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.

Global Hunter on CCME:

We again visited CCME’s headquarters and reviewed all of its contracts with advertising clients and bus operators, tax filings, and bank statements for the last three years. We called or met 16 top advertisers, who verified a total of approximately $105MM of revenue or ~50% of our estimated 2010 revenue. We called China Telecom, and the exclusive advertising agents for Coca Cola and L'Oreal, who confirmed they have placed ads on CCME's platform. We also spoke to 17 bus operators, who confirmed that they have signed in aggregate 14,191 buses with CCME, or 52% of the total number of buses CCME reported. The amount of revenues and buses these advertising customers and bus operators confirmed with us matched the numbers in the contracts we reviewed at CCME. Shanghai Ba-shi Public Transportation and Eading Group also confirmed their partnerships with CCME. CCME until 2010 had been focused on expanding its intercity bus network in tier II and III cities, and has utilized regional advertising agencies which have extensive local relationships, rather than many of the national 4A agencies. We believe this niche market position and unique approach has made them less visible but kept them very profitable.

Reviewed contracts, tax filings and bank statements. The company presented to us all of its bus operator and advertiser contracts, tax filings and bank statements for the last three years. The taxes paid and cash balances appeared reasonable and matched GAAP reported numbers.

·         Verified advertising revenue. We called or met 16 of CCME’s top advertising clients. The revenue they confirmed to us matched what we saw in the contracts provided by CCME. Revenues from these advertisers added up to roughly $105MM, or ~50% of our estimated 2010 revenue. We believe the company currently has a total of 40 agencies and 20+ direct advertisers. The advertisers cited the large size of CCME’s bus network, the enclosed environment and captive audience thus a high “reach” rate, and availability of third party (CTR) media monitor as the reasons why they are engaged with CCME. The company in the past has been choosing regional agencies due to the regional nature of its bus network. These regional agencies have deep relationships with local brands, regional 4A agencies and other advertising agencies from which they receive orders. (See additional details on page 2.)

·         Confirmed number of buses. We spoke to 17 bus operators which operate up to 14,191, or 52% of the total number of buses the company reported. We believe CCME currently has 65-68 bus operators. We visited Shanghai Ba-shi Public Transportation (Group) Co., which confirmed they have 1,892 buses engaged with CCME. We also verified other bus operators that some internet bloggers claimed did not engage as many buses with CCME as the company reported. The numbers these bus operators reported to us matched the contracts we reviewed at CCME. These bus operators confirmed their contracts were 5-8 years in length and cited the large and established network (no competitors with similar scale), good credibility (make payments on time), and quality services (repair equipment on time and change programs twice a month) as reasons for the engagements. (See page 3.)

·         Met with management and Starr. We felt management was eager to prove the legitimacy and validity of its business. The company has been open and cooperative with our due diligence work. We believe the company is currently assisting Deloitte in completing its annual audit, and has been actively collecting third-party verifications. In addition, we visited Starr’s Shanghai office again. We believe Starr has done comprehensive DD and been closely monitoring the company. Our impression was that Starr continues to believe in CCME and is likely to remain as a long-term investor.

·         Eading and Switow. We called Eading Group, an authorized Apple reseller, who confirmed they have been selling Apple products through CCME's Switow platform. Besides receiving a small revenue share, CCME intends to convert Switow's consumer brands into advertising customers in CCME's platform.

·         Reiterate Buy. Our due diligence work further reinforced our thesis. We continue to believe CCME is a leader in the intercity bus advertising market with a unique business model and large growth potential. We reiterate our Buy rating and $26 price target.

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.

Jim Quigley, Global CEO Deloitte
Chris Lu, CEO Deloitte China
Joseph Lo, Chairman Deloitte China

From your website we learn that Deloitte’s corporate motto is “no stones left unturned”. The US capital markets are now waiting to see if indeed Deloitte will give meaning to the phrase.

The US stock market is in turmoil over the chaos caused by a raft of publicly traded companies created by reverse mergers into US shell corporations. Many of these companies are posting the most astounding financial results ever seen in public disclosures; yet at the same time, are riddled with inconsistencies in their public disclosures, and/or utter lack of transparency in their business models.

A case in point is an audit client of Deloitte, China MediaExpress Holdings (NASDAQ:CCME), a 700 million dollar market cap (fully diluted) company, claiming a run rate of revenues in excess of $250 million, $170 million in the bank, and the highest growth rate and profitability of any publicly traded media company in the world. Yet founders have sold their stock holdings at prices far below current market values.

From a transparency standpoint, it is nearly impenetrable. There are gross inconsistencies between its financial and tax filings in the China, and the financial disclosures it makes to the SEC. It claims enormous profits and growth rates, with a relatively tiny number of paid staff. It doesn’t disclose its major counterparties on either side of its advertising transactions.

The company’s financial credibility is inextricably linked to the integrity of its auditor. For the sake of the integrity of the US capital markets, you are implored to carefully consider SAS 99, the Consideration of Fraud in a Financial Statement Audit. This statement requires you to gather information necessary to identify risks of material misstatement, consider fraud risk factors, and evaluate at the completion of the audit whether the accumulated results of auditing procedures and other observations affect the assessment.

In particular, a degree of professional skepticism is required to protect the shareholders and the investing public, on whose behalf you are actually engaged. In detail, SAS 99 requires pro-active “brainstorming” to identify areas where the entity’s financial statements might be susceptible to material misstatement due to fraud.

By virtue of this letter, you are placed on notice of your need to consider the following warning signs within the corporate framework of China MediaExpress:

1. COMPETITORS

   Your firm audits Focus Media, VisionChina Media and AirMedia Group, three of the premiere outdoor media advertising companies in China. From those engagements, your firm should be uniquely aware of industry-specific competitive factors impacting gross margins, returns on capital, growth rates, profitability, and revenue per screen. As well, you should be intimately aware of the cyclicality of the advertising business, as reflected in the severe downturn of 2008 in the industry.

   All of these companies disclose one another as major competitors in their filings, yet none disclose ChinaMedia as a significant competitor. Yet, ChinaMedia has consistently reported financial results outperforming these firms by orders of magnitude.

   China Media Express now reports quarterly and TTM operating income far higher than Focus Media, making it the most profitable advertising company in all of China. The unexplained divergence from industry baselines should provide you the basis for a thorough SAS 99 inquiry.

   This table below was pulled from China MediaExpress's investor presentation. Would your other clients in the space agree that this table is a fair representation of the outdoor advertising business climate in 2010 China?

