Is China Media Express Still a Buy?
http://seekingalpha.com/article/251367-is-china-media-express-still-a-buy?source=yahoo
A couple weeks ago, I mentioned China Media Express (CCME) in an article on undervalued Chinese investment opportunities. Take into consideration that the title has “buy at your own risk” in it, and hopefully you can see that I understand the risks with this company. This company, as is the case with many in China, is high risk but also high reward. CCME seemed worth the risk.
From a valuation standpoint, they were and are a screaming buy. Their revenues are solid and their margins seem appropriate. According to their records, cash on hand is healthy and they are growing very quickly. Starr is convinced they are legitimate and they are audited by Deloitte. Taking everything at face value, along with reaching out to some of my contacts in China, it seems like a good story. So, I added them to my list of cheap China picks. I did this knowing full well the risks inherent not only in CCME, but in Chinese ADRs as a whole. Recently, however, there has been some negative press that needs to be sorted out before I regain confidence in the stock. Last week, claims were made by a few research “firms” that CCME had grossly overstated their revenues, lied about certain crucial aspects of their business and made other egregious errors typical of a “pump-and-dump” scheme.
Normally I have no time for research advice from shorts. Their spin is self-serving and their views on companies as investments can be hacked at best. Also, I find it odd that a stock historically targeted by shorts would receive three passionately negative reports in such rapid succession. I’m not saying the releases were orchestrated and I’m not saying they weren’t. It is odd though, isn’t it? There have been several strong articles of late on CCME and the legitimacy of their business. One in particular from Chimin Sang is worth reading. He points out several statements by CCME that are either brazen overstatements or downright lies. I won’t repeat news that has already been reported adequately on, but I would like to analyze the case of shorts and bulls for CCME.
After reading the report from Muddy, I question whether they are any more reputable as a research firm than CCME is as a genuine company. They have released very few research opinions, and those of which have been released seem to be oriented more as a market mover than an educational piece. You can read their report and draw your own conclusions on the validity and objective nature of their reporting. The numbers are compelling if true, but where is the logic behind their reasoning? The argument from Bronte is much less biased, and seems more focused on the unknown than anything else. Citron, however, presents a case that questions the very existence of CCME as an actual company.
Citron has searched high and low for the "existence" of CCME in Chinese media and internet; he ends up with a lot of links to Google searches and browser translated Mandarin. The basis of the entire argument is two-fold; he compares companies that he believes are comparable and cries foul when CCME does not appear in major media. It is disconcerting that CCME is absent from many lists in the media, but they are a company that up until recently did not operate in many big cities. Many commenters have pointed out that Andrew Left (the author behind Citron) is a “felon” and a fraud himself. However, he is not as much of a terrorist as many of the bulls are claiming. He has been sued, yes, but he has always won. Some of his targets have actually been convicted of fraud. We’ll have to see, however, if his information is solid as he claims. Class action firm Shapiro Haber & Urmy LLP have decided to investigate the legitimacy of these claims, stating that they are:
Investigating potential violations of the federal securities laws by Citron Research, Andrew Left, Muddy Waters Research and Carson Block in connection with their research reports regarding China MediaExpress (NASDAQ: CCME). The investigation focuses on whether statements in those research reports were materially false and misleading at the time they were made. Specifically, the investigation seeks to determine, among other things, whether the research reports improperly mischaracterized numerous aspects of the Company’s business.
Muddy, Citron and Bronte are short, but here is the position from the bulls. Bulls include Starr, Global Hunter and Mike Koza. The quote from Global Hunter is stale (October 2010), but relates directly to the case at hand. If Global Hunter truly did their due diligence, then this is a particularly intriguing argument from someone that has actually been on the ground in China, not just searching the internet for conspiracies. GH says:
During our recent trip to China, we conducted extensive due diligence and channel checks on CCME’s business. We met with the company's entire management team including six regional managers, checked CCME’s sales contracts and bank statements, and interviewed advertising agencies, direct advertisers and bus operators. We took buses in Beijing, Fuzhou and Guangzhou to view the company’s operation and advertising programs. In addition, we met with a representative from CTR, a market research firm, and two directors at Starr International. Our due diligence results reinforce our thesis on the company and we continue to believe that CCME is a leader in its niche market. We believe the fundamentals of the business remain solid.
Mike Koza, of Marketocracy fame, has been one of the best unknown investors for a long time. Ken Kam of Forbes interviewed Mike Koza here. I urge you to read his entire argument, but this in particular caught my attention in response to the lack of major mention in public media. Koza states that:
CCME has been public just a little over a year. They came public via a low profile method. Reverse mergers are not listed in the Wall Street Journal. All IPOs are usually listed/mentioned in the Journal when they occur, and even before they occur. Thus, VisionChina, which went public via IPO many years ago with major US investment banks, should have a much higher profile in the Chinese media. Plus they operate in the big cities that reporters are based in, whereas up until 2010, CCME had no big-city presence.
This makes perfect sense. A smaller company that doesn’t operate in big cities wouldn’t be on annualized top ten reports. However, even a reverse merger would be on the radar if they were making the money that they are claiming. So, who is right? Gerard Dunn, a recent traveler to China took the time to make the case of CCME to me recently. Stating that:
The buses are incredibly crowded in China. The fare is cheap - around sixty cents - and a majority of the working and middle class use these buses to get to and fro for work and pleasure. The TV screens on buses have a clever mix of ads, cartoons, news, weather and are well viewed. The advertiser has a captured market, and the mix of ads and visually appealing content is very good.
Again, this is not a television company. CCME makes their own content and tries to captivate an audience. The equipment itself is not expensive, as the shorts have pointed out, but the user engagement is supposed to be superior to similar elevator and bus based systems. Gerard was not making a case for the valuation of the company, but rather trying to point out that the company seemed legitimate from his encounters in China. He continued to say that:
The story is real, the need is real, and the potential for growth is huge.
The lines have been drawn between the shorts and the bulls. This is one of the most passionately argued stocks I have ever covered. I am anxious to hear more about the case against Citron and Muddy, and also read any follow up reports they have the fortitude to release in the face of legal action.
One things is certain, CCME needs to respond. The recent rebuttal by the CEO is a non-factor for me, despite the run in stock price; only the most incompetent manager would fail to respond to this sort of attack on the fundamental nature of their business. I will be concerned if CCME does not make inroads towards a concrete case for their numbers, legitimacy and feasibility as a long term business in the coming weeks. Things they could do include an actual investors day, additional auditing, more disclosure of contract details, cooperative statements with advertisers and route information. Until they do thees things, there is too much uncertainty right now in this stock to recommend buying unless your risk tolerance is very high, and your stomach for loss is close to total.
Disclaimer: This article is to be used for educational and informational purposes only. The author holds no positions in stocks mentioned and does not plan to initiate positions within 72 hours of the posting of this article. Investments are made at your own risk and the conclusions of this article are the author’s own and do not constitute professional investment advice. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Information contained heretofore is accurate to the best of the author’s knowledge and the author expressly disclaims any liability for accidental omissions of information or errors in fact.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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