Why I Am Long China Media Express

Feb.13.11 | About: China MediaExpress (CCME)
China Media Express (OTCPK:CCME) has recently been the market's most volatile stock with large volumes in the last few days. It soared from $19 to $23 in two business days and retreated to $13 within only 3 days. The float is around 11 million but the daily trading volume is more than 6 million recently. We have seen the “longs” and the “shorts” debate each day and I would like to discuss my thoughts about CCME, below.

In my opinion, the recent rally of CCME is mainly due to some wishful thinking about a short squeeze on CCME. Because CCME had been on Nasdaq's REG SHO Threshold List for more than 9 days and if CCME continues to be in that list for another 4 business days, a forced order from brokerages at day 16 would produce a short squeeze of a lifetime on CCME. People are very bullish on this and push these stocks to a new 52 weeks high. However, I think it is worthwhile to recall an old Wall Street saying: buy a stock in uncertain times and sell when it is certain. When not so many investors know about REG SHO, the people are chasing CCME and pushing it up. When many investors know about REG SHO, CCME becomes a certainty to the investors and the investors need to reap the profits to avoid a large pullback. This has nothing to do with any fundamentals but just a way to protect your own fortune.

At this moment, I would like to discuss my view of CCME and an investment strategy.
The good news for CCME is that CCME is a fast growing company with 100% revenue growth year after year. The current P/E is less than 7 and a top tier investment firm, Starr Investments, led by Hank Greenberg (previous CEO of AIG), has injected 30 million into CCME.

In the meantime, the company commenced a new dividend policy and promised to pay dividends in the future. Last September CCME also approved a stock repurchase program. CCME was ranked number one in the ‘2011 Forbes China 200 small-to-mid sized companies with the most potential.’

CCME operates the largest television advertising network on inter-city and airport express buses within China. An investigation of its legitimacy has been conducted, with the findings posted here.
However, like other Chinese Reverse-Merger colleagues, CCME was attacked by short sellers.
In recent reports issued by Citron Research and Muddy Waters, among others, CCME was accused of fraud and said to be too good to be true. Consequently, CCME plunged and a debate began between the “longs” and the “shorts.” In this article, I will not discuss their claims one by one but rather focus on whether CCME is a black box or a phantom company.

First of all, CTR Market Research, responsible for validating VISN’s audience metrics and ad effectiveness, provides a demographic analysis of CCME here.

CTR was also mentioned in the VISN annual report, proving its authority. Buses are still the major form of transportation in China and many of my friends in China profess to buying things based on bus ads.
Short sellers claimed that finding CCME through search engines like Bidu or Google was impossible. However, inputting ‘中国高速频道’ into baidu.com will cause lots of articles to appear, clearly indicating CCME’s existence. When using Google, try to input the search term ‘Fujian Fenzhong.’ These links are evidence of CCME’s existence (No.9 is CCME).

CCME also announced that they had more than 28000 buses in the network according to SINA, the largest Chinese online media company.

CCME (Fujian Fenzhong) receives substantial government support, as can be seen here.
The solid support provided by the government clearly identifies CCME’s existence and validates its high profile.

Third investors and auditors know that the cash balance for a company is hard to falsify. When auditors examine the cash balance, they require the bank to provide monthly or quarterly statements directly to the auditing firm. These statements contain all the transactions that have occurred during that month or quarter.
Because this information is provided by banks, it’s very unlikely that banks are also participating in fraud. If the bank makes no mistake, then the only suspected party is Deloitte, whom I don’t believe will bear the risk to help a mid-cap Chinese company to fake their financial statements. Besides Deloitte’s due diligence, Starr also invested more than $30 million into CCME and must have checked their investment very carefully.
Finally, before we accept one short seller on Citron’s claims about CCME, let us review Citron’s past record. I was very surprised that Citron published an article in 2009 and was urged to offer EDU with a target price of $14.25. As of today, this stock has rebounded to ~100$, from ~50$ in 2009, and is considered one of the safest Chinese stocks. Muddy Waters had acquired their reputation because of Rino. However, they published several articles in mid-2009 to claim that ONP was guilty of fraud. ONP fought back quickly and proved its existence without being involved with fraud. It is human nature to remember MW’s good hit on RINO, but forget their unsuccessful allegations about ONP.

Please also note that CCME is now observing a quiet period before its quarterly report on Form 10-Q is filed. During the quiet period, investors should not expect the company to release any material information such as dividend policy, share repurchase programs, etc. Once the next quarterly earnings release is published, all the doubts about its dividend and share repurchase policy will be clarified by the company’s press release.

At this moment, I am confident in my research on CCME. To earn above average premiums, I switched to options. I am thankful for options and the liquidity provided by day-to-day market-makers (MM). The option traders tried to hedge their risks through delta and gamma. These two terms are first mathematical in nature, and second, derivatives of underlying stock prices. We don't need to discuss them in a quantitative manner, but what you need to remember is that option traders always hedge their positions.
What does this mean? When they buy some options, they short underlying stocks according to certain calculated numbers. When they short options, they long their stocks. It's easy to see that when short-squeezing happens, option traders find it difficult to do an "exact hedge" and the option prices may simply go in one direction only. The stocks of CCME are very volatile now, so its OTM options may always bear more premiums compared to their peers. Because of this, selling some deep OTM put options for CCME, along with long shares, is my strategy to earn higher yields.

Disclosure: I am long OTCPK:CCME.