China Mediaexpress Holdin (PINK:CCME)

FUJIAN, China, May 19, 2011 /PRNewswire-Asia/ -- China MediaExpress Holdings, Inc. (NASDAQ: CCME) ("CME" or the "Company"), China's largest television advertising operator on inter-city and airport express buses, reported today that the Nasdaq Stock Market ("Nasdaq") has sent a letter to the Company indicating that it denied the request of the Company for continued listing on Nasdaq, and will suspend trading of the Company's shares effective at the open of business on Thursday, May 19, 2011.  The Company intends to further appeal the hearing panel's determination.

FUJIAN, China, April 4, 2011 /PRNewswire-Asia/ -- China MediaExpress Holdings, Inc. reported today that the NASDAQ Stock Market ("NASDAQ") has sent a letter to the Company to the effect that NASDAQ was exercising its discretionary authority under Listing Rule 5101 to suspend the Company's common stock from trading on NASDAQ effective opening of business on April 12, 2011, subject to the Company's right to appeal such determination to a hearing panel not later than April 8, 2011. The Company intends to appeal NASDAQ's determination before such deadline.

Deloitte Reveals More Details

The following reportable events occurred within the period from DTT’s engagement and the two fiscal years of the Company ended December 31, 2009 and 2010 and subsequently up to the date of resignation. DTT has informed the Company in its resignation letter that it was no longer able to rely on the representations of management and that it had lost confidence in the commitment of the Board and the Audit Committee to good governance and reliable financial reporting. Prior to its resignation, DTT raised the following issues (some of which may be considered to be disagreements) encountered during the audit, including:

• 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;
• issues concerning the validity of certain advertising agents/customers and bus operators (including with respect to certain of the Company's top ten customers);
• concerns over possible undisclosed bank accounts and bank loans;
• 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 the validity of a sampling of tax invoices issued in connection with certain large transactions;
• the verification of certain subsidiary tax payments with the local office of the State Administration of Taxation;
• the verification of salary payments made in cash directly to employee bank accounts;
• the verification of the production process for advertising programs;
• and the potential double counting of a certain number of buses.

As a result, DTT had requested that the bank confirmation process be re-done at the banks' head office and that the issues described above be addressed by an independent forensic investigation. 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. DTT's letter also stated that these issues may have adverse implications for the prior periods' financial reports, including the Company’s consolidated financial statements for 2009 and DTT’s report thereon, and that in the absence of the further investigatory procedures that DTT requested, DTT was unable to determine whether the prior periods' financial statements are reliable, and accordingly whether continuing reliance should be placed on these financial statements or on DTT’s report on the Company’s 2009 financial statements.

DTT discussed the subject matter of these reportable events and disagreements with the Company’s Audit Committee. The audit report of DTT on the financial statements of the Company for 2009 did not contain any adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. DTT has advised the Company that the reportable events and disagreements described above, if not resolved to DTT’s satisfaction (had it not resigned), would have caused it to make reference to the subject matter of such events and disagreements if it were to have issued an audit report on the Company’s financial statements for the year ended December 31, 2010. Attached as Exhibit 16.1 to the Original 8-K is a letter from DTT addressed to the Securities and Exchange Commission stating that it concurs with the statements made by the Company with respect to DTT in the Original 8-K. Attached as Exhibit 16.2 to this amendment on Form 8-K/A is a letter addressed to the Securities and Exchange Commission stating that they agree with the statements made by the Company in this Item 4 of this amendment on Form 8-K/A.

On March 11, 2011, China MediaExpress Holding, Inc. (the “Company”) was notified that its principal independent accountant, Deloitte Touche Tohmatsu in Hong Kong ("DTT") had resigned its engagement with the Company, which resignation was effective immediately. DTT was engaged by the Company on December 4, 2009 following the Company’s business combination with Hong Kong Mandefu Holdings Limited. DTT’s resignation as the Company’s principal independent accountant was accepted by the Audit Committee of the Company on March 13, 2011.

The following reportable events occurred within the period from DTT’s engagement and the two fiscal years of the Company ended December 31, 2009 and 2010 and subsequently up to the date of resignation. DTT has informed the Company in its resignation letter that it was no longer able to rely on the representations of management and that it had lost confidence in the commitment of the Board and the Audit Committee to good governance and reliable financial reporting. Prior to its resignation, DTT also had requested that issues encountered during the audit, including issues related to the reliability of the bank confirmation process, be addressed by an independent forensic investigation. 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 DDT’s resignation. DTT's letter also stated that these issues may have adverse implications for the prior periods' financial reports, including the Company’s consolidated financial statements for 2009 and DTT’s report thereon, and that in the absence of the further investigatory procedures that DTT requested, DTT was unable to determine whether the prior periods' financial statements are reliable, and accordingly whether continuing reliance should be placed on these financial statements or on DTT’s report on the Company’s 2009 financial statements. DTT discussed the subject matter of these reportable events and disagreements with the Company’s Audit Committee. The audit report of DTT on the financial statements of the Company for 2009 did not contain any adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. Attached as Exhibit 16.1 is a letter from DTT addressed to the Securities and Exchange Commission stating that it concurs with the statements made by the Company with respect to DTT in this Current Report on Form 8-K.

