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My name is Larry Isen. I am a serial stock market investor. I am 57 years old. I've been investing in small stocks for over 20 years. I was born in Buffalo, NY and attended college at the University of Colorado. I have bachelor's degree. I publish an investment newsletter devoted to China based... More
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Emerging China Stocks
  • Dear Mr. Zheng Cheng 3 comments
    Sep 17, 2010 4:30 PM | about stocks: CCME

    Dear Mr. Zeng Cheng:

    As a shareholder, I just wanted to thank you for taking the first step in restoring your company's credibility- the recently announced stock buy back for $30 million of common stock in the open market.

    While this is certainly a good first step, many of us would like to suggest it might be the wrong step with the right sentiment.

    An open market buy back is something the board authorizes, but there is no assurance of follow up. Voting to do a buy back, and actually buying back the shares are two different items, and the market won't believe the company will actually buy back the shares until proven.

    Today's climate for small cap China based stocks like yours is very ugly. There have recently been accusations surrounding the accounting practices of a number of China stocks- some with foundation- others simply rather transparent and sophomoric efforts on the part of short sellers to bash the stocks down. Fearful investors in this climate are choosing to lose money by selling now, and asking questions later. Short sellers understand this psychology.

    Those of us who follow CCME have noted a remarkably large reported short position building in the stock since June- in fact, the short position has grown from 1 million to 3 million shares - about 500,000 every two weeks.

    This enormous short position suggests short sellers believe there is something wrong with the company, and I believe it is likely some sort of smear campaign will be launched soon.

    A better way to have pledged the capital would have been to announce a quarterly cash dividend. $.25 per quarter ( a quarter a quarter) would be my suggestion, and would have succeeded to accomplish what the stock buy back is not achieving.

    This would have been a far better way to use your capital to enhance shareholder value. Consider the following five reasons a cash dividend is superior to a stock buy back:

    1. You cannot fake a cash dividend. When paying a dividend, you either have the cash or you don't. Paying out the cash leaves no doubt.
    2. The stock would now appeal to a broader cross section of investors in a yield hungry market where coupons are coveted. A $.25 dividend would equate to $1 per share annually- a 12% yield with today's stock price.
    3. The company can easily afford to distribute $.25 to every shareholder on a quarterly basis. From Q1 to Q2 CCME generated about $26 million in cash flow. A $.25 dividend would only be about 1/3 of the excess cash you are generating, leaving 2/3rds for expansion or acquisitions.
    4. Short sellers would have to pay the additional $.25 for every share they are short, making it a little more painful to stay short.
    5. The founders who have shown an interest is selling small portions of their shares in order to raise some capital could now extract some proceeds from the dividends, instead of from the market. In effect, the company's profits would be giving them reasons to hold longer, and rewarding them for building the company at the same time.
    Mr. Cheng, on behalf of all the shareholders of CCME, we would like you to abandon the notion of buying back shares, and give us the cash.

    I believe you will find the market response far more favorable in a climate like this.

    Warmest Regards,

    Larry Isen,
    Shareholder CCME

    Disclosure: Long

    Disclosure: Long CCME
    Stocks: CCME
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Comments (3)
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  • Timothy Conway
    , contributor
    Comments (539) | Send Message
    Larry, the nice thing about a buyback is that it takes shares off the market, so the dividend pay out is less expense for the co.


    Many of us want CCME to do both.


    I've written at today a post suggesting that CCME, after they snap up a lot of shares (up to $30M) at these low prices, then announce an imminent big one-time dividend of $1.00 for Fall 2010, which would smoke out the shorts (no way they will want to pay out $3.2M or so in one lump sum). And CCME could also announce simultaneously that they will then be paying a qrtrly dividend of 15 cents, staring in Jan., and explicitly mention that this will leave a lot of upside room for raising the dividend over coming qrtrs/years.
    18 Sep 2010, 04:55 PM Reply Like
  • LarryI
    , contributor
    Comments (7) | Send Message
    Author’s reply » It is true a share buy back would retire the shares and thereby increase the EPS- in my view that is unnecessary. The current EPS is fine- the company just needs to demonstrate it is believable. I believe it is unlikely the company would do both just to demonstrate its stock is worth more. China managed companies are notoriously frugal. Just announce either an ongoing $.25 quarterly dividend, or a one time $1 dividend which would be more painful for the shorts in the near term. Either way, it demonstrates a strong belief in the ability of the company to continue to generate cash flow, and shows they have the cash.
    19 Sep 2010, 10:24 AM Reply Like
  • Allamerathlete
    , contributor
    Comments (35) | Send Message
    Why give dividend when they can invest in their stunning growth? More analyst coverage please!
    20 Sep 2010, 08:41 PM Reply Like
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