Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Is China Yida (CNYD) the “China Media” Twin of CCME?

|Includes:China MediaExpress Holdings, Inc. (CCME), CHBT, CNYD, CSKI, DEER, WATG

Really? Your business model is selling TV ads on trains?

CCME’s business model was selling TV ads on monitors on buses. CNYD claims to have its fingers in several different lines of business, including selling “infomercial” time on trains. Now CCME’s auditor has resigned, questioning the accuracy of its bank statements, and its largest outside investor has filed a securities fraud suit against it. There are several other reports suggesting the whole company is a sham.

Parallels Between CNYD and CCME:

CCME: Chinese reverse merger stock

CNYD: Chinese reverse merger stock

CCME: Claims huge profits and growth selling ads on buses

CNYD: Claims huge profits and growth selling ads on trains

CCME: Recommended by disgraced Chinese stock promoter Ping Luo

CNYD: Recommended by disgraced Chinese stock promoter Ping Luo

CNYD’s Reported Results Seem Too Good To Be True

CNYD, in the tourism and ad sales business, claims rapid growth and consistent super high margins, claiming total revenue of $54.5 million with net income of $25.5 million, a profit margin of 46%.

By comparison, Microsoft, considered one of the highest-margin companies in the world, had 2010 revenue of $62.5 billion and net income of $18.8 billion, a profit margin of 30%. I invite my readers to find a single other media or tourism company with CNYD’s claimed profit margin of 46%. It just sounds too good to be true to me.

In addition to unprecedented profit margins, CNYD also claims extremely rapid growth. In essence, a rapidly growing money-making machine. Yet why would such a cash-machine sell huge numbers of shares for peanuts to a penny-stock promoter if it was the real deal?

Another Red Flag: CNYD’s Auditors Keep Changing

From the most recent annual report:

On May 20, 2010, the Company dismissed Kabani & Company, Inc. (“Kabani”) as our independent auditors and engaged BDO China Li Xin Da Hua CPA Co., Ltd. (BDO China), an Independent Registered Public Accounting Firm, to serve as our independent auditors.

And then….

On August 8, 2010, the Company accepted the resignation of BDO China Li Xin Da Hua CPA Co., Ltd (“BDO Li Xin Da Hua”), ceasing to act as our independent auditors and, on August 9, 2010 we engaged Friedman LLP (“Friedman”), an Independent Registered Public Accounting Firm, to serve as our independent auditors. The engagement of Friedman LLP was approved by our Audit Committee on August 9, 2010.

What legitimate company feels the need to cycle through auditors so fast? One auditor is fired in May 2010, then a second auditor hired to replace them calls it quits 3 months later and a third auditing firm is hired.

Opaque Corporate Structure With Insider Loans and Transactions with Penny-Stock Promoter Pope Investments

The standard way Chinese penny-stock scams operate is: (1) sell cheap shares to penny stock promoters (2) report false results which are pumped up by the penny stock promoter (3) sell shares at high prices to gullible American investors (4) steal the money raised by the various sales via collusive transactions with insiders.

There are signs of this type of activity with CNYD. For the first point, the company sold common stock and ultra-cheap warrants for a total of 20 million shares to Pope Investments for $13 million after fundraising costs, plus warrants to buy more at $1.05 a share. The same quarter this occurred (Q1 2008), the company reported earns of 17 cents per share, or after-tax earnings of 68 cents per share on an annual basis. Immediately before the transaction, the company also reported book value of about $2 a share.

This transaction makes no sense to me if the company’s reported growth and earnings are legit. A company with book value of about 1.50 a share, and earnings of 68 cents a share, and rapidly growing revenues, does not sell a large part of itself to a foreign penny-stock company for $1 a share. Even at a low p/e of 8, the company was worth more than five times that amount.

Not only do the numbers add up for me on this transaction, they don’t even come close.

Here’s another strange aspect of the Pope Investment deal: in addition to selling shares to Pope that would be at a tiny fraction of a reasonable valuation if the numbers are accurate, the company also agreed to various penalties in the deal if earnings didn’t rapidly increase.

The company’s reports are also full of large and poorly described purchases of property and insider transactions. When I have more time I may look at these in more detail. Personally, the similarity to CCME, rapid cycling of auditors, and the transaction with Pope Investments is all I needed to see to go short.

Disclosure: Short CNYD and CCME

Disclosure: I am short OTCPK:CCME, CNYD.