history of capitalism or (b) one of the most brazen frauds in the history of capitalism.  That post was linked by Forbes (disapprovingly) or Fortune (somewhat approvingly).

I noted that extraordinary claims require extraordinary evidence – and that neither side (long or short) had presented extraordinary evidence.

I also noted that the basis for my short was that the numbers were too good to be true – but I did not state in what way they were too good to be true.  (Many people in the comments and by email questioned my assertion that the numbers were too good to be true.)

Finally I suggested that there was a relatively simple way of checking the bona-fides of CCME which was to check the veracity of a claim that they had contractual arrangement with Apple. Apple of course would tell the truth to the SEC if asked.

Since I wrote all this the stock is down about 40 percent. My (very small) short position is ex-post too small – but then as I noted the evidence that I had to support that short was flimsy and did not justify a large short position.

I was short simply because it was “too good to be true”. Alas really good does not mean false – so this was a tiny bet. I was (and remain) more interested in the drama than the result.

The Muddy Waters Report

Yesterday (last night my time) the stock fell a third fairly rapidly after a small China-based research outfit (Muddy Waters) released a report. Muddy Waters has released two prior reports alleging fraud – one on Orient Paper (Amex:ONP) and one on Rino International. ONP denied the charges and the results to date only marginally vindicate Muddy Waters. (The stock is down – but nobody has admitted fraud.) Rino International however is one of the great hits of all time. Rino has admitted fraud, been delisted from the Nasdaq and now trades on the Pink Sheets and have filed with the SEC to say they will no longer be filing with the SEC. It is – as John Cleese might say – pushing up daisies. (I remain short RINO.PK and will cover in the pennies.  There doesn't seem any reason to allow the longs an exit above $1 when they hold clearly worthless paper.)

Muddy Waters shoots one (and a bit) from two.

And Muddy Waters claims are extraordinary. They don't suggest the company does not exist (it clearly does – and indeed they visited them in many guises). They just suggest that it is egregiously overstated both in the number of buses used and the revenue from each bus. They suggest earnings per share are (generously) about 5c (compared to the stated $2.37 historical). These are big claims and Muddy Waters present considerable evidence to back them up. They claim that major advertisers (such as people who handle the Coca Cola account) could not verify the existence of this company. This was strange because the company claimed considerable revenue from Coca Cola.  (The company does exist.  Muddy Waters just asserts it is a minnow.)

Moreover Muddy Waters claimed to have checked the Apple contract. I quote:
We caught CCME’s management telling a particularly egregious lie. It recently announced it had created an online shopping platform that has an agreement with Apple Inc. (NASDAQ:AAPL – yes, THAT Apple) or one of AAPL’s distributors. AAPL made clear to us that it has no such relationship with CCME’s subsidiary. Further, AAPL keeps tight control over its distribution in China, with only two authorized online distributors (including Amazon.com’s China subsidiary). None of AAPL’s China distributors have authority to sub-license.
This is pretty incontrovertible. If Apple will verify this to the SEC the SEC has no choice but to suspend the stock - send it to the Pink Sheets and leave the corpse to the class-action lawyers to clean up. If Apple will not verify this to the SEC then Muddy Waters has some questions to answer. This issue alone is sufficient to say who is telling the truth.

But I am not here to talk about the Muddy Waters report (although it is an impressive piece of due diligence). I am here to explain what it was that you could check from your desk in Sydney, New York or London that made me think that CCME was a strange company.

It was the payments for media content.

How media content is paid for

TV shows are expensive to produce. The stars are paid well (sometimes very well). Scripts are expensive. Studios and their staff more so. Tens of billions of dollars annually is spent producing TV content.

People don't spend all that money on TV content and then give it away. Those tens of billions of dollars have to be recovered from somewhere. Indeed they are usually recovered eventually from either advertisers or pay TV subscriptions.

Content deals come in two forms. Either (a) I pay a fee for the content or (b) I broadcast the content on my distribution (say a TV station) and I allow you a share of the advertising revenue or give you a proportion of the total advertising time in which to sell adverts.

In the US most TV content is sold by networks to regional TV stations in exchange for “minutes” of advertising time. If a network is selling a hot show (like American Idol) it might demand 10 minutes of advertising time per hour. If its a very cool show the network might demand 4 minutes of time leaving a larger piece of the smaller pie to distribution.

But its one or the other. I either pay for the content in hard cash or I pay for it by giving up revenue.

If I pay for it in hard cash that cash outflow will show in the accounts (and reported margins will be lower).

If I pay for it in minutes then the cash outflow will not show in the accounts – but the revenue per screen will be lower.

