China Mediaexpress Holdin (PINK:CCME)

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.

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.

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

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 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.

FMCN	2006	2007	2008	2009
Revenue	211,905	410,228	642,335	505,035
COGS	81,380	184,465	347,234	339,134
Gross Profit	130,525	225,763	295,101	165,901
Gross Margin	61.60%	55.03%	45.94%	32.85%

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.

FMCN LCD	2007	2008	2009	2010 1Q	2010 2Q
Revenue	183,528	239,505	208,499	80,056	55,428
COGS	51,850	77,866	75,467	14,486	14,945
Gross Profit	131,678	161,639	133,032	65,570	40,483
Gross Margin	71.75%	67.49%	63.80%	81.91%	73.04%

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

CCME	2007	2008	2009	2010 1Q	2010 2Q
Revenue	25,837	62,999	95,934	44,525	53,511
COGS	13,164	25,065	32,937	17,931	11,398
Gross Profit	12,673	37,934	62,997	26,594	42,113
Gross Margin	49.05%	60.21%	65.67%	59.73%	78.70%

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.

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)

- Is the company's auditor ranked in the top 100?
- Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm.  Short sellers have been using this information as a tool to validate their opinions. 
- Are the company's internal controls satisfactory?
- Are their any outstanding legal issues?
- Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better. (we will use annualized cash flow run rate and eliminate non-cash charges from account liabilities ).
- Cash divided by Current Liabilities is greater than one. This is the most conservative liquidity ratio.- Is the company buying back stock?

Criteria	Meets Criteria	Notes
Top 100 Auditor	Yes (Big 4)	Deloitte Touche Tohmatsu; Note that the PCAOB (Public Company Oversight Board) is denied access to conduct inspections. This appears to be a common occurrence for auditing firms located in China, as many reputable auditing firms also share the same issue.
Located in U.S.A	No	Hong Kong
Satisfactory Internal Controls	YES	The Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2010,  disclosure controls and procedures were effective in ensuring that material information relating to us, is made known to the Chief Executive Officer and Chief Financial Officer by others within our company during the period in which this report was being prepared.
No Legal issues	NO	Uncertainty over the need to obtain an advertising license in certain jurisdictions.(We will gain more clarity on this issue).
Customer Concentration	YES	In the three months ended March 31, 2009 and 2010, there was no single customer that contributed for 10% or more of the Group's revenue.
Cash Flow Ratio is Greater then 1	YES	2.29
Cash ratio is greater than 1	YES	5.05
Buying Back Stock/Insider Buying	No	n/a

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.

New independent article available on CCME

Excerpts from super-trades .com

Sunday, December 20, 2009

CCME Should Be The Next Chinese Momentum Stock

This year we have seen many Chinese momentum stocks make runs of $10-$20+ per share: TRIT, RINO, FUQI, CAGC and the list goes on. All of these stocks were in hot sectors with growing sales and EPS.  www.super-trades.com.

Lately, Chinese out of home advertising stocks have been on fire. Focus Media holdings (FMCN), and VisionChina Media (VISN) are both at or near 52 week highs with strong trading volume. FMCN, closed at $16.81 on Friday, December 18, which represents a 20 P/E against the average 2010 EPS estimate of $0.83. VISN, closed at $12.05 on Friday, December 18, which represents a 22 P/E against the average 2010 EPS estimate of $0.54.

I think Wall Street is about to discover a third major player in the same sector and find it incredibly undervalued compared to FMCN and VISN. Enter China MediaExpress Holdings (CCME), which operates the largest television advertising network on inter-city express buses in China. CCME's clientele includes local brand names as well as those well-known international and national brands such as Coca Cola, Pepsi, Siemens, Hitachi, China Telecom, China Mobile, China Post, Toyota, Bank of China and China Pacific Life Insurance.

CCME, formerly TMI, was acquired in a SPAC transaction this October. They have $41m of cash with no debt. Revenues grew 65% last quarter and net income grew 43%.

Net Income through September 30, 2009 was $27.4m and the Company appears to be on track to take on management's full year target of $42m. CCME has approximately 24m shares outstanding and approximately 10m warrants with a strike price of $5.50. Estimated fully diluted shares outstanding using the treasury method will be approximately 29m at the end of 2009. EPS for 2009 should be $1.35-$1.45 if they hit the target. (The CEO said, “Historically, our fourth quarter is seasonally our best quarter. It appears that the 2009 fourth quarter will be no exception.”). For 2010, managment is targeting $83.5m in net income and fully diluted shares outstanding should be approximately 35m, for a targeted 2010 net income of $2.39 per share.