   

2. CASH

   Many stock frauds, such as those implicated in the S-Chip and P-Chip scandals, falsified cash balances as a basis for fabricating prior years’ profitability. The most common method of doing this was to “show cash” in accounts that was actually not the company’s own cash, but in effect “borrowed” -- arranged to be deposited in the company’s accounts utilizing a variety of undisclosed contingent liability arrangements.

   As a further concern, China Media’s huge reported free cash balances only earn .2%, far less than the income that would customarily be available to such a cash-rich entity.

   Given the lack of transparency of China Media’s historic disclosures, can you verify that all its cash balances as now reported are free of any such undisclosed contingent liabilities?

3. CREDIBILITY OF AGENCY COUNTERPARTIES

   Shanghai Apollo has been the only counterparty agency disclosed by CCME, appearing both at investor day presentations and referenced in analyst reports. Yet, it appears that this company is far too small to be support the 50 million RMB revenue booked by the company in 2010, with similar levels projected for 2011.

   Can you verify sufficient arms-length transactions with Shanghai Apollo to support its key role in China Media’s reported revenues? Can you verify other agencies engaging in arms-length non-related-party transactions sufficient to verify materially all of China Media’s revenues?

   [ http://www.scribd.com/doc/48093063/ShanghaiApollo08 ]

4. ACCOUNTING FOR BUSES UNDER CONTRACT

   China Media states in recent Press Releases that it operates its advertising network on 27,700 buses, which is the company’s sole stated source of revenue. Yet, most of these buses are run by very small operators, whose own statements about fleet size diverge materially from China Media’s. Additionally, many of these bus operators are a blend of company-owned and owner-operator buses. The owner-operator units would not be bound by advertising contracts of their company.

   Independent verification of the accuracy of the company’s stated numbers of buses in its contracted advertising network should be a critical factor in your audit.

5. FREE CONTENT

   The company reports in its last 10-K that it receives content for free from Fujian SouthEastern Television Channel and Hunan Satellite Television. Are there firm and verifiable contracts that would show there is not cost of content from Hunan to China MediaExpress?

6. LARGE NATIONAL AND INTERNATIONAL ADVERTISER CLIENTS

   China MediaExpress claims to advertise for large global brands including names such as Coca-Cola, Pepsi, China Mobile, China Telecom and Master Kong as stated in their investor presentation.

   Verification of payment streams deriving from invoices to Coca-Cola, Pepsi-Cola, China Mobile, China Telecom and the other top-10 advertisers publicly disclosed by ChinaMedia, are vital components of your audit work. [Ref.CCME investor presentation, page 6, here: http://ccme.tv/eng/ir/events/ec101021.pdf ]

7. MISMATCH BETWEEN SAIC AND SAT DOCUMENTS AND SEC FILINGS

   The Company’s SAIC documents show gross mismatches to its SEC reported financials in revenues, assets and liabilities. SAT tax filings of the company also appear grossly discrepant to the company’s reported financial filings with the SEC.

   Any discrepancies between SAIC SAT and SEC filings for ChinaMedia should be considered material issues of your audit and should be reconciled. Verification of taxes actually paid to government authorities should be a basic reference point of your audit.

8. GOVERNMENT LICENSING CLAIMS

   China MediaExpress claims to have an exclusive license from an agency of the Chinese government to operate screens on inter-city buses. [ Ref.: http://ccme.tv/eng/ir/events/ec101021.pdf page 27 ]

   However, the document presented by China MediaExpress does not appear to have any binding administrative power as there is no reference number. Meanwhile, plenty of other advertising companies operating in the inter-city bus screen advertising market can be found online.

   Independent verification of any exclusive agreement with government entities for inter-city bus advertising is a material issue of your audit, and should be verified and documented.

9. UNUSUAL INSIDER TRANSACTIONS

   Ou Wen Lin sold over 1 million shares at absurdly low valuation. On Dec 9th, 2010, CFO Jacky Lam purchased 100,000 shares at 15 USD per share; on the same date, insider vehicle Bright Elite Management also sold 100,000 shares at 15 USD.

   Were these fully disclosed arms-length, non-related-party transactions? Who was the counterparty to Ou Wen Lin’s sale? What other information regarding these transaction is the public entitled to know?

Deloitte can provide a great service to the capital markets by delivering a full and fair audit, guided by its obligation to bring to the task a full measure of “professional skepticism” as mandated by SAS 99. The easiest way to do this would just speak to the “competition” of China MediaExpress who are also Deloitte clients.

Thank you in advance for looking out for the investors.

Copies To:

Tom Kwok - Lead Partner of China MediaExpress
Vince Niblett - Global Head of Audit
Chaly Mah - Asian Pacific CEO & Regional Managing Partner
Pamela Brown - AP Regional Audit Leader
Uantchern Loh  - AERS Enterprise Risk Services
Charles Lip - Head of Audit China

The Geo Attorney, Bob, has been convering the CCME allegations and response from the company. So far, he has offered explanation of two pertinent issues which have been posted on the message board.

The first issue, which you can read his response to here, is regarding the patents and relationships with local government.

The second, read here, further explains government relations.

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.

FUJIAN, China--(BUSINESS WIRE)--China MediaExpress Holdings, Inc. (NASDAQ GS: CCME)  today denied the misleading and inaccurate allegations made in a recent report published by Muddy Waters. The Company announced that it would, as soon as possible, issue a public statement to refute these defamatory remarks and that it expected to be in a position to provide a thorough and detailed response within the next few days, notwithstanding Muddy Water’s apparently strategic decision to release its “report” at the outset of the Chinese New Year.

In a separate but related note, CME today also announced its December 2010 contract with Eading Group (http://www.eading.com/web/eadingcompany/rongyu/), one of Apple Inc.’s official distributors in China to advertise Apple products, specifically iPads, in CME’s SWITOW magazine, a new B2C shopping platform for its contracted advertisers.

Citron attempted to rock the boat by publishing a hit piece on CCME mid day, yesterday. Please see article here.

In a recent GeoAlert, we posted the article from Citron Research regarding CCME. In response to the article, we have prepared the following points to stress to our readers:

At first glance, the accusations do not look too impactful as to insinuate outright fraud. It appears to be merely an attempt to establish some doubt by exaggerating the truth. For example, the report questions CCME's competitive position by referencing a top ten list of companies Citron claims are in CCME market. Citron then shows that CCME is not in this list. While this last statement is "true", we had Bob dig a little deeper:

"I went through this report already. Yes. CCME is not in the list mentioned by this report. But I also went through these ten companies. I do not see any of them in the niche market of CCME (commute bus between different cities, similar to gray hound in the United States). The listed companies are in a different bus market (public transportation within a city, such as MTA of NYC)."