Its one or the other. Either cash outflow shows in the accounts or revenue per screen is lower. No choice in that.

So lets look at the accounts to see which:

Here is the cost-of-revenue section in the last annual report. To quote:
CME’s cost of revenue increased to $25.1 million for the year ended December 31, 2008 from $13.2 million for the year ended December 31, 2007 due to the following reasons:
Concession fees.  Concession fees charged by inter-city express bus operators increased to $20.0 million for the year ended December 31, 2008 from $10.7 million for the year ended December 31, 2007. The substantial increase was attributable to the concession fees payable to the group of bus operators participating in CME’s network through the execution of long-term framework agreements for the year ended December 31, 2008 as well as an increase in the number of inter-city express buses carrying CME’s network to 15,260 as of December 31, 2008 from 10,053 as of December 31, 2007.
Depreciation.  Depreciation for CME’s digital television displays and hard disk drives increased to $2.8 million for the year ended December 31, 2008 from $1.6 million for the year ended December 31, 2007. The increase was attributable to installation of new equipment and control systems in connection with the increase in the number of inter-city express buses in the CME’s networks.
Business tax.  Business tax increased to $2.1 million for the year ended December 31, 2008 from $0.7 million for the year ended December 31, 2007. The increase was primarily attributable to business taxes arising from consulting services Fujian Express provided to Fujian Fenzhong in the year ended December 31, 2008.
Salary.  Salaries increased to the amount of $203,000 for the year ended December 31, 2008 from the amount of $156,000 for year ended December 31, 2007. The increase was primarily attributable to the increase in number of staff in production and maintenance department in 2008.
Other operating costs.  Other operating costs decreased slightly to approximately $9,000 for the year ended December 31, 2008 from approximately $13,000 for the year ended December 31, 2007. The decrease was primarily attributable to the decrease in production costs in 2008.
Now lets add this up.  Concession fees were 20.0 million dollars, depreciation another 2.0 million, business tax 2.1 million.  Salary was a paltry 0.2 million.  Other expenses were trivial.  That adds up to 24.3 million.  Total cost of revenue is 25.1 million. There is $800 thousand unexplained.

That $800 thousand must include all content payments. There is no other place that content payments in cash can go.

That is not much – relative to huge revenues to pay for content.

So we can presume they are not paying much for content.

That is OK of course. Regional TV stations don't pay much cash for content - they yield minutes of advertising time instead. Its entirely possible that CCME yielded minutes of advertising time.
Indeed I questioned one of the stock brokers pushing the stock about this and they told me – after discussion with the company – that the low payments for content were explained by yielding minutes of advertising time.

Alright – then you would expect revenue per screen to be lower than the competition because – after all – the company does not own all the advertising time on the screens.

I did the calculation – and it is repeated in the Citron Research blog post. Advertising revenue per screen was roughly double the competition.

No cash outflows for content are visible in the accounts and revenue per screen is higher than the competition (suggesting but not proving that they are not paying much for content by yielding minutes).

As I note: this is not proof of fraud. Checking fraud is difficult: though physically checking say the contract with Apple exists would probably constitute proof of fraud.

I did not try to check fraud.  My standard of proof was low - but then so was my position size.

After all, it is possible that CCME had worked out how to sell adverts for 4 times what the competition sell them (thus producing double the revenue per screen whilst sharing half the advertising time with the suppliers).

But I thought that was “too good to be true” so I shorted the stock.

Was I confident about this? No. That is one reason why my position was small.

Does the Muddy Waters research surprise me?

No. I was kind of expecting an end game somewhat like that – and it makes sense of my observations.

Does the Muddy Waters research constitute proof?  Not directly - you would either need to confirm some of their observations yourself or wait for the SEC to do it for you.

However confirming the claim about Apple would be pretty convincing. The SEC should do this and – with that proof – they should suspend the stock.

I am not holding my breath. The SEC are regulators with a reputation for being slow.

If the short case is right (and I have a small bet on that it is right) then some prominent people have some egg on their face. Starr Asia - associated with Hank Greenberg - looks really stupid.  They have repeatedly purchased stock in this company and claim to have done due diligence.  That I guess will further tarnish Hank's reputation.  Deloittes is the auditor.  Knock one more failure up for a major audit firm - albeit a particularly embarrassing failure.

At this point you know my (weakly held) view.  I still welcome criticism in the comments.

Finally to the new readers who came from Forbes or Fortune.  Welcome.



John

28 comments:

Anonymous said...

The Muddy Waters report has already been disproven in several regards, and that's only in the first several hours since they published it.

