China MediaExpress Holdings: All Eyes on Deloitte

Glen Bradford profile picture
Glen Bradford

Don't take my word for it. Why don't you just ask Carson Block, who has been a large supporter of the hypothesis that China MediaExpress Holdings (OTCPK:CCME) is a fraud.

China Media shares have fallen about 21% since Feb. 2, the day before your report was published. What is likely to happen next?

Where the stock goes depends on what its auditor does. If the auditor signs off on the financials, then most likely the stock returns to its prior level above $20.

And if not?

It is likely the stock price will drop a decent bit.

What's crazy about all of this is that Deloitte audited the financials in 2009. Deloitte has been auditing the financials for 2010 as well since at least the beginning of the year. Deloitte has to have known about the hit pieces that have been written against CCME accusing them of fraud. I'm sure that they looked into the claims. I am sure that Carson Block has profited from the drop in stock price.

I figure that Deloitte has been hard at work auditing these numbers for at least 60 days now. In my experience, I'd have expected Deloitte to resign if there were large discrepancies.

At this point in time, especially since the Global Hunter report indicated that as of February 1, 2011 --- that Deloitte has completed the initial part of their audit --- that things were going as planned as of then.

Roughly a month later, with all of this additional time to review the fraud accusations and dig deeper, seeing that Deloitte has not resigned implies that things are continuing to go as planned.

I have received tons of messages that can be summarized by the belief that auditors do not look for fraud and that all they do is make sure things line up in the reports. I can say that this is not true simply by being practical. If we didn't have auditors to verify the claims that companies make, then companies could claim whatever they want to. The purpose of auditors is completely, entirely, and wholly to look for indications of fraudulant activity --- and to do their best to remove all possible doubt that the company is misrepresenting itself on its financial statements.

Then, if things are OK, they sign off on them. Some auditors are better than others. Deloitte is the best. Period. End of Statement.

The company is being quiet in my opinion because they realize that the Deloitte sign off speaks louder than any PR that they could ever release. I still continue to believe that the Deloitte audit could be late. Heck, it was late last year. I bet you that the due diligence that they are doing on this audit with the swirling accusations is extensive to say the least.

In all fairness, this company has been accused of committing fraud because allegedly, the numbers are "too good to be true." In that regards, in the midst of fraud accusations, having Deloitte back you up and confirm your legitimacy in my opinion deserves a multiple that trumps all of their peers, because again, the allegations are that CCME's numbers by comparison are just far superior to anything out there. Take a look at what Citron has to say about how great CCME claims to be:

Management claims the company has grown faster and produced more cash flow than any other US listed Chinese media company over the last 4 years. In spite of having spent a mere fraction of what competitors have on infrastructure, CCME has purportedly grown profits from $2M to to its recently raised guidance of $85M expected this year, on revenues of $200 million. Over the last 8 quarters, CCME reported generating $95 million of cash flow after all CAPEX and for-cash acquisitions. If true, this ROI would be one of the highest in the world, and a complete outlier in the Chinese advertising market, generating even more profit than giant Focus Media, and outpacing all of their competition by a landslide, despite their smaller footprint.

Every day that passes that Deloitte does not resign, especially after the empirical evidence suggesting that fraud accusations that come via hit pieces are now driving the price higher, I think that we should stair step higher. The 10-K is going to be what cripples the shorts. The shorts know this and yet they are apparently digging in their heels against one of the cleanest balance sheets out there with the best auditor. All evidence indicates that CCME will roar higher. Simply being above $20 seems a little low considering everything that I just discussed, but it sure is funny that even the most vocal of the shorts with completely biased research only pointing out and accusing the company of fraud admits that we could go significantly higher. And in my opinion, we shall.

Disclosure: I am long CCME.

This article was written by

Glen Bradford profile picture
Glen Bradford MBA contributes to Seeking Alpha primarily to read people's negative feedback so that he can avoid generating unnecessary losses. "Uncertainty will certainly work for me." - Glen Bradford March 2009.Glen wishes you a bright sunny warm day filled with smiles, laughter, and love.The Supreme Court got it wrong, which is sad, but it's not over yet.

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