As CCME has had a strong run in recent months, we fully expected a hit piece from the short side. However, we did not expect one to be this imminent. Upon further reflection, they probably needed to begin to instill fear. CCME looked to be consolidating after its recent run, gearing up for a second leg up. Also, it’s possible that the hit piece is being timed to make an impact before the 2010 audit is completed, validating CCME.

Regardless, CCME is a tier-one company and we will take the allegations very seriously. We will consider beginning our own due diligence on CCME shortly. However, others have offered a swift response to the Citron Report. Please see SA article and Global Hunter comments. Conservative investors need to be aware that Citron and related players are to sure to keep firing away at CCME. Until a better argument is constructed against the CCME story we can not give up on this tier one name. Our exposure is less than 20% to the ChinaHybrid space and if we are going to make a bet on a non-IPO company it will be CCME.

Please see recent message board posts regarding our thoughts on CCME.

http://geoinvesting.com/forums/yaf_postsm5311_Bob-makes-initial-comment-on-one-of.aspx#singleMsg

http://geoinvesting.com/forums/yaf_postsm5308_Response-to-an-inquiry-from-a-GeoUser.aspx#singleMsg

Global Hunter on CCME:

*Summary:** We are currently on a due diligence trip in China and as part of our ongoing work on CCME, we talked again to a number of advertisers and bus operators and observed CCME's buses during this trip. We also checked government certificates/documents and the ranking from China Advertising Association, which in 2009 ranked CCME #6 in China by outdoor advertising revenue. During the last seven months, we have done extensive due diligence on the company, including interviews with advertising customers, bus operators, regional managers and CTR, an independent market research firm. We have visited Starr International and talked to the company’s independent auditor, Deloitte. We feel comfortable with CCME’s business and continue to believe in CCME’s growth potential. We maintain our Buy rating and $26 price target. ***

------------------------------------------------------------------------

*Highlights*

*Interviews with advertisers and bus operators.* In the last few days, we talked to a number of CCME’s customers and bus operators. The advertiser customers we spoke to confirmed their 2010 revenues with CCME, and stated that they continued working with CCME in 2011. Among the customers, Shanghai Apollo, a company owned by Shanghai People’s Fine Arts Publishing House, a state-owned company with 50+ years history and strong industry relationships, confirmed that they bought approximately 7 minutes (~RMB50MM revenue) in 2010 and expect to buy similar amount of advertising time from CCME in 2011. These advertisers and bus operators confirmed that CCME is the only inter-city bus media company with a national coverage and quality services.

*Experiencing the bus rides.* We again rode on the company’s airport buses in different cities. The following videos in Guangzhou and Chengdu airports, which are similar to our experiences, we believe can give investors a feel of CCME’s operations. http://www.soku.com/search_video/q_CCME<.

*Checked government documents.* We checked with China Advertising Association (CAA), an official government agency that all advertising platforms in China must register with. In 2007, CAA ranked CCME’s operating entity Fujian Fenzhong Media #15 by total advertising revenue http://www.cnadtop.com/news/FHDT/2009/2/6/b98600ff-c4d3-4646-ab84-fe9a5764b33a.htm, and #6 by outdoor advertising revenue in 2009 http://www.cnadtop.com/news/vision/2010/8/2/578d5f78-6a1a-4ff3-aa7e-d6bf2fcd55d0_3.htm;. The company is also a Class I Advertising Enterprise; we checked the company’s certificate issued by CAA. We have also reviewed the company’s five-year contract with TTAVC, an agency under the Ministry of Transport, which granted CCME the rights to operate copy rights protected contents on inter-city buses in the country.

*Reviewed various contracts and other channel checks.* We have in the past few months reviewed the company’s list of customers and bus operators. We reviewed the company’s contracts with advertisers and bus operators, rate cards, and we have also reviewed the company’s bank statements. We talked to CTR, an independent market research firm, who monitors over 70% of the media companies in China. CTR is conducting a comprehensive research on CCME, which evaluates the company’s business model, market share, customer feedback, and media value. We expect CTR to issue such research within the next month. We also learned Deloitte has done its initial part of the annual audit, and will continue after the Chinese New Year holiday. We expect the company to issue audited annual report in early March.

*Maintain Buy.* During the last seven months, we have done extensive due diligence. We interviewed a number of advertising customers, bus operators, and the company’s regional managers. We also talked to CTR, the third-party market research firm, visited Starr International’s office in Shanghai and talked to the company’s independent auditor, Deloitte. We have taken CCME’s buses in different cities and checked its advertisements and programs. We have also looked at CCMEs contracts with customers and bus operators, and government certificates and documents. We feel comfortable with CCME’s business and continue to believe in its growth potential. We therefore maintain our Buy rating and $26 price target.

Dec. 28, 2010 (Business Wire from this morning) -- China MediaExpress Holdings, Inc. (NASDAQ GS: CCME) today announced that CME formally launches SWITOW, a new B2C shopping platform for its contracted advertisers.

The SWITOW shopping platform includes: a) the SWITOW magazine that will be distributed in CME’s network, b) the SWITOW website (www.switow.com) and c) boutiques to be opened in certain major cities. Through the SWITOW platform, our advertisers will be able to promote a wide range of their products including popular consumer items such as electronic appliances, computers, mobile phones, apparel, fragrances and cosmetics, and household items. Customers may place orders by either calling the SWITOW hotline, or via the SWITOW website.

The contracted advertisers will provide the “lowest price guarantee” for all the items sold on the SWITOW platform. Moreover, some items sold through SWITOW will offer a longer warranty period than the traditional sales platform. CME has already signed contracts with many prestigious global and Chinese domestic companies or their distributors such as Apple, Sony, Toshiba, Adidas, Nike, Samsung, Phillips, Skyworth, Supor and others, to feature their most popular products on SWITOW and we expect others to join the platform. CME has hosted the SWITOW launching ceremony today in Fuzhou, where the press and representatives from China Enterprise Directors Association, HuaXia Bank and the contracted advertisers attended.

SWITOW orders will directly pass to the contracted advertisers who are solely responsible for order fulfillment and bear all inventory risks, as well as all post-sale obligations. A percentage of the sale of the listed items will be earned by SWITOW. SWITOW will reward the contracted advertisers by broadcasting the advertisements of the contracted advertisers on CME’s media network. CME’s expenses consist primarily of the cost of printing and distributing the shopping magazine, website management, and staffing and equipping the hotline center. CME will also pay a moderate monthly fee to bus operators, airports and other locations for the exclusive right to distribute the magazine.