The company has provided the name of the Authorized Apple Distributor with which they have a contract and provided a link. See today's press release.

The Chinese web pages where MW derived the number of buses for various bus operators were mistranslated by MW. The bus company websites actually validate the same number of buses as stated by CCME. MW mistranslated to their own benefit.

Anonymous said...

John,

Would evidence from CCME that they get a large bulk of their content for free change your mind? What would it take for you to be convinced?

CCME claims:

http://www.ccme.tv/eng/ir/faqs.php

So perhaps they can show some official documentation or release from the 2 satellite stations that they give content to CCME for free?

John Hempton said...

I believe that they get their content free of charge cash. The company told me.

The problem then is that the revenue per screen is then too high.

One or the other.

Unless someone is stupid enough to make content and give it to them gratis. Implausible really.

Anonymous said...

It's important to understand that the PRC government wanted to consolidate this media market, and gave CCME an exclusive endorsement to do so. The PRC wanted control over the rampant display of pirated DVDs on buses leading up to the Beijing Olympics. In China, a government 'endorsement' means something, and the bus operators were being paid to comply anyway. The content providers are second-tier satellite TV companies who get free advertising in exchange for their content.

Yes the documentation of the agreement with the PRC is online, and there are press accounts as well. I hope people will watch the facts closely, all is not what it seems here. Watch the facts as they unfold.

Potato said...

I have to admit I'm kicking myself a tiny bit. Spent a few hours on tuesday after your post reading up on all sorts of other opinions and the company's filings, and was seriously considering going short. Decided it wasn't going to go anywhere that soon, so I could take the weekend to think on it some more (I've never gone short before)... too late :(

As to free content, one possibility is if the content is itself advertainment in nature... but I doubt it.

Edgar Poe said...

Here's hoping your small position was in February put options..... From >$20 earlier this week..... wow.

Nice call John. Always be skeptical.

Anonymous said...

Re free video content.

Duh, you probably don't live in China so you don't understand the nuances. Hunan Satellite TV, with its family-type variety shows, is one of the most popular TV channels in China. The competition of TV channels in China is huge with several dozens TV channels of similar type. How do you maintain or boost your popularity and viewership in the market if you are Hunan Satellite? Give free content to CCME, in exchange for tens of millions of viewership on inter-city buses. It's a win-win for both Hunan Satellite and CCME.

saia said...

The company did release the name of the Apple distributor. Do you agree MW was wrong about this? They also misrepresented the number of buses by doing the translation wrong.
John, I know you are skeptical and that's good but Starr has 50$ mil investment in this company and CFO bought 100k shares last month. I know i know there are enrons but still what is more probable here? you decide. Hoping you reply to this comment.

John Hempton said...

The company released the name of the Apple distributor: So what. In what way is anything the company says proof that the company is telling the truth.

Apple told Muddy Waters that there are ONLY 2 online distributors in China and they do not have rights to appoint sub-distributors.

If Apple said that then CCME could say that their distributor was the Lord Jesus Christ reincarnated as a Buddhist merchant - and it would not make it the truth.

John

short_yen said...

John, what I personally find disturbing is that you almost always have your facts way wrong. I don't know whether it's on purpose or not but given the fact that you are a fund manager you shouldn't always bring up totally false evidence on issues.

The fact that you speak about "impressive research" when you speak about the hit piece of MW in regards to CCME basically shows your bias. Afterall you are a short seller. These guys twisted the facts in any possible way and you applaud them for it. I don't get this seriously.

Regarding the Apple distributor. Just call that company mentioned in the PR and you will quickly realize they are for real and they are working with China Media Express.

But I guess people like Citron or MW or even you are not interested in bringing the truth up otherwise they couldn't continue with their attacks.

Have you ever asked yourself why such a "research" company don't contact the company before releasing this BS in order to clarify these things? It would be so easy but of course you short selling guys don't want anything to clear up. The more muddy the better right.

I'm just disappointed that you would continue to post false facts. Like I said I have no idea whether it's on purpose or not. All the main points are already long cleared up and you obviously missed it.

Heck I'm not even invested anymore in this company but I can't be quiet if I read such intentional misleading crap. Sorry.

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

Alex said...

I find the whole Apple discussion a little bit unrealistic. I mean, from my understanding of this business, its bread and butter is the intercity market between 2nd and 3rd tier cities. How many people riding buses between those cities can afford an Apple product?

Maybe there's some reasonable revenue opportunity for Apple on the airport side of CCME's operations, but if Apple wants some effective advertising, any advertising exec with half a brain would put ads on the high speed rail network that is being developed over there.

