China MediaExpress Holdings, Inc. (fka CCME)

[otatais]

I write to help clarify my own thoughts and only post my thoughts in case they are useful to others, in order to try and repay as best I can, all the helpful posts by others more knowledgable than me.

I’m starting to think that if the Co stays on NAS thus there is a credible business, then holding the shares for another year or two may be the best course of action.
I’m thinking that maybe I can play the initial volatility to hopefully increase my shareholding, then hold for a year or two.
As long as the company is prepared to clean itself up.
It’s internal controls seem to be insufficient and it’s own audit committee compromised.

Surely Zheng Cheng (I have him holding around 14M shares) must have realized by now that the market just won’t allow his shares to be decently valued until the company convinces the market it is investible by being open and transparent.
It can only do this by having an independent forensic audit done. The value of his stock won’t go up until he does this.
It’s gonna be ugly for a while but he’s going to have to fess up to the financial self interest I think has been going on.

I‘ve divided up the DTT concerns into 3 areas to try and deduce the seriousness of the concerns. I’ve made some simple interpretations, which with my limited knowledge of these matters, are the best I can do:

Cash/Banking issues
issues related to the authenticity of bank statements
a loss of confidence in bank confirmation procedures carried out under circumstances which DTT believed to be suspicious
concerns over possible undisclosed bank accounts and bank loans
the verification of salary payments made in cash directly to employee bank accounts

They have probably been dicking around with the cash to either profit from ‘hypothecating’ or ripping some off or both

Operational issues
issues concerning the validity of certain advertising agents/customers
and bus operators (including with respect to certain of the Company's top ten customers
and the potential double counting of a certain number of buses
the verification of the production process for advertising programs

They have probably been inflating sales possibly to meet the make good target and maybe also allow the Lins to get out at an inflated stock price

Taxation issues
information on file with the State Administration of Industry and Commerce as to certain subsidiaries appearing to be inconsistent with comparable financial information provided to DTT
the verification of certain subsidiary tax payments with the local office of the State Administration of Taxation
the verification of the validity of a sampling of tax invoices issued in connection with certain large transactions

I thought SAIC is usually inconsistent, with GAAP and SAT at least, but I also think I remember Fernando saying Jacky told him SAIC would match this year?
The verification of SAT tax and ‘validity of a sampling tax invoices’ I take to mean they havn’t been able to verify (one way or the other) Are they saying they have received insufficient information, rather than suspicious information? They only use the word suspicious in no2 in cash/banking issues.

Again someone may have been ripping off some cash - ‘tax invoices issued in connection with certain large transactions’

DTT stated in its resignation letter that, in its view, the Company was not in good faith willing to proceed with the course of action requested by DTT
however, the Company believes that it was working to address these items at the time of DTT’s resignation.

It’s possible (but unlikely IMO) the company just needed more time to address the issues - in which case they would have asked for an extension to lodging the 10K and most probably Jacky and Dong (Starr) would not have resigned.

It seems to me that some underhand dealings are far more likely, whether they amount to fraud, I don’t know where to draw the line, not knowing the specific details.

I think they have been manipulating the cash and inflating sales.

I’m prepared to believe that management may just be benefiting from endemic deceptive China business practice attitudes that we westerners would find unacceptable. Also they seem to be able to do it with relative impunity – so why am I invested in this space at all!?

China is number 78 on the world corruption list. For the number 2 economy in the world I guess that’s pretty poor.
For myself coming from the least corrupt country I realize I have been naïve to trust China business in general.
I just did not think Starr and DTT in 2009 could be fooled and gave some credence to Chinese native speaker and apparently savvy Ping Lou.

http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results

I believe there is a business and we’ll find out how big after a credible audit and should know by the time the stock resumes trading on NAS since compliance will surely demand one - I think? (all bets off if on pinks though)

If the company has only half the stated cash and only does half the stated business, then the CEO will not earn his make good shares, thus there will be no dilution in 2011/2012 and CEO may (and should) lose his 2009 1M make good shares.

If he wants to increase the value of his current very large share holding, then actually using the 30M buyback to buy say 5 -6M shares at $5 -6 average on recommencing will reduce the shares outstanding to 34M
The company cash would still be a healthy 70M
He would be buying back stock at 3PE, hard to get a better aquisition/investment/expansion deal than this.
He would ultimately be increasing the value of his own shareholding, thus should be incentivized to do the buyback at least.(assuming he still does have a large shareholding?)

At half the stated business, 2011 EPS should come in at $1.75.
Once the dust settles on both the company and this dodgy china space CCME could see a PE of 8 again in the next year or 2 = $16 in 2012 say, based on 15% YOY EPS growth and $2 EPS.
I say could not will!

Considering there will probably be an overreaction to the downside on recommencing, a possible $6 opening or less will be a price many longs might sell out. A possible approx. 200% return on holding for 1 year is hard to beat in any other investment out there i.e. from that level, this may be as good an investment as any, so why sell at $5-6?

By 2012 there will be a new generation of investors in CCME. Much of this current generation will have sold out on understandable disgust and disillusionment.

But if the company was to re-establish credibility ( I would expect it would take a forensic audit by E&Y or similar to do this), having gone through the hit piece/clean itself up cycle/ clean 2011 10K - I think that the new generation of stock holders here will be bullish about the stock again, especially if the China small cap space in general has been more cleaned up over time - more stringent audits by higher grade auditors plus possible legislative action by SEC - and the shallow FUD pieces have lost their effectiveness.
I don't see how this space is even investible at the moment but at least CCME may have seen the worst - may have.
IMHO FWIW.