Founder & CEO, Zheng Cheng, added, “This project further enhances the value and growth potential of CME’s platform. We believe this business model can make use of the strength of our passenger flows and will be successful as it helps contracted advertisers target sales through a new retailing channel. As media demand for CME’s network increases, we expect that this driver will accelerate the growing momentum of the advertising platform in CME. It also enhances value to advertisers, as advertisers not only spend their money on CME’s platform but they can also earn money from CME’s platform. Passengers will be able to enjoy lower prices for products sold through SWITOW. This platform should be a win-win-win situation for CME, the contracted advertisers, and passengers.”

CME’s Chief Financial Officer, Jacky Lam, commented, “As previously announced, this project has been in the works for several months. With the launch of the SWITOW platform, we are expanding our revenue sources by offering customer-direct sales to our advertising clients at a relatively low cost and our clients are able to optimize their advertising expenditures by using our media platform. We expect the incremental revenue and profits from this extension of our core business to be reflected in our 2011 financial results.”

CCME take another step to maximize shareholder value:

AN, China--(BUSINESS WIRE)--China MediaExpress Holdings, Inc. today announced that its Board of Directors has approved the implementation of a dividend policy on its common and preferred shares. Pursuant to the policy adopted by the Board, commencing with the six month period ending December 31, 2010, a semi-annual cash dividend of 5% to 10% of CME’s net profit will be paid upon receipt of the related financial statements by the Board. The Company’s Board of Directors will decide the exact payable amount at the corresponding board meetings in light of CME’s cash flows, expected liquidity needs and future corporate strategies.

CME’s Founder & CEO, Zheng Cheng, commented, “Consistent with our commitment to continuously maximize value to our investors, our Board of Directors agreed that with the Company’s exceptional balance sheet and solid free cash flow generation, it is time to recognize the ongoing support of our shareholders. With this payout ratio, we will continue to have the financial flexibility to invest in our high-return, high-growth projects.”

Global Hunter on CCME

China Media Express Holdings (Accumulate) CCME: Q3 beat. Shares exceed price target;

Lowering from Buy to Accumulate China MediaExpress (CCME) reported strong Q3 results that beat our/consensus estimates, driven by continued network expansion and favorable margin mix. The company generated strong operating cash flow and further strengthened its balance sheet with $170MM in net cash by quarter end. Management raised its FY10 net income guidance. We are increasing our FY10 and FY11 estimates. Shares are trading at 8x our FY11 EPS estimate, which we still consider as inexpensive. However, shares have rallied 180% from its bottom since September, and exceeded our previous price target of $21. We expect some profit taking after this substantial rally. We wait for further indication from management on the use of cash, including a potential dividend policy. We believe a dividend distribution would certainly help unlock the remaining value for shareholders and could serve as the next catalyst for the stock. However, given the appreciation in shares, we are lowering our rating from Buy to Accumulate while raising our 12-month price target from $21 to $24, representing 9x our updated FY11 EPS estimate.

Key Points:

Q3 beat. CCME reported Q3 revenue of $57.0MM, slightly ahead of our/consensus estimates of $55.6MM/$56MM. This represented 118% YoY growth and 6.4% QoQ increase, primarily driven by continued expansion in network coverage. Net income of $31.1MM or $0.81/share exceeded our estimate of $27.6MM or $0.76/share. The company generated strong operating cash flow of $31MM for Q3 and $69MM for the first three quarters. At the end of Q3, CCME had $170MM in cash and no debt, up from $139MM net cash at Q2 end.
 
Network expansion continued. The company increased the number of bus operators and number of buses from 59 and 22,775 at the end of Q2 to 63 and 24,400 at the end of Q3, respectively. The network now covers 18 regions in China. The company plans to add another 1,000-2,000 buses before year end. During Q3, CCME expanded its airport bus network to include Changsha and Chongqing airports in addition to the airports in Guangzhou, Fuzhou, Beijing, and Qingdao.
 
Gross margins maintained at high levels. Q3 gross margin was 76.8%, which was relatively stable from 78.7% in Q2 and compared to 67.0% in 3Q09. The YoY improvement was primarily due to increased contribution from its higher-margin airport bus segment, which contributed $15MM, or 26% of Q3 revenue, up from $13.1MM (or 24%) in Q2 and $7MM (or 16%) in Q1. In addition, increased contribution from embedded advertising and sales to direct advertisers which carry higher margins also contributed to margin improvement. Management expects gross margins to stay above 65% in the next 2-3 years as increasing concession costs are expected to be partially offset by ASP increases and the potential launch of new higher-margin services.
 
FY10 guidance raised. Management raised its FY10 net income guidance from the prior $82MM-$85MM to $100MM-$104MM, driven primarily by network expansion. The guidance indicated Q4 net income expectations of $22MM-$26MM. Although management expected additional expenses in Q4 related to new projects such as tour buses, and some marketing costs to promote the company's brand name, we view the new guidance as conservative because Q4 is typically a peak season for adversing business.
 
·         Raising estimates. For FY10, we are increasing revenue estimate slightly from $211MM to $213MM, net income from $100MM to $104MM, and EPS from $2.61 to $2.67. For FY11, we are increasing revenue from $288MM to $291MM (37% YoY), net income from $131MM to $133MM, and EPS from $2.65 to $2.69. We expect the growth during the next year to be driven by continued network expansion and higher ASP's. The company plans to increase ASP's by roughly 15% in January given fairly full utilization. In addition to network expansion, the company also considers increasing advertising time slots available from the current 20 minutes to 30 minutes to add capacity.
 
Raising price target but lowering rating from Buy to Accumulate after the recent rally. We expect the company to continue growing driven by market demand, network expansion, and increasing ASPs. We believe shares are still inexpensive at current levels, trading at 8x our FY11 EPS, or 6.3x if backing out net cash of $4.40 per share. However, shares have climbed 180% from its bottom in September and exceeded our previous $21 price target. We expect some profit taking by investors after the substantial rally. Therefore we are lowering our rating from Buy to Accumulate, although we are raising our price target from $21 to $24, which is 9x our increased FY11 EPS estimate. We wait for further indication from management on the use of cash, either for new projects or for a dividend. We believe a dividend policy would help unlock the remaining value for shareholders and could serve as the next catalyst for the stock.

Third Quarter 2010 vs. Third Quarter 2009

• Revenue increased by 118% to $57.0 million as compared to $26.1 million;
• Gross margin was 76.8% as compared to 67.0%. 
• Income from operations increased by 166% to $41.2 million as compared to $15.5 million.
• Net income increased by 167% to $31.1 million or $0.81 per diluted share as compared to $11.7 million or $0.56 per diluted share.
• As of September 30, 2010, the Company had approximately $170 million in cash.