Just a thought.

Anonymous said...

It's amusing to read this blog and the comments about Apple, so uninformed. Even after CCME identified the distributor with whom they have a contract, and especially since you can simply go to switow.com and purchase an iPad, it's puzzling why you are clinging to this myth.

Do some DD. The switow.com site is a pass-through ad site. CCME does not hold inventory, all orders pass through to the company that is selling the goods, all fulfillment comes from them. The site is a value-add for CCME's advertising customers and for the passengers on the buses, CCME does not become an online distributor for Apple products via the website and catalog. If Apple ends up having a problem with their distributor, so be it, there are many other agreements in place.

In addition the ridership of these buses is not a bunch of peasants with garden tools in their hands. If you don't believe CCME, or CTR, or Nielsen Media - who have all done real research on the demographics - then ask yourself why so many large companies are advertising on this ad network? Yes, the ads are running, go to China and see for yourself, or take a look at an ongoing blog that is actually documenting facts, including video of many of the routes - http://ccme-info.xanga.com.

Keep your eye on the facts.

Anonymous said...

1. There is no mistranslations of the bus operator website. I am fluent in Chinese. It would be silly for Muddy Waters to tarnish their reputation with incorrect translations of screen shots in the report. They are based in China and obviously have Chinese working for them.

2. I find the interviewed with the advertising agencies and competitors to be most convincing. The agencies representing Coca Cola and Lenovo has never heard of CCME. CCME claims to make more revenue from the Beijing airport express bus route than AirMedia does with many times more screen inside the airport. AirMedia use to operate the ads in the airport buses before CCME, and they can't understand CCME's claims.

Anonymous said...

"Alright – then you would expect revenue per screen to be lower than the competition because – after all – the company does not own all the advertising time on the screens.

I did the calculation – and it is repeated in the Citron Research blog post. Advertising revenue per screen was roughly double the competition."

This is a major error in this logic. For starters, which competitors are you talking about? The differences between CCME and its competitors has been well-documented. For the most part, they operate in different markets. CCME has a captive audience for much longer amounts of time due to the longer rides, and thus advertisers are willing to pay more.

The issue of their margins has also been addresses (copied and pasted from elsewhere):

China MediaExpress earns 3.5 times revenue per screen:

How many ads per hour does each company display on their system?

VISN displays an average of 6-7 minutes of advertisement per hour
CCME displays an average of 20 minutes of ads per hour

What is 20 divided by 6? Take a guess. It is about 3.3, thus the reason China MediaExpress earns about 3.5 times revenue.

That is the simple answer, but also, since the individuals that ride on the China MediaExpress bus generally have a longer trip, the screens are viewed longer with less crowding and noise compared to subways and intra-city buses where people are standing. This also helps contribute to receiving more in revenue, as it has more of an effect on the "captive audience."

MARGINS - This table is from the recent Goldman Sachs research on FMCN:

Growth & margins (%) ----12/09 -- 12/10E -- 12/11E -- 12/12E

LCD display ------------ 63.8% --- 77.3% --- 80.6% --- 83.0%
In-store network ------- 20.4% --- 38.6% --- 47.5% --- 53.4%
Poster frame network ----3.6% --- 29.8% --- 40.6% --- 47.3%
Overall gross margin ----32.9% --- 57.1% --- 61.8% --- 65.1%

FMCN's LCD display business is similar to CCME's, displaying ads on TV screens. In 2010, the GM is 77.3% and Goldman estimates FMCN's GM will be 80.6% and 83% in 2011 and 2012.

China MediaExpress has margins closer to 70%.


"The company released the name of the Apple distributor: So what. In what way is anything the company says proof that the company is telling the truth.

Apple told Muddy Waters that there are ONLY 2 online distributors in China and they do not have rights to appoint sub-distributors."

But Apple refused to give them a written statement, so they would have some evidence of this? You are just taking MW's word on this with no evidence whatsoever. Eading is a very well-known company in China and it shouldn't be hard to determine if they are a licensed re-seller of Apple products, as CCME has claimed.

Anonymous said...

Say I want to write an article that suggests John Hempton doesn't exist, at least not in the way that this blog claims. So I go out and talk to people in financial journalism, since he claims he is a financial journalist. I talk to 10 people who I can claim "should" know about him. 6 of them say they know of him, 4 say they do not. So, great - I write my article and say that I asked 6 people who should know of John, and none of them know of him. So John doesn't exist! And I just happen to fail to mention the 4 people who DID know him - it's called the fallacy of omission, Logic 101.

