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Red Flags at China MediaExpress: Where Are Your Advertising Agencies?

|Includes:China MediaExpress Holdings, Inc. (CCME)

 In my last article, I presented the SAIC and SAT numbers of China MediaExpress and showed that they were significantly lower than what the Company presented to the SEC.

Some readers correctly pointed out that the SAIC/SAT numbers were so low that they do not make common sense, as the Company has to afford expensive things such as Deloitte auditing. One reader asked if I was challenging people's common sense. In fact, the one who challenged people's common sense was China MediaExpress.
It did at least challenge my common sense. For the past year it produced numerous press releases announcing signing of new buses and routes without mentioning specific signing parties. That did leave an impression of expanding business except for one thing - they all pointed to the cost side of the business.
It is always easy to spend money than to make money. As we learned from the Company's quarterly conference calls, revenue numbers were jumping up rapidly every single quarter, yet the Company never included a single press release indicating major advertising contract signing.
China MediaExpress' revenue dramatically increased from $63m in 2008 to $96m in 2009 and to an estimated $214m in 2010 (Source: Global Hunter Analyst Report). According to the management, most of the revenue came from 20 plus advertising agencies. In 2008, the ratio was 98%. (see screenshot below: Slide 19 of its June 22, 2010 SEC filing) In 2009, the ratio was 78.6% as indicated in page 15 of its last 10-K.  
Click to enlarge
What is puzzling though is that the Company has been tight-lipped about the names of those agencies. They did make public one of the agencies during the Investor day that took place on September 7, 2010. The agency is Shanghai Apollo Culture and Art Company and its Investor Day video can be found here.
Global Hunter Analyst Ping Luo also had interviews with Shanghai Apollo and had the following note in her research report.
“Among the customers, Shanghai Apollo, a company owned by Shanghai People’s Fine Arts Publishing House, a state-owned company with 50+ years history and strong industry relationships, confirmed that they bought approximately 7 minutes (~RMB50MM revenue) in 2010 and expect to buy similar amount of advertising time from CCME in 2011.”
My research of this Shanghai Apollo Culture and Art Company yielded disturbing results.
First, Shanghai Apollo’s registration with Shanghai government does not indicate it has a license to operate as an advertising agency.
We can search this company through the Shanghai Administration for Industry & Commerce. The result is here and Google translation can be found here. Note that its business covers only advertisement design, not advertising agency.
In contrast, if we look for any other reputable 4A agencies, we find advertising agency clearly indicated in the covered business.
Example 1: Shanghai Leo Burnett Advertising Company (SAIC entry and Google translation)
Example 2: Saatchi & Saatchi International Advertising Co., Ltd. Shanghai Branch
(SAIC entry and Google translation)
So the business description does not support that Shanghai Apollo in the advertising agency business. It should be noted that China takes the business description seriously since different business would involve different business license. It is very common for business to change its business description with SAIC. For example, page 6 and page 11 of its SAIC report are for business description changes.
Further, for any business to be in the advertising agency business, an advertising business license is needed. The relevant government regulation can be found here and its Google translation can be found here. For Shanghai Apollo to be in the business, it has to obtain an advertising business license, which is not indicated in its SAIC filing.
Second, its SAIC numbers do not support its claimed RMB 50m business.
I obtained its SAIC report from Shanghai Administration of Industry & Commerce in December 2010, and an electronic copy can be found here. The document shows that it reported revenues of RMB 138k in 2006, RMB 248k in 2007 (Page 15, top left) and RMB 58k in 2008 (Page 20, top right). No report for 2009 can be found. Its registered capital is RMB 500k, as indicated on the SAIC website and page 1, 4 and 19 in the SAIC report. (Google Translation mistakenly translates Chinese word 10k to million, which would erroneously indicate a capital base of RMB 50m.)
The official available data for its capital base and revenues do not support its claim that it could possibly have a RMB 50 million business in aggregate, which is 100 times its capital base and about 1000 times its revenues in 2008. China MediaExpress being only one of its customers makes the story lack even more common sense.
Challenge to the China MediaExpress Management
Based on my research of Shanghai Apollo, I believe that it is very unlikely that Shanghai Apollo had RMB 50m business with China MediaExpress. Given Shanghai Apollo was the only advertising agent invited for the investor day, the whole revenue claim of China MediaExpress is in doubt.
To restore credibility to its revenues number, China MediaExpress should make public a list of its advertising brokers so that investors can independently check their qualifications, contact them and verify their revenue numbers and business relationships with China MediaExpress.
Stocks: CCME