China MediaExpress : Too Good to be True?

The Story

China MediaExpress (CCME) is a small-mid cap China stock specializing in television advertising network on inter-city and airport express buses in China. This counter has been attracting reviews and comments from many investors mainly due to its spectacular results. An article by a blog from Citron Research recently has created huge panic reactions from the market, causing CCME stock price to plummet almost 30% to $16.66. Is this a value buy or a case of fraud?

The Dark Side

Citron Research claimed that CCME is just a “phantom” company with an overly lack of transparency in its story. In spite of having spent a mere fraction of what competitors have on infrastructure, CCME has purportedly grown profits from $2 mil to its recently raised guidance of $85 mil. Over the last 8 quarters, CCME reported generating $95 mil of cash flow after all CAPEX and for-cash acquisitions. This result puts CCME ahead of giant Focus Media in terms of profit, and outpacing all their competition by a landslide, despite their smaller footprint.

Citron Research went on to list a few websites to support their claims that CCME had been “missing” in majority of news covering outdoor media in China. CCME website does not show a rate card, its cooperating bus operators or any business partners.

CCME also had limited analyst coverage, namely by : Global Hunter and Northland only. By contrast, Focus Media is covered by Goldman Sachs, JP Morgan, CSFB and Deutsche Bank. Vision China Media and AirMedia are also covered by big weights JP Morgan, BoA and Oppenheimer.

The Light Side

CCME came out yesterday to announce its management awareness of the negative statements contained in Citron Research. CCME confirms that they were never approached by Citron Research with respect to the company, its growth, the advertising business in China or industry conditions generally… CCME also strongly disagrees with the views expressed and believes investors should rely on the Company's public reports filed with the Securities and Exchange Commission. The company expects to announce its audited financial results for the year ended 31 Dec 2010 on schedule.

There are reasons why many believed that CCME is “real”.

Firstly, Starr International on 15 Jan 2010 purchased in a $30 mil private placement, 1,000,000 newly issued shares of CCME Series A Convertible Preferred Stock at $30 per share, together with 1,545,455 of CCME common stock purchase warrants. Many believed that Starr International, being a private financial services holding company that makes investments through direct investments, publicly traded securities and private equity funds, would have done their due diligence on CCME.

Secondly, on 16 Dec 2010, CCME announced that its Board of Directors has approved the implementation of a dividend policy on its common and preferred shares, commencing with six month period ending 31 Dec 2010. The dividend will be a semi-annual cash dividend of 5-10% of CCME's net profit. It will be interesting to see how much dividend CCME will pay in the financial result which we believe will be announce soon in Feb 2011. The official press release can be found here.

Thirdly, on 12 Jan 2011, it was announced that CCME was ranked #1 in the 2011 Forbes China 200 small-to-mid sized company with the most potential. The rankings were based on various metrics, including 3-year weighted average revenue growth rates, return on assets, return on equity and operating margins and also factored in the candidates' 2010 business performance. Again, we wouldn't expect Forbes China to award #1 to a “phantom” company. The list can be found here.

The Stock Trading Advisor has managed to find 2 research reports on CCME on the web. One dated 12 Mar 2010 by SPAC Analytics and the other dated 15 Oct 2010 by Global Hunter, which is one of the official analyst for CCME.

There is also another blogger from Seeking Alpha who had provided many links to rebuff Citron's analysis.

The Verdict

So is CCME going to be a fraud afterall? Citron Research points does seems sensible and has caused a huge impact on the stock price. However, it can be seen on their blog that Citron has a habit of coming up with the “scaring tactic”. We are not sure if they had profited from the collapse of those counters which they wrote about. If the profit from CCME is indeed true, then it is a steal at the current price. The Stock Trading Advisor will take a huge gamble here and enter a small bit. We want to see if CCME is going to give out dividend as they have claimed they would.

Buy CCME at $16.88 (Highly risky entry! Trade at your own risk!)