This is the fallacy that just lopped off hundreds of millions of market cap off of a stock owned by Goldman and others.

Clearly CCME exists, and clearly they sell ads. So why didn't Muddy Waters talk to the ad agencies that DO know them. Why didn't they talk to the Apple distributor that has a contract with CCME? Why didn't they place an order on the switow website and purchase an Apple product?

The answer is that they surely did these things. No doubt they would have loved to claim that they attempted to place an order on switow.com and were unable to do so. So they placed an order, and the iPod arrived. That tactic failed, so they sent an email to Apple and asked "Ever hear of China MediaExpress?". As if Apple would know anything about how one of its distributors is advertising. Then they write that CCME does not have a contract with Apple, even though CCME only said they have a contract with an authorized Apple distributor, which is true. But Muddy Waters omits that information from their article.

These kinds of opportunistic hit pieces have one purpose, to make money for the authors and their clients. This one isn't even intended to destroy the company, the allegations are easily disproven and the information omitted from the report is easily provided. This was rather a drive-by shooting, designed to trigger long margin calls and save the massive short position of one or more hedge funds from a forced buy-in.

Daniel Kaufman said...

John, you appear to be the most intelligent short blogger/investor in ccme. I would love to hear your response to my "follow the money" argument below. I can also make a positive case for why CCME isn't "too good to be true" (I ran an ad network with $5M/month in revenue and 40% profit margins that was highly analogous to CCME), but I want to hear one good counter to the below first...
CCME -- Just follow the money
On 9/30/10, CCME had $170 million in cash, per its Deloitte reviewed 10-Q. By now, they have well over $200 million in cash.
Deloitte has verified the cash on numerous occasions. Starr International, which invested $43.5 million in CCME, verifies the cash on an ongoing basis. Numerous banking analysts have verified the cash.
Now various investors who are short CCME and have written attack pieces claiming that the company is a complete fraud -- Muddy Waters, Citron, Chimin Sang et al -- would have us believe that the founder of CCME sneakily, fraudulently injected over $100M of his own money into the company bank account over the past 12 months, pretending that the $100M was revenue and earnings. It would have to have been freakishly complicated, making it look like all that money came from umpteen different customers, customers that none of the sales people had actually sold anything to. Seriously, take a moment and try to imagine how hard it would be to inject $100M of cash into the company and make it look like it came from real customers. Do you think this would be possible? (I don't).
And why would these short-sellers have us believe the founder injected $100M of his own money to perpetrate this massive fraud? He put in all this CASH in order to earn more SHARES. Shares which he could only sell years later after additional Deloitte audits, which could only be sold to institutional investors who would examine the company's books and operations with a magnifying glass. Meanwhile, the founder knows that he's sitting on a company with a tremendous short interest whose short investors are loudly proclaiming that the company is a complete fraud. So just picture how much due diligence an investor would do prior to buying shares from the founder. Seriously, try to imagine *this* being the evil, master plan of a criminal founder. (Of course it can't be done).
This has to be the foundation of the short's argument, and it's retarded. But wait, you say, Citron, Muddy Waters and Chimin didn't make this argument. You're right, they avoided it like the plague and made other totally distracting arguments about google and baidu searches, numbers of buses from outdated and misleading sources, gibberish about patents, and timed their attacks on the Chinese New Year.
Anyway, back to what matters... following the money. The way frauds work is the opposite of the scenario above... the founder DOES NOT put gigantic amounts of CASH INTO the company. He takes CASH OUT of the company, as much as he can and as fast as he can. He inflates inventory and a/r to pretend there are earnings that aren't really there. He does secondary offerings to raise cash for the company. He pockets this cash for himself by buying related parties at inflated values. That kind of thing.
But hold on a minute, you say, these short investors are smart! They must have an answer to this "follow the money" argument. Actually, no, they don't because there is none. In fact, the smart shorts know that the cash is real, the earnings are real, and the company is real. The smart shorts were the ones that knew the content of the hit pieces and when they would be released, and they have all taken advantage of the panic among long investors, of the forced selling of long investors that had used margin -- and they've either covered their short positions or are in the process of doing so. The remaining short investors, the ones who were not "IN" on the attack pieces before they were released, but who simply read and were convinced by their content, are in trouble.

John Hempton said...

If the cash is there and the buisness generated the cash then this is not a fruad.

The Muddy Waters argument - which says the business is a fraud - but values it at cash - is a non-sequitor. If it has the cash generated by the business then it is not a fraud.

Whatever - here are some counter points.

This is - on the numbers so cheap - that if it were real you would just buy it. If Muddy Waters did the due diligence and found it was real then buying it is an easier way to make money than shorting it.

