Replies to post #44430 on China Growth Stocks

[Traderfan]

Gene_finder, regarding CCME

Can you please tell me where you have this excerpt from? Tia.


CCME: a VIC post
I'm not trying to squelch discussions; this is a good forum for it. I'm sensitive to the fraud argument, though, because I've heard it so often in connection with Chinese companies and, more often than not, when you ask the person making the argument for some basis they look at you with glassy eyes and an expression that says "Well, duh, it's China isn't it?" That doesn't make a very convincing argument for me.

The senior managers behind the CCME operating company were actually going to go the traditional IPO route. They started this process in mid-2008, and were 80% of the way there when the market went to hell late that year. As a result, they began discussions with a wide range of potential SPAC and PE partners. The implied valuation that they got from the SPAC with which they eventually closed the deal was actually the highest offered by all the counterparties they were speaking with. Not surprisingly, Starr was one of the groups with which they had originally engaged but Starr offered a lower initial implied valn than the SPAC that closed the deal. If you go back and look at the history of the SPAC transaction, it was handled very poorly by the sponsors and they had to jump through numerous hoops to get the deal approved. Basically, the approval rate was extremely low and virtually all of the SPAC's cash was returned to SPAC shareholders. This left the operating company with far less cash than it had initially hoped to have post deal-closure. As a result, mgmt continued its discussions with Starr and ultimately closed the Starr private placement.

In the US (and other developed markets), yes, mgmt probably would continue to generate cash flow organically, rebutress the balance sheet, and minimize dilution. However, the mentality among Chinese managers is considerably different. A significant portion of publicly-listed Chinese businesses are overcapitalized by Western standards. In part, this is because of a wealth of acquisition opportunity available and a massive land rush mentality for market share. In addition, despite what you hear regarding bank lending in China at the national level, loans for small businesses are not easy to get and are often short-term in nature. Its rare to see Chinese companies with true, debt-based long term funding in place. One of the biggest drivers of public listings for Chinese companies is the ability to raise capital relatively quickly, which gives them a big advantage over their private cash-strapped competitors. In addition, if you speak to a range of the management teams over there you will hear them talk about the image benefits of having a publicly listed company, particularly one listed in the US. Sounds a little silly by our standards, but I can assure you that it is a common theme. With respect to CCME in particular, I think it is likely that you will see one or more acquisitions in the near future. With any advertising network, scale is significant as it allows them to charge higher rates to advertisers and generate very high margin incremental revenue.