Focus Media Holding's Ltd. (NASDAQ:FMCN)
Before being caught short with its LCD inventory count (see prior article), Focus Media claimed in 2008 to have over 27,000 theaters in its movie theater network. (here) Muddy Waters Research called them out on that one too: there were unfortunately less than 1,600 urban theaters in all of China that year ‒ which puts FMCN's count off by only … about … 25,000. (here) Focus Media recently submitted an amended filing, explaining that they were not really talking about theaters, but …
Prior to 2009, we calculated the size of its movie theater network by calculating the number of screens on which each of its advertisers had purchased advertising and then summing the screen count for each advertiser to produce an aggregate number of screens. (Amended SEC 20-F)
My answers to this are No and No and No.
1) No. The original statement was very clear,
As of December 31, 2008, we had rights to lease advertising time on screens in 27,164 movie theaters in cities across China. (SEC 20-F, 2008)
The increase is primarily due to … (3) increased leasing costs associated with time we rent on movie theatre screens as a result of an increase in the number of theaters we leased in our network from 10,930 in 2007 to 27,164 in 2008. (SEC 20-F, 2009)
2) No, the movie count for 2008 ‒ "27,164" ‒ persisted beyond 2008. What are we supposed to believe? That they changed the calculation method "prior to 2009" but continued using the number, "27,164," one month before 2011? The filing date of the above amended 2009 20-F was December 10, 2010. If the method of calculation changed prior to 2009 why not mention that change in the 2009 20-F? "Prior to 2009"? I couldn't even find a mention of the new method of calculation prior to 2012? Let me put this softly. It would be a statement against myself not to hold out the strong possibility that this "change of methodology" was a result of being exposed by Muddy Waters' Research. (Filing detail)
3) No matter how recklessly we twist the two statements to force reconciliation, 27,164 is just too big of a number. We can't use it without suffering an irreconcilable contradiction between the two statements. Let me show you what I mean:
What could the number "27,164" refer to?
We're not talking about theaters, because there were only 1,545 Urban Movie theaters in all of China in 2008. We're not talking about screens because there were only 4,097 Urban Movie screens in all of China in 2008. (See: A Critical Failure in the Focus Media Story.)
So what does that number represent?
Focus Media offered us an answer, but only if we forget that Focus Media had ever mentioned theaters or screens. We must accept a very convoluted explanation that the number, "27,164," only refers to "purchased advertisements." It's the only way the math can work. But why such a confusing explanation? The words "theaters," "screens," "network," "advertisers," and "purchased ads" were spread out in the passage as a five-year-old would spread green peas on his plate to fool Mom into thinking he had finally eaten some. In the end, the peas are still on the plate and Mom hasn't been fooled: What happened to the 27,000 theaters Focus Media claimed in 2008? … or in the document filed one month before 2011? (SEC Amendment #4, 20-F filed December 10, 2010, "Filing Detail" link above.)
Assets were misrepresented. There is no middle ground here. Who was supposed to know that "theaters" were not concrete things, but transactions? What did investors think they were buying? How was an investor really supposed to value a network of 27,000 theaters in 2008? If that number was not correct, where did the revenue come from for those years? How many other numbers have to be corrected? Have we carried into 2012 "contributions" to equity from non-existent businesses?
Focus Media claimed to have refuted Muddy Waters Research. That's well said, but anyone can say that. For example, I can claim that I have refuted the equation two plus two equals four, but I cannot demonstrate that claim. This point is worth underscoring: a refutation is demonstrated, not merely declared.
As of December 31, 2008, we had rights to lease advertising time on screens in 27,164 movie theaters in cities across China.
This is a very clear sentence. From that statement to the most recent amended filing, Focus Media in not so few words has basically debated with itself before the SEC and investors:
Dec 2010: "As we've been telling you again and again for the last two years, we had a network of 27,164 theaters."
Jan 2012: "Not true, those were 27,164 purchased advertisements."
Focus Media has cornered itself. Its past revenue is highly suspect. Just as apples are not oranges and poster frames are not LCD displays ‒ 27,000 theaters are not 27,000 purchased advertisements. The company has indeed demonstrated a refutation ‒ of their own prior filings.
Disclosure: I am short FMCN.