Muddy Waters is not stupid. They would have bought it.

Second: the company is not behaving like the cash is there. Capex last quarter was 400K. If the cash is there - 170 million of it - the company would just step and buy stock. Lots of it. When capex is 400K there is no reason why they need the cash.

If you look at the behaviour - Muddy Waters is behaving like it is a fraud (the alternative for them of buying the stock if it is real is too attractive).

The company is behaving like it is a fraud (the alternative of buying the stock is too attractive).

John

Daniel Kaufman said...

So your main counter-argument is...
"Muddy Waters is not stupid. Therefore, since they are short the stock rather than long, it must be a fraud."
Are you really convinced by that logic?? What if I could point you to some long investors who have muddy waters beat by a couple of standard deviations in the smarts department?? No, that probably wouldn't change your mind either.
So, how about I grant that mw is smart, very smart. They wrote a grossly deceptive report knowing that it would, without a doubt, cause the stock price to fall. They got very short in advance of releasing the report on Chinese New Year. They didn't make a short "investment." What they did was simply to "trade" in advance of their hit piece. Maybe they're still short if they have more good hit pieces in the works. Maybe they've already covered or gone long. I am quite confident that they won't be short by March 15 when the 2010 audit is due.
As for your second argument, about the company not buying back its stock:
first, i expect the company to announce in next few days that it has been buying stock;
second, i could explain why it is rational for the founder (who already owns majority of shares and will receive another 7 million shares for hitting 2010 earnings threshold and most likely another 7 million for 2011 threshold), but i'm realizing it's not worth it.
short investors in the name are exhibiting the most extreme herd mentality i have ever seen.
i will just shut up and enjoy the show

John Hempton said...

Don't patronize me. I am not stupid. I was short this stock before i knew who Muddy Waters were - or at least before I knew Muddy Waters was interested.

There are MANY things that are too good to be true here.

The Muddy Waters report is very convincing though. But it is not the reason I was short.

John

Anonymous said...

John, you say that if Muddy Waters had 'discovered' that CCME was legitimate then he would have gone long on the stock. That's not plausible if you think about it.

First, there is an article on Benzinga in which Carson's father brags that his son is coordinating with hedge funds who only short China stocks. These hedge funds likely had a large position and were willing to pay for the article, so it is probable that Muddy Waters is being paid handsomely for the article. From his perspective, the paycheck + the guaranteed gains on his short position were a far better bet than taking a long position in the stock. After all, he had insider knowledge on when the article was coming out and what it would claim. There's no way a positive article on CCME would have gained him as much profit, even if he had been inclined to write one.

And you can't seriously be suggesting that he ever approached researching the company with an open mind or without a preordained conclusion. He only writes negative articles on China stocks, that's what he does. The article is laughably biased. It would have been simple for him to discover the Apple distributor that has a contract with CCME, for example, there are only a few authorized dealers in China. He faked the Internet searches, anyone who speaks Chinese can find many references. And why wouldn't they be able to, the company exists... you know, like in this physical universe there are buses with screens, playing ads from major multinational corporations. There is a website where you can purchase Apple products.

Now it turns out the spreadsheets he claims are internal CCME schedules were modified or created by him on his own computer - the file metadata identifies a member of his own family as the 'author'. This only happens when the file is created on that particular computer. You can download them and take a look for yourself.

I suspect this was a drive-by attack that paid him so well that he through caution to the wind and went for it, fabricating what he needed to and omitting everything that didn't fit his objective. I think we'll see a strong response from the company, including strong verification of its financials.

Anonymous said...

I love how the true believers keep saying 'the company obviously exists, you guys can't read the internet,' when John, MW, CR, and everyone else fully acknowledges the firm exists.

As did Enron, Parmalat, and Worldcom.

Daniel Kaufman said...

sorry, did not mean to be patronizing...
honestly i was trying to get you out of a bad investment (being short CCME). i understand the company better than any short. i understand what its warts are and why it isn't too good to be true. i can explain why the stock probably isn't worth any more than 25/share even with its tremendous earnings and growth rate. but it isn't a fraud and will be much higher than it is now when the next audit comes out a month from now.
the only smart way to be short ccme is to be an unethical blogger who is willing to lie and deceive by fabricating evidence, release the attack piece, and then cover. i do not believe that you fall into this category. cheers

Anonymous said...

Evidence of CCME Pump and Dump?

Bright Elite used to own 2 million shares and sold most of its shares late year. Those sales weren't reported because its ownership dipped below 5%.

