Saturday, March 12, 2011

China Media Express: all will be revealed

China Media Express (Nasdaq:CCME) has been my favorite drama on Wall Street (see posts here and here and here).

The stock is now suspended without news.  We do not even know who called for the suspension.

It is time for the big reveal...

Just to amuse you though I want to run you through an email exchange I had with Snowball - the anonymous blogger at "Good Stock Bad Stock".  I read his blog irregularly.

You see Snowball is a self-confessed "beginner" value investor - but he managed to write a seemingly balanced piece on CCME.  He then suggested he was going long.  So out of the kindness I wrote him a letter to try and convince him out of it.

This is how it ended:

You wrote an ambivalent piece on CCME.  I am not sure there is much to be ambivalent about there.  Indeed your idea that you might find 10 of these - half will be frauds - and you will be up is a first cut. 
But can I put it another way.  Taleb argues that you flip a coin 50 times and it comes back heads 50 times.  You then ask a mathematician what it will be on the 51st throw.  The mathematician says it should be 50 percent heads, 50 percent tails.  After all probability is uninfluenced by prior events.  
The trader is more canny.  He says it will be heads.  The coin is rigged.
Of course the trader is right. 
Now have a look at the overlap between S-Chip scandals and CCME.  And ask yourself whether your 50-50 guess is right. 
You know what I think: the coin is rigged.

Snowball I think heeded the advice.  I think Snowball owes me - but I guess we find out today!



Anonymous said...

The term one would use in a search engine is {Taleb "Fat Tony" coin}

Anonymous said...

yep it's likely to be bad. if it was all is well biz as usual, they wouldn;t have halted the f'n stock.

Brian Maloney said...

Halted all day and then NO news whatsoever? What gives?

Seeing several faux China stocks quietly selling off today, some getting out while they can.

Anonymous said...

Looks like you might have to wait. Trading day is over for 50 minutes now and still no news.

John Hempton said...

Thus far all has not been revealed. And it is 6.30 am in Singapore - so I have not been able to rouse Snowball and see if he took my advice.


Anonymous said...

John, would a clean Deloitte audit change your opinion on whether CCME is a fraud or not? or would your thesis remain the same?

Are you willing to concede that there's a probability (however unlikely) that the company is legitimately running a monopolized business that is simply hard to observe due to the ridiculously large geographic scope and loose business standards in China?

I'm trying to understand your perspective in terms of % fraud versus % not fraud. Although your coin analogy seems to suggest you're at 100/0.

John Hempton said...

Anon asks what would make me change my mind.

I am tempted to answer that fossil rabbits in the precambrian would change my world view.

But this is a more statistical game than that.

There are about 50 red flags in my notes. Quite a large number. Two or three red flags and I almost always put on a speculative short position.

50 - no brainer.

Now what would change my mind. Well if I could dismiss 20 of those red flags then I would think it was a reasonable possibility it was not going to wind up a good short.

If I could dismiss 40 then I would be worried.

But no - Deloitte signing would not change my mind - but it would almost certainly cover a few of my above mentioned red-flags. I need more than that by now.


Precambrian said...

Thanks for the response, I appreciate it.

I'm trying to reconcile my view with yours, and I guess it stems from two possibilities:

1) The red flags on our lists are, for the most part, identical, except I'm reasonably more satisfied with the answers provided to those flags in the public forum (GH Research, Star DD, Deloitte, Nielsen, WCTBills, etc.)

2) There's a bunch of red flags that you're basing your view on that I (and the general public) am not aware of.

If scenario 1 is the case, I'm comfortable that everyone makes decisions and benefits/suffers the consequences of them.

If scenario 2 is the case, it worries me and I would love to know more about your red flags. I don't expect you to share them (but it doesn't hurt to ask).

I suppose where this is coming from is that your current opinion (which sounds nearly 100% certain that they are a fraud) is, to me, a significant departure from your February 4th blog post where you said:

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


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

For what it's worth, my view on the market is that there's roughly an 80% chance of fraud baked into the stock, and aside from people that have absolute inside information of the outcome, a reasonable confidence level of fraud falls somewhere between 50-80%.

Anonymous said...

suspension was called by the company

Unknown said...

Read Alfred Little's article about the Lin brothers' dump of their shares last year and how CCME lied about it, and see if you still hold your long thesis.
Alfred Little on CCME
Responses on IHUB's CCME fan site

Here is the Investor Presentation given the backdoor listing merger. The summary of the transaction is on page 4. It was technically a SPAC, but nearly 100% of the SPAC shareholder decided to cash out instead of continue as shareholders of CME.

In 2010, Zheng Cheng and the Lin brothers (Bright Elite and Thousand Space) received $30.9 million in cash from the company, as part of the transaction consideration (see cashflow statement in Q3 2010 10-Q)
- $20.9 million
- $10 million from the payment of the note

The Lin brothers have also sold at least 2.6 million shares for over $30 million
- $9 mil (1 million shares sold by Thousand Space to Starr at $9 / share)
- $4.5 mil (500K shares sold by Bright Elite to Starr at $9 / shares)
- ~$17 mil (1.1 million shares at between $15 to $17 per share sold by Bright Elite on the market (after hours) from Dec. 16 to Jan. 10; may have already sold the rest)

The CEO Cheng Zheng also received a $17 mil dividend in Feb 09 before the merger.

A strange thing is the Cheng still owned 100% of CME when he received the dividend in Feb 09. By the time of the merger in late 09, Cheng owned only 61% of CME, with 28% owned by Thousand Space and 11% owned by Bright Elite. It's strange that Cheng would give up ownership of nearly 40% of this very cashflow rich business in just a few months.
Summary of Disposition by Bright Elite

1.8M as of 12/16/2010

1,803,231 (SEC Filing)

-0.20M 12/20/2010
-0.15M 12/21/2010
-0.15M 12/28/2010

-0.15M 01/04/2011
-0.15M 01/06/2011
-0.15M 01/07/2011

-0.15M 01/10/2011 Today

Total -
1.10M as of 01/10/2011

0.70M shares left held by Bright Elite.

If our theory of BE selling is correct, and we see 150K blocks every day this week. They will have 0% by the end of the week.

If their goal was to cut their position by 50%, they have already achieved that.
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.

FINRA said...

T-1 halt. FINRA will explain it. Try contacting Pat Clem or perhaps Cameron Funkhouser tomorrow if you have interest.

Anonymous said...


Do you know how puts will be affected by this halt? I mean, assuming this things is halted till expiry date, what will happen to options?

Anonymous said...

CAGC (another stock Mr. Hempton has opined on) was also halted Friday. A double bagger in the works?

Anonymous said...

It has reached conclusion. Deloitte and Lam are gone. I notice longs are claiming that the shorts just got lucky this time...

Precambrian said...

CCME's pretty done. Will be interesting to see if there's anything left after Star's puts etc.

Good call John, still curious about my two scenarios that I posed earlier :)

Also looks like your call on CAGC is drawing some attention from the Nasdaq!

Brian Maloney said...

UTA still trading but dropping fast, even more in the after-hours

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