Zheng Cheng, CME’s Founder and CEO, commented, “As expected, revenue and net income maintained very strong growth in the third quarter. The growth was primarily attributed to the power from our largest inter-city buses network in China where our advertising time sold, average advertising rates, number of our advertising customers, and a greater proportion of direct sales to agency sales increased substantially compared to last year.

“In addition, embedded advertising continued to generate a significant portion of our revenue as we have packaged and sold it separately to our clients since Q3 2009. The embedded advertising, which is displayed during the broadcasting of the content, has relatively low production cost, generates high margins and accounts for approximately 23% of our revenue for the nine months ended September 30, 2010.

“Furthermore, our year-to-date results reflect the success of our airport express bus business. Since the first launch of this new business line at the beginning of 2010, the advertising packages sold for airport express buses have been at premium prices, because of the demographics of airport express bus travelers, exclusivity for all the buses from the airports and the unique captive environment. As a result, the expansion of this business has generated significant revenue and has produced higher gross margins overall. For the nine months ended September 30, 2010, the revenue generated from airport express buses was approximately $35.1 million, of which approximately $15.0 million was generated in the third quarter. Our network today covers six large and important airports in China: Beijing, Fuzhou, Guangzhou, Qingdao, Changsha and Chongqing.”

Mr. Cheng continued, “We continue to grow our bus network through new contracts with bus operators in regions we already serve and by expanding into new regions in this highly fragmented niche market. Since the start of this year, we have grown our network by more than 4,000 express buses and have expanded into five new regions: Zhejiang, Hunan, Jianxi, Henan and Inner Mongolia. We have long-term contracts in place, ranging from three to eight years with 63 bus operators.”

Jacky Lam, CME’s Chief Financial Officer stated, “As of September 30, 2010, we had approximately $170 million in cash up from $139 million as of June 30, 2010. Cash generated from operating activities for the first nine months of 2010 was $69.0 million (of which $30.8 million was generated in the third quarter), compared to $29.9 million generated in the same period of 2009. Net cash used in investing activities during the current nine month period was $3.6 million. Our cash resources continue to be sufficient to meet both our short-term and long-term liquidity needs, capital expenditure requirements to achieve our expansion plans, including internal growth initiatives as well as potential acquisitions.”

Increase 2010 Net Income Guidance

Based on year-to-to-date results and expectations for the fourth quarter, the Company is increasing its 2010 net income guidance which is expected to be in the range of $100 million to $104 million compared to the previous net income guidance of $82 million to $85 million (on a non-GAAP basis, exclusive of non-cash charges for (i) share based compensation in connection with the granting of options under the Company’s share incentive plan expected to be adopted later in 2010 and (ii) deemed dividends on outstanding convertible preferred shares).

Mr. Cheng concluded, “As we have mentioned in the past, we are working on several additional opportunities to increase our market share and reinforce our position as one of the leading players in the out-of-home advertising space. Furthermore, mergers and acquisition remain a corporate priority. We are very proud of our achievements and look forward to continued growth during the years ahead.”

Global Hunter:

Estimates Revision: We expect revenue to be roughly in line with our estimate, but we are increasing our gross margin estimate to 75% from our previous conservative estimate of 64%. We are raising our Q3 EPS estimate from $0.59 to $0.76, as we are also lowering our diluted share count. For ’10 we are maintaining our previous revenue estimate, but increasing our EPS from $2.38 to $2.61. For ‘11, we are maintaining our revenue estimate at $288MM, but increasing our EPS from $2.55 to $2.65, as a result of increased gross margin assumption in ’11 from 65% previously to 67.4%.

Confirmation that China Mediaexpress has obtained the State Administration of Radio Film and Television of the PRC (the “SARFT”)  license. Source: Spread sheet from SARFT website.

Translation from row 2276 (item 2272): (Provided by attorney)

2272   福建                       福建分众传媒有限公司                 (闽)字第068号

2272  Fujian                   Fujian Focus Media Co., Ltd.     (Min) Zi No. 068

Fujian is the name of the province name where CCME lies in. The number of the certificate shall be (Min) Zi. No. 068. Min refers the abstraction of Fujian (similar to PA refers to Pennsylvania).

It did not mention when CCME obtained the license in this document. It states that CCME (and other companies as well) passed the annual inspection for this license for the year of 2009 and can hold the license for 2010.

China Media Express Holdings, Inc (Buy) CCME:
Our extensive due diligence reinforces our thesis; Reiterate Buy

During our recent trip to China, we conducted extensive due diligence and channel checks on CCME’s business. We met with the company's entire management team including six regional managers, checked CCME’s sales contracts and bank statements, and interviewed advertising agencies, direct advertisers and bus operators.

We took buses in Beijing, Fuzhou and Guangzhou to view the company’s operation and advertising programs. In addition, we met with a representative from CTR, a market research firm, and two directors at Starr International. Our due diligence results reinforce our thesis on the company and we continue to believe that CCME is a leader in its niche market. We believe the fundamentals of the business remain solid. Thus, we reiterate our Buy rating. Please let me know if want the full note.

Key Points:
 
Interviews with advertising customers. CCME works with ~30 ad agencies who contribute ~70% of total revenue, with the remaining 30% from direct advertisers. We interviewed a number of ad agencies and direct advertisers, including agencies which purchase advertising time in Beijing and Guangzhou airports. The revenue amount these agencies disclosed to us matched that in the sales contracts and the customer list and revenue breakdown presented by CCME. These customers represent annual contract value of approximately RMB400MM ($60MM), or ~30% of our estimated ‘10 revenue. The agencies receive business either directly from brands or from 4As or other large advertising agencies. These advertisers stated that CCME’s large network and quality customer service make it the top choice in the inter-city bus market.
Interviews with bus operators. CCME’s network currently covers over 60 bus operators and close to 25,000 buses. The bus operators we interviewed ran a total of 4,000 buses. They receive concession fees ranging between RMB600 and RMB1,500 per bus per month, which we view as considerably low as compared to its peers in other outdoor media markets. We believe the low cost is due to a lack of major competitors in this niche market as well as weak bargaining power from bus operators who operate in a highly fragmented market. Concession fees typically account for 70%+ of COGS of a media company. Continuing to control concession fees is a key task for a media company. We believe this low level of concession charges explains CCME’s high margin profile.

Taking the rides. We took CCME’s buses in Beijing, Fuzhou and Guangzhou to view its operation and programs. The programs were rotated with 30 minutes of entertainment content and 10 minutes of advertisements. We saw brands including multinational names such as Pepsi-Cola, P&G, Coca-Cola, Siemens, and Samsung, and well-known domestic brands such as China Mobile, China Post, Wanglaoji Beverage, Tongyi Green Tea, Huangjin Dadang Nutrition and Yili Dairy, among others. Bus operators expressed favorable feedback from passengers; we believe the availability of various entertainment content makes passengers more receptive to advertising programs.