The founders also sold 1.5 million of their own share to Starr in October last year at $9/share. Last year was on pace to be a $4 EPS year. Why were they selling their stocks so cheaply?

Here are some messages on the Yahoo board from last year about the sales. People didn't pick up what was going on at the time.
http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_C/threadview?bn=101061&tid=33227&mid=33345
December 28, 2010
When Jacky bought 100,000 shares from Bright Elite, it took Bright Elite's ownership percentage to 4.89%. Coincidence? I doubt it. By getting below 5%, they can sell without having to file.

I think all the PR's are intended to help keep the stock up as Bright sells. That's why all the good news leads to a brief pop then a fade. Jacky buyback, dividend announcement, SWITOW announcement, etc.

http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_C/threadview?bn=101061&tid=35648&mid=35676
Furthermore, this should leave Lin with exactly 600,000 shares. The afterhours selling since the 20th of December were as follows:
12/20 = 200,000
12/21 = 150,000
12/28 = 150,000
01/04 = 150,000
01/06 = 80,000
01/07 = 150,000
01/10 = 150,000
01/11 = 73,231

For a total of 1,103,231 shares sold and that would leave Lin with a nice round number of 600,000 Shares. I bet that is what he plans on holding on to and this last sale rounded out his position.

His sales seemed to be around 10% of daily volume.. approximately.


http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_C/threadview?bn=101061&tid=23687&mid=23687
Starr to Purchase 1.5 Million Common Shares from Founders of CCME
13-Oct-10 09:59 am

Starr Investments Cayman II, Inc. (“Starr Cayman”), has agreed to purchase an aggregate of 1.5 million shares of the Company’s common stock in two private transactions. Mr. Ou Wen Lin and Mr. Qing Ping Lin, two of CME’s founding shareholders, through their holding companies, Thousand Space Holdings Limited and Bright Elite Management Limited have agreed to sell 1,000,000 and 500,000 shares of the Company’s common stock, respectively, to Starr International at $9 per share.

Although the agreement was signed after the Chinese Golden Week holiday, it has been under discussion between the parties since the middle of September, and the selling price was based on CME’s average closing trading prices for that month. It is CME’s understanding that Mr. Ou Wen Lin and Mr. Qing Ping Lin intend to use proceeds from the stock sale to finance their other personal business projects that are unrelated to CME.

Anonymous said...

About a different China fraud but very relevant to CCME: 'Wey does offer his own explanation as to why the numbers that Chinese companies report to Chinese officials often do not match those mentioned in SEC documents.

"Under U.S. GAAP, revenue is booked when products are shipped out of the company's warehouse," Wey says. "In China, however, revenue is recognized when the receiving party issues you a government-issued receipt. But there's a 17% tax incurred. There are many companies in China that do not necessarily want to pay that 17% upfront. So they delay asking for the receipts. That doesn't mean that revenue is not properly booked."

So, CCME -- if they are real like the other Chinese firms -- should be trying to *understate* revenue to minimize taxes [normal corp behiavior].

Sure doesn't seem like they're going that route...

Daniel Kaufman said...

CCME, cast of short characters and exit strategy
Here is the cast:
1. Shorts who who have conviction that the company is a complete fraud, and that the stock will eventually go well below 5 (and don't give a shit about the 2010 audit, in fact they're looking forward to -- Deloitte resigning). These guys are short the stock and long post-audit puts. These guys have been short the stock since last September. Some of them are still under-water believe it or not.
2. Shorts who think the company looks like a fraud, but aren't convinced (and are worried about the audit). These guys are short the stock and long Feb puts. They are feeling ok with their situation, since they accounted for the increased short interest over past couple months (and are in the black) but are focused on what the hit piece writers are working on next, as it was the hit pieces that made them money.
3. Shorts who don't know if the company is real or not, but who have bet the stock would go down, based on either advance knowledge of, or expectation of hit pieces. These guys are in cahoots with the hit piece writers. Maybe they paid them, or are in their circle, or whatever. These guys are short the stock and long Feb puts but none expiring after that. These guys are nervous, they've already made money, and they've got their fingers on the "cover" trigger. This group is completely focused on the hit piece writers. Their whole strategy is based on riding the coattails of and/or frontrunning the hit piece writers.
4. Hit piece writers. What they own is the $64,000 question. I am guessing that they are almost entirely long Feb puts. The reason is that all the hit pieces have happened one after another in the past 2 weeks. They bought them when the stock was high, and they profited like banshees when the stock got crushed. Put yourself in their shoes. If you know WHEN a stock is going to plummet, you buy short term puts just before the hit piece rather than long-term puts or going short the stock. This is how you maximize your profits. You also have the advantage of not having to take the "audit risk". You have the further advantage of Chinese New Year and the company's blackout period.
5. Retail short followers. They are late to the party. They read the hit pieces and bought puts.

