China Growth Stocks

[ratobranco]

CCME - No, I'm adding the warrant exercise plus the promissory note. See 1st quarter 10-Q cash flow statement, p.4.

http://www.sec.gov/Archives/edgar/data/1399067/000114420410027123/v184849_10q.htm

He had all of that money by Feb, potentially before the 10-K was filed. The question is, when and how did Deloitte verify the balance? That's the key question.

I agree, it's pretty outlandish to think he pulled something like that off. He'd have to be insane. In fact, some kind of collusion with a bookie at Deloitte or something of that nature may be a more realistic scenario. But he had money.

Another interesting thing to look at. If you look at 2010 10-Q, you will see that the operating company took in about $47MM total in the SPAC consummation, with most of that money eventually going to Zheng Cheng.

How many shares were offered? 3M original shares + 8MM warrants exercised. That's 11MM shares, the public float. Note that the 3MM original shares were essentially given away for free, because the SPAC, at the time of consummation, had almost no money in it. They had to pay off redemptions for 9.5MM shares, which took them pretty close to a book value of zero.

So this company was sold to the public for a price of $47MM/11MM = 4.27 per share. That's a little too close to 2011 EPS for my taste. When you back out the $29MM cash the operating company already had out of the equation, the valuation becomes even more insane.

That's why I'm cautious, even though I think fraud is an unlikely scenario, and I think the 10-K will pass OK. Even if the company is legit, do I really want to invest in a management that would give a meaningful stake in this company to Americans for such a ridiculous price? It's the $1000 mercedes problem. If you want to sell your mercedes for that price, then I don't want to buy it.

I just cannot understand what they were thinking to sell this company at that valuation in a situation where they were well capitalized and had no need or use for the cash. I'm not comfortable with the argument that these were just poor little rural chinese entrepreneurs that really wanted to go public in the grand old USA, to live the American dream. Not buying it for a second. When you have a high-quality business like CCME, with huge growth and cash flow, you don't go public on those kinds of terms. You just don't do it. They could have gottten a better deal in a conventional RTO for crying out loud.