Meeting regional managers. We met with regional managers in charge of sales and customer service in Beijing, Guangdong, Sichuan, Jiangsu, Hubei and Fujian. We cross checked with them the number of buses, top agency customers and total revenues in each region. Currently there are ~30 people in each region who provide customer service to existing customers and develop new local customers (esp. direct advertisers) in the region.

Visit to Starr International. We visited Starr’s Shanghai office and met with directors who stated they have done a thorough due diligence before their $30MM investment in January, including hiring ACNielsen to conduct due diligence and market research, and Deloitte to audit CCME’s financials. They indicated that they monitored CCME’s operation and financial results on a monthly basis and continued to believe in its fundamentals, which is further evidenced by Starr’s additional investment of $13.5MM announced earlier this week to purchase 1.5MM common shares from early investors of the company.

Reiterate Buy. We have spent substantial time and effort in our ongoing due diligence over the last three months, the results of which reinforced our thesis. Shares are currently trading at just 6x our ’10 EPS (or 4x after backing out $139MM or $3.89/share in net cash). We expect more positive catalysts in the near term as the company continues to expand its network. As such, we reiterate our Buy rating and $21 price target, which is 9x our ’10 EPS of $2.38.

Global Hunter Disclaimer

China MediaExpress Holdings, Inc. announced that Starr International Company, Inc. (“Starr International”), through its wholly-owned subsidiary, Starr Investments Cayman II, Inc. (“Starr Cayman”), has agreed to purchase an aggregate of 1.5 million shares of the Company’s common stock in two private transactions. Mr. Ou Wen Lin and Mr. Qing Ping Lin, two of CME’s founding shareholders, through their holding companies, Thousand Space Holdings Limited and Bright Elite Management Limited have agreed to sell 1,000,000 and 500,000 shares of the Company’s common stock, respectively, to Starr International at $9 per share. Although the agreement was signed after the Chinese Golden Week holiday, it has been under discussion between the parties since the middle of September, and the selling price was based on CME’s average closing trading prices for that month. It is CME’s understanding that Mr. Ou Wen Lin and Mr. Qing Ping Lin intend to use proceeds from the stock sale to finance their other personal business projects that are unrelated to CME.

Starr International is one of the major investors in CME, having invested, through Starr Cayman, $30 million in January 2010 in the form of 1,000,000 shares of CME Series A Convertible Preferred Stock at $30.00 per share, together with 1,545,455 of CME common stock purchase warrants.

Mr. Zheng Cheng, CME’s Chairman and Chief Executive Officer, noted, “We are pleased that Starr International increased its investment in CME, which is indicative of their continued confidence in our business plan and growth prospects. This transaction is also an indication that Starr International views its investment in CME as a very sound long-term investment for the firm and its investors. We are glad that the Ou Wen Lin and Qing Ping Lin were able to satisfy their personal liquidity requirements while meeting Starr International's investment objectives in a manner consistent with our understanding of their intention to avoid sales into the public market.”

China MediaExpress is one of the many ChinaHybrid companies that has had its business model and financial integrity questioned in recent weeks. In an attempt to inform investors of the potential reasons that short sellers may utilize to attack CCME, we listed a few possible points of contention with potential rebuttals.

A) Uncertainty over the need to obtain licenses/registration in certain jurisdictions. We have also sent the following three questions to management on more than one occasion).

In addition to the Advertising Law, the SAIC promulgated the Out-of-Home Advertising Registration Administrative Regulations on December 8, 1995, as amended on December 3, 1998 and May 22, 2006, which also governs the out-of-home advertising industry in China. Under these regulations, out-of-home advertisements in China must be registered with the local SAIC before dissemination. The advertising distributors are required to submit a registration application form and other supporting documents for registration. After review and examination, if an application complies with the requirements, the local SAIC will issue an Out-of-home Advertising Registration Certificate for such advertisement. The content, quantity, format, specifications, periods, distributors’ name, and locations of dissemination of the out-of-home advertisement must be submitted for registration with the local SAIC. A change of registration with local SAICs must be effected in the event of a change in the distributor, the location of dissemination, the periods, the content, the format, or the specifications of the advertisements. It is unclear whether the SAIC, or any of its local branches in the municipalities and provinces covered by CME’s network, will deem CME’s business as out-of-home advertising business, and thus require CME to obtain the Out-of-Home Advertising Registration Certificate. See the section entitled “RISK FACTORS — Risks Relating to CME — If the PRC government determines that CME was obligated to register as an out-of-home advertising network operator, it may be subject to administrative sanctions, including discontinuation of its business for failure to complete such registration”.

According to the Out-of-Home Advertising Regulations, advertisements posted or placed on public transportation vehicles, such as inter-city express buses, are considered out-of-home advertisements and must be registered as advertising distributors. However, it is unclear whether the advertisements displayed on CME’s network would be considered out-of-home advertisements. Further, although the PRC Advertising Law defines an “advertising distributor” as a legal person or other economic entity that distributes advertisements for advertisers or an advertising operator entrusted by advertisers, the Out-of-Home Advertising Regulations do not define “advertising distributor.” Therefore, CME is unable to determine whether it is considered as an advertising distributor for purposes of the Out-of-Home Advertising Regulations and therefore is obligated to obtain the registration certificate.

Question: How is it unclear whether CCME is an out-of-home advertiser? It seems clear that they are.

Possible explanation provided by the GeoTeam's attorney

I read the Regulation. This regulation makes a list of out-of-home advertisements. The advertisement network of CCME is not clearly stated in the list. However, the statements regarding some types of advertisement in the list are very ambiguous. The advertisement network of CCME may be interpreted as one type within the list. For this, it depends on the deliberation of local AICs to determine whether the advertisement network requires the registration.

2. In addition, on December 6, 2007, the State Administration of Radio Film and Television of the PRC (the “SARFT”) promulgated the December 2007 Notice pursuant to which the broadcasting of audio and visual programs, including news, drama series, sports, technology, entertainment and other programs, through radio and television networks, the Internet and other information systems affixed to vehicles and buildings and in airports, bus and railway stations, shopping malls, banks, hospitals and other out-of-home public media is subject to approval by the SARFT. The December 2007 Notice requires the local branches of SARFT to investigate and record any organization or company engaging in the activities described in the December 2007 Notice without any permissions, send written notices to such organizations or companies demanding their compliance with the December 2007 Notice, and report the results of such investigations to SARFT by January 15, 2008. CME has not received any notice from the SARFT or any of its local branch demanding its compliance with the December 2007 Notice. For risks relating to the December 2007 Notice, see the section entitled “RISK FACTORS — Risks Relating to CME — CME may be required to obtain an approval from the PRC State Administration of Radio, Film and Television, or SARFT, under the Notice on Strengthening the Administration of Audio and Visual Media on Vehicles, Buildings and Other Public Arena, or December 2007 Notice, or be required to remove entertainment programs from its advertising network”.