Exit strategy in the next comment...

Daniel Kaufman said...

CCME short exit mayhem
Here's what I think is going to happen:
A. this week groups 3 and 4 are going to exit their positions, because there is no reason for them to stay short as the audit gets closer and the feb puts have already expired. groups 3 and 4 will mostly be selling their positions to group 5 mon, tues and wed. group 4 will be actively writing more of their hit pieces early in the week, to facilitate the sale of their puts.
B. group 2 is going to be calling group 4 all week... asking them... are you buying more march puts? are you getting out of the trade? what do you have in store for next month? group 2 isn't going to like what they hear and they're going to get very nervous. they will start covering their shorts and selling their puts, esp their longer dated puts.
C. Group 1 is just going to ride it all out through the audit. They may replace the short positions of Groups 2,3,4 as they flee. (group 1 is a lot like CCME longs who have been in the stock since last Fall or earlier, some of whom invested a bunch more these past couple weeks)
D. By thursday, it's going to be clear that there are not enough of Groups 1 and 5 to let Groups 2, 3 and 4 exit. It's going to get very crowded at that exit door. The shorts are going to be racing each other out the door. Stock will go up $1 on Thurs and $2 (or more) on Fri
E. By Monday, 2/21, anyone remaining from group 2 and 3 is going to bail (group 4 is already long gone), and group 5 is going to start freaking out with their losses - they will start to bail. (group 5 is going to be a lot like people who first went long ccme when that short squeeze was supposed to happen). Group 1 is going to feel nauseous, a lot like the long-term longs who saw all their profits go away these past weeks -- with some wondering "oh shit, what if i'm wrong and this gets REALLY ugly.
F. CCME Mgmt is the wildcard. There are a whole host of things they could announce that would light a fire under the stock. This could start as early as Tuesday morning. This is the wildcard that could cause the stampede to happen earlier in the week rather than later in the week.

Anonymous said...

@daniel kaufman: excellent!

Btw: the latest on the ground RESEARCH (not the guessing of the Bronte variety) by Global Hunter has by and large sealed the case for MW and all the people who shorted based on MW's (and Bronte's) advice. Of course, anything can still happen over the next quarters to CCME's business, but for now it is pretty much game over for the short sellers in ccme.

Anonymous said...

John: The more I read your comments in the context of the article the more it appears you are either unwilling to do any actual research or are choosing to be disengenuous.

Your comment: "The company released the name of the Apple distributor: So what. In what way is anything the company says proof that the company is telling the truth.

Apple told Muddy Waters that there are ONLY 2 online distributors in China and they do not have rights to appoint sub-distributors.

Company PR 12/28: "CME has already signed contracts with many prestigious global and Chinese domestic companies or their distributors such as Apple"..."SWITOW orders will directly pass to the contracted advertisers who are solely responsible for order fulfillment."

Summary: CCME is not a distributor or subdistributor. They advertise and capture orders that are turned over to Eading for fulfillment for which they are paid a fee. This activity is the equivalent of an outside commissioned sales rep for Eading.

Your comment: "This is - on the numbers so cheap - that if it were real you would just buy it. If Muddy Waters did the due diligence and found it was real then buying it is an easier way to make money than shorting it."

Reaction: How does that argument work? MW has a history of publishing fraud claims. Have you seen them ever report that a company was a buy and have the stock go up 50%? To suggest that they wouldn't have an incentive to go short, claim fraud and make a quick 50% profit because the alternative is so compelling is not based upon any objective evidence that I've found.

Your comment: Second: the company is not behaving like the cash is there. Capex last quarter was 400K. If the cash is there - 170 million of it - the company would just step and buy stock. Lots of it. When capex is 400K there is no reason why they need the cash.

Reaction: This again does not appear to be based upon any actual findings. Companies that are small or microcap with roughly 70% insider ownership historically do not buy back stock. To suggest that not doing so is an indication the cash is nonexistent just doesn't appear logical. The company went public to establish a public market for their stock and needs to increase float to attract large institutional buyers and analysts rather than reduce it. It's shameful that they should have to even consider caving into the fraud claimants who have no credible evidence of fraud. Doing so undermines their progress toward establishing a viable public market for their securities and using their reluctance to go down this path as "evidence" they don't have the cash is equally shameful.

Hope this is a case of not researching the facts and claims rather than the alternative.

marty

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