To apply the forward 2010 P/E of 20 that competitors FMCN and VISN currently have to $2.39 EPS would give CCME a price per share of $47.80. What makes CCME even more interesting is it currently has a trading float of only approximately 750k shares with 168k of those shares sold short.

If Wall Street likes FMCN and VISN enough to give them a 20 P/E, they should salivate over CCME once they discover the fundamentals of this Company.

Disclosure - I am long CCME since it was TMI under $8. This blog is my personal opinion and not investment advice. Never chase stocks and always do your own due diligence and be responsible for your trades.

Update: January 14, 2010

CCME - "The Hangover"

The movie, "The Hangover", was a Las Vegas-set comedy centered around three groomsmen who lose their about-to-be-wed buddy during their drunken misadventures, then must retrace their steps in order to find him. For CCME, my first pick of 2010 that I believe has strong potential to be in the www.super-trades.com 100%+ gainers club, you must retrace their steps to get the full potential of this story.

China MediaExpress Holdings (CCME), operates the largest television advertising network on inter-city express buses in China. CCME's clientele includes local brand names as well as those well-known international and national brands such as Coca Cola, Pepsi, Siemens, Hitachi, China Telecom, China Mobile, China Post, Toyota, Bank of China and China Pacific Life Insurance.

CCME, formerly TMI, was acquired in a SPAC transaction this October. SPAC transactions usually involve warrants which can create an overhang in the common stock until they are converted. CCME's warrant "hangover" is almost over as they announced that January 29, 2010 is the last day for warrant redemption. According to this article about SPAC warrant overhang, "after the warrants expire and the overhang is over though, all the investors that wanted to own shares of this stock can now buy them without fear that they are over-paying. This can result in significant out performance in the stock, regardless of the market's performance."

The press release told me three things:

1) CCME must be planning a large, accretive acquisition that will enable them to achieve the 100% net income growth in 2010 to $83.5m. From the PR, "In addition to enlarging our market share and geographic coverage through agreements with additional bus operators, we are now exploring possible M&A opportunities." They will now have approximately $100m in cash after this transaction and the warrant conversion.

2) CCME has been planning this acquisition and private placement for sometime. From the press release, Jacky Lam, CME’s CFO added, “We are pleased with the valuation that Starr International offered and appreciate the thoroughness of their validation procedures. Having worked with them over the past several months on negotiating the terms of the investment, we believe that they have gotten to know CME’s business and management and their decision to proceed is a strong vote of confidence in our business model.”

3) CCME has attracted a powerful institution as a major investor. "We are delighted to have Starr International, a respected investment firm with a significant presence in China and the US, as one of our major investors and we are delighted in the firm’s confidence in CME, our business plan and growth prospects.” Starr is headed up by Maurice Greenberg, from AIG.

The numbers show me that CCME is extremely undervalued and has some appreciating to do with the warrant "hangover" ending.

CCME will have approximately $100m of cash with no debt. Revenues grew 65% last quarter and net income grew 43%. Net Income through September 30, 2009 was $27.4m and the Company appears to be on track to take on management's full year target of $42m. CCME had approximately 24m shares outstanding and approximately 10m warrants with a strike price of $5.50 at the end of 2009. Estimated fully diluted shares outstanding using the treasury method will be approximately 29m at the end of 2009. EPS for 2009 should be $1.35-$1.45 if they hit the target. (The CEO said, “Historically, our fourth quarter is seasonally our best quarter. It appears that the 2009 fourth quarter will be no exception.”). For 2010, management is targeting $83.5m in net income and fully diluted shares outstanding should be approximately 38.5m, for a targeted 2010 net income of $2.17 per share.

To apply the forward 2010 P/E of 20 that competitors FMCN and VISN currently have to $2.17 EPS would give CCME a price per share of $43.38.

I am long CCME since $8. I believe the warrant "hangover" is almost over and the real party is about to begin. At a stock price in the $10's, CCME has strong potential to be the first super-trades.com 100%+ gainer in 2010. Posted by Superman at 3:16 AM

GeoNuggets® - Quick Check List Highlighting Undiscovered Opportunities

Tm Entertainment & Media (AMEX:TMI)

Company Description: Tm Entertainment & Media is a blank-check company in the process of consummating a share exchange with China MediaExpress (CME). The proposed transaction still needs to be approved by Tm Entertainment shareholders. The closing of the transaction is anticipated to occur in the third quarter of 2009.

