To Our Shareholders and Friends:
During the week of Chinese New Year, CCME’s stock was the subject of an attack by
short sellers that caused volatile swings in its stock price. Management and CCME’s
Board of Directors are keenly aware of their responsibility to protect our investors
from these reckless and baseless attacks and, accordingly, the Company’s board has
authorized the engagement of outside counsel and other consultants to advise it
with regard to appropriate countermeasures.
To allay the concerns of those shareholders who have read the blog posts of the
short sellers and wondered if there is any basis to their statements, management has
provided below a preliminary review of the factual inaccuracies and misleading
innuendo employed by these bloggers for their self-benefit.
The “Research Reports”
On January 31, 2011, Citron Research published a report entitled “The China Reverse
Merger stock that is ‘Too Good to be True.’” On February 1, 2011, Bronte Capital
issued “China MediaExpress the Wall Street Drama Continues.” On February 3,
2011, Muddy Waters said that it was “initiating research” with a strong sell
recommendation. Each of these reports makes certain allegations about China
MediaExpress’s reported financial statements and operating data, although none of
the authors of these “reports” even attempted to speak with management of CCME
or, to our knowledge, performed any meaningful due diligence on the Company or
sought to develop a rigorous financial model of its business in the manner any Wall
Street research analyst would. We have every reason to believe that each of these
“researchers” is actually a short seller, and each stands to make money – at the
expense of our stockholders – when they succeed in driving down the price of our
stock. This conflict of interest gives rise to understandable doubts about their
motivation and intentions and, of course, the objectivity and legitimacy of their
“reports.”
The manner in which the short sellers seem to have timed and coordinated their 2
efforts plays into their ultimate strategy. By using the anonymity of the internet and
publicizing as many unfounded allegations as they can craft, they can make it look as
if there is a ground swell of criticism against the Company when in reality all the
claims emerge from a small group of self-interested parties. Their ultimate plan is
not a complicated one. As long as they can drive down the stock price when the U.S.
markets are open (even if there is a holiday in China) and then cover their short
position cheaply and quickly, they have accomplished their goal. It does not take
long for them to make a profit at the expense of the company and other
shareholders, particularly, if allegations are made while businesses in China are
closed.
The Company will actively resist the efforts of these short sellers. First and
foremost, THE COMPANY CATEGORICALLY DENIES THE ALLEGATIONS MADE IN
THESE PUBLICATIONS. We address below the most significant claims made in these
materials – all of which contain large factual errors. To the extent it is necessary, we
will provide a more comprehensive response at the appropriate time.
We also note that the attacks are continuing and we fully expect to continue to have
to take appropriate countermeasures.
Important Examples of the Bloggers’ Factual Inaccuracies and Misleading Tactics
ALLEGATION: The Company is a fraud and reported revenue is exaggerated by tens of
millions of dollars.
FACT: The Company is strong and doing well. Its revenues and cash position have
been audited by reputable and well-known auditors who have confirmed both.
ALLEGATION: The media kit obtained from CCME’s sales personnel indicates that
CCME has less than half of the buses under contract compared to CCME
representations.
FACT: As of today, the Company currently has 27,200 buses under contract, and in
addition to our regular monthly independent audit and verification by CTR Market
Research – which we perform for the benefit of our agents and customers -- we will
engage a professional third party to verify that fact. Although Muddy Waters claims
to base its attack on our own advertising kit, and has appended to its “report” some
spread sheets that Muddy Waters claims to come from our kit, that simply is not the
case. The spread sheets on which Muddy Waters purports to rely (a) do not look
like ours, (b) are not in the same format as ours, (c) appear to have been authored by 3
an individual unknown to us (based on a review of the pdf document’s properties
section, the name of the author does not appear to be a name of any of our Chinese
staff), and most importantly (d) do not have the same information as the spread
sheets that are included in our advertising kit. We obviously do not know where
Muddy Waters sourced this information, but what we do know is that, contrary to
what Muddy Waters said in its “report,” the information is not the same as our
advertising kit.
The spread sheets linked to the Muddy Waters “report” clearly have significant
discrepancies from the Company’s actual advertising kit, as the following charts
indicate:
Muddy Waters’ spreadsheet:
Spread sheet from the Company’s official advertising kit (showing some of the same
buses, with screen counts and entirely different sequencing):
Moreover, the numbers reported by Muddy Waters are entirely different from those
appearing in our advertising kit. We have tried to figure out how and why Muddy
Waters could have gotten it so wrong, but of course we do not know what they did.
We have some theories, but the reality is that it is wrong, dramatically so.4
ALLEGATION: Fewer than half of the buses in CCME’s network actually show CCME
content.
FACT: This claim relies entirely on anecdotal evidence. Under our contracts, bus
operators are not allowed to remove our players and display content not provided by
our company. Our media players operate on a hard-drive based system that is
locked. We have tailor-made our media players (with a patent) so that it is nearly
impossible to play content other than that which we supply. The content on the
media players can only be updated by CCME operators and is typically updated on
our contracted buses twice a month. Drivers are not able to switch off the LCD
screens during the trip. In fact, the system automatically loads and plays the
content when the bus engine starts and automatically shuts down when the bus
engine is turned off.
ALLEGATION: CTR research reports are inaccurate and manipulated by CCME’s
management.
FACT: CTR is an independent and very reputable research provider. Among other
things, CTR used a questionnaire survey to gather basic data from bus companies
and the AV Center under the Ministry of Communication. Through the
questionnaire, CTR is able to quantify the number of contracted vehicles, LCD
screens and monthly sum of passengers. It also obtained statistical data of
advertising in inter-city buses, LCD screens, hard disk playback mode, and monthly
sum of passengers in the whole of China. All of this data is provided by third
parties – the bus operators and the AV Center under the Ministry of
Communication – not the Company.