Article from the Web alleging that Muddy Waters reiterates its sell rating on CCME:

Muddy Waters, LLC has reviewed the report on China MediaExpress Holdings Inc. (NASDAQ: CCME) issued today by Ping Luo (of Global Hunter Securities), as well as the February 7, 2011 open letter from CCME chairman Zheng Cheng The report and letter are responses to our February 3, 2011 report, CCME: Taking the Short Bus to Profits.

Ms. Luo and Mr. Cheng’s documents contain gross misstatements of facts that are material to the investment case in favor of CCME. Muddy Waters, LLC intends to respond to these misstatements with evidence of the inaccuracies within a reasonable time period.

We reiterate our Strong Sell rating on CCME, and stand by our conclusion that CCME management is significantly inflating its revenue and earnings in order to generate management earn-outs and inflate the stock price so insiders can sell.

We intend to shortly contact CCME’s auditor, Deloitte & Touche LLP, and the enforcement division of the Securities and Exchange Commission with documentation of our work, including evidence that directly contradicts statements in the aforementioned documents. Such evidence will include transcripts of meetings and telephone conversations between Muddy Waters, LLC and individuals with authoritative knowledge of the matters in contention.

Disclaimer:

As of the date of this statement, Muddy Waters, LLC has no position in the securities covered herein, although we previously have had short positions in such securities. Following publication of this release, we may transact in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. Use of Muddy Waters LLC’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not
insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. However, such information is presented "as is," without warranty of any kind – whether express or implied. Muddy Waters, LLC makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and Muddy Waters, LLC does not undertake to update or supplement this report or any of the information contained herein.

Investors, including the GeoTeam®, will closely monitor the developments surrounding the attack on CCME by Citron and Muddy Waters. Last week, we published a small update regarding our initial thoughts on this subject.

Due to events over the past year, many investors have abandoned the ChinaHybrid space. If CCME can be taken out, it is our fear that the RTO space may lose another layer of supporters that have kept their faith in believing that quality could be found. The outcome of CCME's story could have far reaching ramifications for the near term trading prospect of rest of the companies in the RTO universe.

CCME has a top auditor, convincing third party on-the-ground due diligence, strong institutional investors, has issued a dividend and a employs a CFO who bought a large amount of stock at $15.00. If we can’t trust this scenario, what can we trust? That is why we were only moderately impressed with CCME’s response this morning. Although, they did touch on many of the issues in the “hit” pieces, one major and defining issue was not addressed:

Muddy Waters issues on pages 13 and 14 of their report regarding allegations that key media buyers who handle accounts of customers that CCME claims to do business with are unaware of CCME. 

CCME needs to address this concern. Show us a contract or have some of your major customers publish a comment attesting to their relationship with you.  It would be very impactful if management could confirm its relationship with a company like Coca-Cola®.

CCME could have also done a better job handling their assertion that SAIC documents drastically differ from SEC filings.

Here is their comment:

"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"

CCME should take a page out of GFRE hit piece rebuttal that points to supportive references. Please see GFRE 8K exhibits.

We are not long CCME, as we await more details.   We also for see rebuttals from Muddy Waters or Citron.  One question investors will begin to ask will be how does this tier one company go public at a low multiple via an RTO transaction in lieu of an IPO, especially since it did not need to raise expansion funds?  Investors should begin to take a closer look at the SPAC transaction to follow the money trail and value the transaction.  

As for investors who want to deploy significant capital to the ChinaHybrid space, investors should do one of two things.

• Wait for the completion of 2010 audits; multiples are low enough that you may be able to still grab good value at this time.
• Invest only after you have completed a level of on the ground due diligence on prospective companies.  Along with pulling SAIC filings on several ChinaHybrids, we have performed some level of DD on many firms. Investors need to know that there is hair on more names than we would like to admit. We will have details on this later and why we think SAIC filings may be a more useful investment tool than originally thought by many.
• Seasoned investors may want to deploy minimal capital across names that they think will pass audits (provided audits will be completed by top auditors).

Overall, we feel that the ChinaHybrid universe will continue to be a sentiment driven market vs. a fundamental driven market, at least until mid March/April when audit results will begin to offer clarity. We also need to be mindful of the SEC investigation into Chinese RTOs. A little help from CCME management would not hurt too.

We are maintaining our portfolio weight allocation of 80 % U.S.A and no more than 20% ChinaHybrids. We have also began shorting ChinaHybrids when our on-the-ground due diligence gives us reason to. Our over-exposure to the U.S. micro-cap sector has enabled us to perform nicely over the past several months, even as China RTOs struggle to gain sustained momentum.

Last week we removed NEWN from the tier one list and CELM from the GeoBargain list until they address significant differences between SAIC and SEC filings. From this point forward we will not code ChinaHybrids as a GeoSpecials or GeoBargains if SAIC filings significantly diverge from SEC filings or until more clarity is offered on this topic. see note

Disclosure: We have purchased puts as a precaution. We feel the current attitude creates volatility and can possibly test the nerves of any fragile long investors. Furthermore, we need to see more clairification and confirming evidence regarding customers as well as disclosure of SAT documents. A trading halt in shares poses a risk to option-related strategies. We are still performing on the ground due diligence before we make any long investment decision.