CME operates the largest television advertising network on inter-city express buses in China. CME generates revenue by selling advertisements on its network of television displays installed on express buses originating in nine of China’s regions, including the four municipalities of Beijing, Shanghai, Tianjin and Chongqing and five provinces, namely Guangdong, Jiangsu, Fujian, Sichuan and Hebei. See Report.

Keep in mind that there are no guarantees that the deal between Tm Entertainment and CME will happen. However, given the current available information and anticipated growth, the GeoTeam® was driven to code this stock as a GeoBargain® due to its favorable valuation, coupled with the Company's efforts to communicate its story by hiring an investor relations firm and attending road shows.

Data Ended 6/25/09

• Price = $7.74
• Implied/Proforma Trailing EPS = $0.81 ^a
• Target EPS based on incentive allocations = $1.28 (2009), $2.47 (2010), $3.19 (2011) ^a
• P/E based on Trailing EPS = 9.5 ^a

Reasons for Optimism. We generally do not code stocks as GeoBargains® before the closing of a share exchange transaction of this nature, but our confidence that investors will approve the transaction has been reinforced due to several factors.

1. TMI meets 8 out of 10 GeoBargain® Requirements
   
   

   	Requirement	Comments
   	Recent 52-week High (generally within 3 months)	Must Reach $7.85
   	30% EPS Growth Rate a	Full year 2009 Target implies a Proforma EPS growth rate of 58%
   	10% Revenue Growth	First Qtr. 2009 vs. 2008 revenue growth rate of 23%
   	Strong Balance Sheet	Yes
   	Positive Cash Flow	Yes, But Awaiting Future Filings For Specific Details
   	Debt to Equity Ratio less than 20%	No Long -Term Debt
   	Current Ratio is at least 2:1	3:1 as of First Quarter
   	Return on Equity is at least 15%	110% on Trailing Net Income
   	Minimum Pre-tax Operating Margins of 8%	56.1% as of 1st Qtr. 2009
   	Preferably Under 50 Million Shares	32.7 Million after closing of share exchange
   	High Insider Ownership (generally greater than 15%)	We Anticipate Will be >15% upon closing of share exchange
   	Limited Institutional Ownership (generally less than 20%)	TBA when information becomes available
   	P/E Divided by Growth Rate (PEG Ratio) is Less Than 1. a	0.16

   
   
2. Earlier this week, we outlined net revenue and EPS targets that CME must meet in order for CME shareholders to receive up to an additional 15 million incentive allocation shares. These targets, which imply exceptional growth, may add to investor confidence.
   
3. CME is currently the leader in China for adverting on television in inter-city express buses, a large and rapidly expanding industry. The Company has continuing agreements, ranging from five to eight years long, with 40 bus operating partners and works with well-known international brands such as Coca Cola (NYSE:KO), Pepsi, Siemens (NYSE:SI), Hitachi (NYSE:HIT), China Telecom (NYSE:CHA) and Toyota (NYSE:TM). CME's business model takes advantage of being able to offer flexible advertising packages to both advertising agencies and direct advertising customers. The Company's advertising network can be tracked to over 3000 highways in over 80% of the fastest growing cities in the world. *
   
4. As the out-of-home advertising industry in China continues to grow and become more a widely accepted method to reach the masses, CME is positioned to take advantage of the reputation it has built as the leader. Compared to the United States advertising per capita of ~586$, advertising spending per capita in China was a mere ~$12 in 2007. Out-of-home advertising is currently China's third largest advertising medium and is projected to grow 18% annually to over $5 billion in 2011. *
   
5. The company has experienced a compounded annual growth rate in net income of over 400% since 2006, enabled in part by healthy operating margins. Looking forward and utilizing its incentive financial targets, CME has attractive valuations that may make it a worthwhile long-term investment.*

* Source: Tm Entertainment & Media Report, filed with 8-K, Feb 22, 2009.  Other sources are highlighted in report.

Potential Valuation Scenarios if the company can achieve its EPS growth goals

Short-Term Potential value based on trailing Proforma EPS

P/E 20 * $0.81 = $16.2
P/E 25 * $0.81 = $20.3

Short-term Potential value based on 2009 Proforma EPS target

P/E 15 * $1.28 = $19.2

^a The company did not supply EPS data. The GeoTeam® calculated implied EPS figures using 32.7 million diluted shares for 2009 as the initial base amount and adding incentive shares in subsequent years assuming net income targets are met. We did this only as a frame of reference as the figures do not take into account the possibility of any future dilutive events. (After the closing of the share exchange, there will be approximately 28.9 million basic and 32.7 million fully diluted ordinary shares outstanding).

These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.