ALLEGATION: CCME’s relationship with its largest bus operator does not exist and
CCME has misstated the number of buses it contracts with Beijing A-er-sha Passenger
Transaction Co. Ltd (“Alsa”) and Beijing Xiang Long A-er-sha Passenger Transportation
Co. Ltd. (“Xiang Long Alsa”).
FACT: The largest operator in CTR’s 2008 report, Shanghai Bus Industrial Group Co.,
Ltd., contracted with us in 2008 (and now) for 1,892 buses. We obviously cannot
comment on why Muddy Waters would report otherwise, other than as mentioned
above regarding the unknown nature of their ‘official advertiser kit,’ but the contract
does, in fact, exist and they are listed in our current advertiser kit.5
From the Muddy Waters report:
From our official advertiser kit (only the first three buses out of the 1,892 total are
shown in the excerpt):
Muddy Waters alleges that it contacted representatives of Alsa and Xiang Long Alsa
to find out that they only have 20 buses and 60 buses, respectively. Muddy Waters
provides screen shots of these two companies’ websites to support this allegation.
Because of the scale of CCME’s operations, we often enter into a contract with a bus
operator on behalf of itself and other bus operators. Of course Alsa or Xiang Long
Alsa would not misrepresent to the public that they operate more buses than they do,
but neither would they include all the details of their subcontracting arrangements
regarding advertising matters in their corporate website. This fact also explains
Muddy Waters’ exaggerated concern over the number of operators we do business
with – it is simply the case that at as of December 31, 2010 we had signed
agreements with only 70 bus operators but that those operators had subcontracting
arrangements with many others comprising the CCME network.
The extraordinary deficiencies in Muddy Waters’ “proof” and “analysis” – including
presenting information for the wrong customer, failing to investigate and report
publicly available information, and failing to make follow-up inquiries with CCME –
naturally casts doubt both on their capabilities and/or their objectivity.
ALLEGATION: Apple does not have a deal with CCME’s Switow platform.
FACT: We signed a contract with Apple’s authorized distributor, Eading Group, in
December 2010. We encourage you, when in China, to buy an iPad from them.
ALLEGATION: CCME’s Target Audience is Mainly a “SubGreyhound Demographic”
FACT: Our target audience consists of members of households with above-average
income in China. CTR’s independent research shows that the average household 6
income of our audience is about RMB 4,500-6,000 per month. This demographic is
attractive to the advertisers with whom we have contracted. Some of the global
companies that advertise on our platform are Lenovo, China Mobile, Siemens, Toyota
and Pepsi.
ALLEGATION: Our “competitors” and certain media buyers do not know CCME.
FACT: The companies listed in the Muddy Waters report are not in the same industry
group as CCME. FMCN focuses on the commercial real estate, retail, outdoor
billboard, and Internet advertising platforms in China. AMCN is in the airport and
airplane segment. VISN and Bus Online are in the intra-city bus segment. We are
the media market leader in intercity and airport express buses in China, and there are
no comparable competitors, either in size or experience.
ALLEGATION: The 2009 SAIC revenue does not match with our SEC reported financial
results.
FACT: CCME’s SAIC reports were prepared in accordance with pertinent SAIC rules
and policies. Our consolidated financial results reported in the Company's audited
financial statements are prepared in accordance with US GAAP.
ALLEGATION: CCME has misled investors regarding government approval of its
operations by calling it an “exclusive license from the Ministry of Transport.”
FACT: The bloggers are playing disingenuous word games. However you want to
translate the name of the approval, the Company has lucrative agreements
throughout China that are providing strong revenues for the Company and its
shareholders. This allegation is an example of how far the bloggers will go to try to
create the illusion that there is something wrong with the Company. CCME has
been issued a “tongzhi” by the Transportion Television Audio Visual Center, a
department under the Ministry of Transport, which has binding effect on the bus
operators. We have made a copy of this approval available on our corporate
website, which includes the relevant TTAVC Seal (red stamp). What the bloggers
don’t say – and can’t say – is that this approval is not lucrative, important, or
enforceable or even that this approval does not give the Company the exclusive right
to access and advertise to the passengers on these buses. The proof of the pudding
is in the eating. The Company has benefited greatly from the “tongzhi” from the
TTAVC with operators in cities throughout China.
* * * * *7
As noted above, our ability to respond completely to these bloggers is limited due to
the Chinese New Year holidays –a fact that we believe was pivotal to the timing of
the release of these “reports.” Although we hope that the investing public will
recognize the bloggers’ attacks for what they are, to the extent that a further and
more comprehensive response is useful, we will provide further information to the
investing public after the Chinese New Year to respond to these defamatory
allegations.
Thank you all. I particularly hope that the those shareholders who have remained
loyal to CCME and share the vision I have to responsibly leverage our “tongzhi” and
designation as the exclusive inter-city bus TV media by China's Ministry of Transport
and thereby grow our revenue and profitability will accept my sincere and humble
thanks for their trust and support. I am also heartened by the fact that many
people have, unbidden, posted responses to these scurrilous attacks and have
strongly supported the Company. They have done this on their own, and I thank
them for their support. For the stock market speculators interested in enriching
themselves through manipulation, information arbitrage and a “zero sum” gain, all at
the expense of our investors, I am certain that their actions will ultimately catch up
with them.
Zheng Cheng
Chairman, CEO and President
February 7, 201
AI