3. To ensure that CME’s business complies with the Out-of-Home Advertising Regulations, CME made inquiries with the local SAICs in the cities in which it has operations regarding whether it is required to obtain Out-of-Home Advertising Registration Certificates or to proceed with other procedures, such as filing, in these cities. With the exception of the local SAIC in Jiangsu province and Xiamen city of Fujian province, all the local SAICs with whom CME consulted do not expressly require CME to register with them. The officials at different levels within the local SAIC in Jiangsu and Xiamen city expressed different views on whether the advertisements shown on CME’s digital television displays should be regarded as out-of-home advertisements. CME recently again inquired with the local SAIC of Xiamen whether it is required to be registered and was verbally told that the advertisements displayed on CME’s digital television displays do not need to be registered with Xiamen SAIC and that CME does not need to obtain the Out-of-Home Advertising Registration Certificate according to Out-of-Home Advertising Regulations, but is only required to file the content of advertisement with the Xiamen SAIC. However, the filing procedures are unclear and it is also unclear whether penalties will be imposed if CME fails to make such filings. In addition, CME tried to re-apply for Out-of-Home Advertising Registration with the local SAICs in Jiangsu, but the officials rejected such applications saying that CME does not need to register under current applicable regulations. In light of such circumstances, there can be no assurance that CME will be able to complete the registration procedure in compliance with the new out-of-home advertisement provisions in Jiangsu, or at all. If CME is required to complete the registration procedure with the local SAIC in Jiangsu but fails to do so, the relevant authorities in Jiangsu may require CME to forfeit its advertising income sourced in Jiangsu or subject it to fines. CME may also be required to discontinue its operations in Jiangsu, which would result in a breach of contracts with its clients and its business, financial condition and results of operations would be materially adversely affected.

On December 6, 2007, SARFT promulgated the December 2007 Notice pursuant to which the broadcasting of audio and visual programs, including news, drama series, sports, technology, entertainment and other programs, through radio and television networks, the Internet and other information systems affixed to vehicles and buildings and in airports, bus and railway stations, shopping malls, banks, hospitals and other out-of-home public media is subject to approval by the SARFT. The December 2007 Notice requires the local branches of SARFT to investigate and record any organization or company engaging in the activities described in the December 2007 Notice without any permissions, send written notices to such organizations or companies demanding their compliance with the December 2007 Notice, and report the results of such investigations to SARFT by January 15, 2008. To date, CME has not received any notice from the SARFT, or any of its local branches in the municipalities and provinces included in its network, demanding its compliance with the December 2007 Notice. CME made inquiries with SARFT regarding whether it is required to obtain an approval and the procedures of obtaining such an approval. Due to the lack to clear implementing rules and regulations for the December 2007 Notice, CME is unable to obtain a written confirmation from SARFT as to whether it is required to obtain an approval under the December 2007 Notice and the procedures thereof. To ensure that its business complies with the December 2007 Notice, CME submitted an application for approval with the local SARFT in Fujian in July 2008 but has not obtained any approval to date. In the event that the SARFT, or any of its local branches in the municipalities and provinces included in CME’s network, requires it to obtain an approval, there is no assurance that it will be able to obtain such approval. If it is unable to obtain such approval, it may be required to discontinue its operations, which will decrease the attractiveness of its advertising network may cause its clients to reduce or cease the purchase of advertising time slots from it, and could materially adversely affect its business, financial condition and results of operations.

Question: Can CCME provide investors with a copy of the regulations that cover the licensing requirements of its business with the SIAC and SARFT? Do competitors have these licenses? Can CCME provide the letters from the agencies claiming that it does not need approvals? Can Jiangsu SAIC provide CCME with anything other than a verbal acknowledgment that it does not need approvals?

Possible explanation provided by the GeoTeam's attorney

This type of regulation is different from the law published by the congress and/or State Council. Usually, it is difficult to find an English version in public. Whether the competitors have the licenses is a good question. Usually, the local authorities do not issue a letter to state that there is no such a requirement. For the SARFT requirement, I think the video network of CCME is required to have the approval. However, as the regulation was only issued in Dec. 2007, it is possible that till the Jan of 2008, there was no internal implementation of the rule yet and the local authority does not know how to implement this regulation.

B) SAIC do not match SEC files. Less than stellar credit report. 

Possible rebuttal that investors may pose

• CCME corporate structure is a variable interest entity (VIE). SAIC filings for VIE are not audited and thus can't definitively indicate that fraud is present.
  
• The due diligence process carried out by Starr International, with regards to a private placement, was extensive.
  
• The $17.6 million dividend payment to Cheng Zheng on February 5, 2009 shows that the company had a substantial amount of cash going into 2009, proving SAIC filings are useless:
  
  "For the year ended December 31, 2009, HKMDF approved a cash dividend payment of $17.6 million to the founder shareholders On February 5, 2009, the board of directors of HKMDF approved and paid a dividend of $17,570 (equivalent to RMB120 million) or $1,757 per share (before the effect of Share Exchange) payable to Cheng Zheng, the sole shareholder of HKMDF at the date of dividend declaration. "

C) The shorts argue that gross margins are too high to be real, and also that they will go down over time in this business.

We have provided a possible rebuttal provided by a GeoContributor.

Shorts argue that Gross margins in the LCD advertising business tend to drop substantially over time—look at the trends in FMCN.

Really? Look closer. FMCN's gross margins have contracted because they've ventured into lower margin revenue streams such as internet advertising. If you filter out those streams and look only at their LCD business, you will see that their margins have remained quite strong.

Note that these margins are on par with CCME's margins.

Additional Possible rebuttal that investors may pose

• CCME is enjoying a competitive position due to its exclusive arrangement with the local government.
  
• Operates in regions/markets with favorable demographics/rates.
  
• CCME LCDs are displayed in long haul inter city buses. People are sitting on the seat and can watch on bus programs comfortably. VISN LCDs are placed on inner city buses or subway. These passengers are short time passengers, most are standing on the bus. The standing people can easily block the view of LCDs. Due to the short term trip, adding the noising environment, people are not interested in watching LCD. So in terms of efficiency, CCME is far more effective than VISN.  (Source: comment by eric_wuwei on Seeking Alpha).

D) Competitors have downplayed CCME position in the industry.

These companies may just be baffled and jealous of CCME accomplishments. Some companies just get it right while others do not.

E) The more pressing issue: Now is the time to question how the market may react to what looks like weak EPS growth for the remainder of 2010 and 2011.

Possible rebuttal that investors may pose

Based on 2010 second quarter results, when the company crushed estimates, the company may be able to easily exceed estimates which probably do not take into account acquisitions, the addition of buses to its network or share repurchases.

F) Questions as to why CCME needed to raise money from Starr international/questionable transactions

• The February 2009 dividend payment to one shareholder was rather large. This dividend was 18.5% of sales.
  
• The company then raises $30.0 million from U.S. investors in 2010. Why does a company that will have a nearly $200 million cash balance by the end of 2010, has an annual expense run rate of only $12.0 million, has net-margins of over 50.0% and is tracking at an annual operating cash flow run rate of nearly $80.0 million need to raise money? This issue becomes even more ambiguous based on the company's historical lack of investing cash flows.

We have no comment on why CCME needed to raise money. According to SEC filings, CCME is a cash cow. Given that no acquisition has been announced and CCME's strong balance sheet, we see little reason for the Starr raise.

What should CCME do?

If CCME was willing to pay a dividend when it was a much smaller company, paying one now should be a no brainer. We would also urge the auditor to issue a statement commenting that they have seen SAT files and that they were pulled independently.

Second Quarter 2010 vs. Second Quarter 2009 :

• Revenue increased by 180% to $53.5 million as compared to $19.1 million.
• Gross margin for the current second quarter was 79% as compared to 62%.
• Income from operations increased by 245% to $38.3 million as compared to $11.1 million. 
• Net income increased by 244% to $28.5 million or $0.80 per diluted share as compared to $8.3 million or $0.40 per diluted share.

First Half 2010 vs. First Half 2009

• Revenue increased by 159% to $98.0 million as compared to $37.9 million.
• Gross margin for the current first half period was 70% as compared to 62%.
• Income from operations increased by 189% to $62.5 million as compared to $21.6 million.
• Net income increased by 196% to $46.6 million or $1.07 per diluted share as compared to $15.7 million or $0.75 per diluted share.
• As of June 30, 2010, the Company had more than $139 million in cash.

Zheng Cheng, CME’s Founder and CEO, commented, “We are very pleased with the record first half results and continuous growth of our business. Our revenue and net income for the first half of 2010 grew by 159% and 196% respectively when compared to the same period of 2009, but more importantly has already surpassed revenue and net income reported for 2009 as a whole. The increase was attributable to several factors including:

• total amount of advertising time sold.
• higher average CPM rates.
• expansion of our advertising base and geographic coverage.

Furthermore, since the third quarter of last year we started to generate additional revenue from the embedded advertisement displayed during the broadcast of the entertainment content and in addition to the revenues generated by the airport express buses, a business which we entered in early 2010. In the beginning of the year, we made the important decision to implement premium advertising rates for airport express buses compared to inter-city bus advertising rates. As a result of these premium advertising rates, we were able to generate $20.1 million of additional revenue for the first half of 2010 (out of which $7 million were generated in the first quarter), as compared to the same period of 2009, when this business was non-existing. Our network today covers the airports of Beijing, Fuzhou, Guangzhou and Qingdao.”

The Company reaffirms its recently revised 2010 net income guidance which is expected to be in the range of $82 million to $85 million (on a non-GAAP basis, exclusive of non-cash charges for (i) share based compensation in connection with the granting of options under the Company’s share incentive plan expected to be adopted later in 2010 and (ii) deemed dividends on outstanding convertible preferred shares). Again, these projections exclude the impact of any possible acquisitions, additional of new buses and new investments in other media projects in 2010.

Mr. Cheng concluded, “We are very proud of our achievements. We have a dedicated management team which continues to work diligently to take advantage of several opportunities to increase our market share and further strengthen our position as China’s largest television advertising operator on inter-city and airport express buses. China's quick economic recovery in 2009, the rapid growth of advertising spending in China (which increased by 13.5% to $74 billion in 2009), and the better-than-expected outdoor advertising market trends, have paved the way for the ads market to reach new heights in 2010.”

As of the end of the second quarter CCME had:

• Zero long-term or short-term  debt
• Current ratio of 6 to 1
• $139.3  cash balance
• Annualized operating cash flow run rate of $76.4 million

China Mediaexpress added another 805 buses to its network.

CME signed these four new contracts to supply entertainment programming along with paid advertising for a period of five years, as follows:

A contract with a bus operator of 356 inter-city express buses originating from the province of Jiangxi, which commenced on June 1, 2010.

Three contracts with the bus operators of 449 inter-city express buses originating from the city of Hangzhou, the capital of Zhejiang province. One of the contracts commenced on June 1, 2010 and the remaining two commenced on July 1, 2010.

This update, coupled with the 1751 additional busses added since the company's original guidance, should ensure that CCME

• is well on its way to easily exceeding its guidance.
• is alleviating some concerns we had with respect to the abilty to achieve consistent quarterly 30% EPS growth.

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially)

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors’ portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question.

China’s largest television advertising operator on inter-city and airport express buses, today announced that based on the latest developments, including the expanded geographic coverage, increased number of inter-city buses, and higher margins from the airport express buses platform, it is revising its 2010 net income guidance.

The revised guidance calls for 2010 net income to be in the range of $82 million to $85 million (on a non-GAAP basis, exclusive of non-cash charges for (i) share based compensation in connection with grants under the Company’s share incentive plan expected to be adopted later in 2010 and (ii) deemed dividends on outstanding convertible preferred shares), compared to the initial 2010 net income guidance of $71 million to $75 million.

Jacky Lam, CME’s Chief Financial Officer stated, “Our revised 2010 net income guidance reflects the continued growth of our business from existing revenue sources, and excludes the impact of any possible acquisitions, additional new buses, new revenue streams and any new investments in other media projects in 2010.

“We expect to continue to benefit from China’s rapid increase in advertising spending - which is projected to remain one of the fastest growing advertising markets in the world - sustained economic growth, and increases in disposable income and domestic consumption. We plan to continue to grow our business organically and we are also actively looking for acquisition opportunities within our core business platform. Furthermore, we are working hard to finalize several new projects which we believe will further enhance CME’s shareholder value. We have sufficient resources to fund our business expansion plans, including internal growth initiatives as well as potential acquisitions.”