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CCME Shorts versus longs, keeping score

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

Since the release of the Citron report on CCME, followed by the more extensive Muddy Waters reports there has been a lot of arguing between the two sides. I have been following the soap the past week intensively and decided to do a quick recap of the arguments and counter arguments so far.

Citron claims:

Phantom company (longs +1)
Seems to be untrue; plenty of evidence that it exists, and for example ranked #8 on this Chinese government website. China MediaExpress was named China's No. 1 small-to-mid sized company with the greatest potential in 2011 by Forbes China. It was also ranked #2 by the China Advertising Association in 2010

Too good to be true (undecided)
The numbers certainly look very good, and I personally think this is one point that has not sufficiently addressed, but at the same time the FMCN LCD display business (somewhat comparable business) generates even higher margins; so it's certainly not impossible. And the math behind the rate card does add up.

The cover-up (longs +1)
Citron claims Shanghai Apollo is a small two man shop. Hard to judge from here, but doesn't seem to be true.

Government deal (not sure, but leaning towards long side)
Remains a bit fuzzy to me, but seems to be real.

No substantial analyst coverage (technically true, but longs +1)
While this is somewhat true - there is no major investment bank involved - CCME is covered by some small analyst firms that claim to have months of research in China checking for example advertising companies and bus operators.

Muddy Waters claims:

Pump and dump scheme (not really a point)
Not really saying anything, especially when insiders are buying instead of selling.

Estimates 17 million revenue instead 95,9 million
Hard to prove or disprove; we'll have to wait for the next audited report

Fewer than half the 27,200 buses
(not sure, but leaning towards long side)
Also hard to prove or disprove; but it has been shown that the list of muddy waters contains errors compared to information easily accessible online, and the company also provided some documents to show that it isn't correct and there is also some additional info that makes the MW data suspect (but information provided by the company isn't really useful, if they are a fraud they would have the biggest incentive of all to lie)

CTR report contains gross errors (undecided)
Also hard to disprove, but simple fact is that the more companies and persons are involved, the harder it is going to be to pull off a fraud.

Half of CCME's network plays other content
Also hard to disprove, but there is at least plenty of evidence that a lot of busses play CCME's content and that the driver has no influence on what is displayed

Agreement with Apple a big lie
(longs +1)
This was called a particularly egregious lie by WM, but it seems a big lie from MW at this point since it looks to be possible to simply buy Apple products on

Obscure company in its industry (longs +1)
Seems to be false given for example the Chinese government website and other online information.

Core audience is sub-Greyhound Bus demographic (undecided)
Again hard to prove or disprove.

Bronte Capital case (shorts +1)
Main case is that the numbers are too good to be true. I actually respect John Hempton opinion a lot, and the fact that he thinks it is a short is a big concern for me. But at the same time he does not provide any proof for fraud, but certainly a good argument for why the numbers look to good to be true. But as already stated; the math behind the rates adds up.

Seeking Alpha-articles, Chimin Sang:

No license from ministry of transpor
t (longs +1)
This still remains a bit fuzzy to me, but there seems to be a valid document from TTAVC and certainly a lot of points in the article are false. Even more worrying for the short sellers case the obvious deception by hiding the TTAVC red seal from the document.

Did not win national prizes as claimed (undecided)
Did read some pro and cons, but can't find the links. Short case was questionable, but what they did win was also not too clear.

Huge difference between SEC and SAIC/SAT numbers
(longs +1)
Evidence seems fabricated. At the same time; where are the real numbers?

Various other points

Star International (longs +1)
Some see this as a positive point, since they invested 30M + 13,5M and claim to have do significant due diligence. Some questions are asked why Star got the terms as stated in the press release. For 30M they got 30M worth of shares, +/- 6M of warrants and 1,5M of additional shares. It looks like a good deal, but it's not excessive as some people seem to think (probably using the Jan 2011 stock price in the calculations instead the Jan 2010 price (2010 jan 13 price: 10,29)). The 13,5M deal was also done close to market at 9$/share, market on 13 October was 13,27, but before 28 September the price was below 9$/share (and presumably a deal like this isn't made in one day)

Auditor (longs +1)
This is probably the best argument for a long case by far. Fooling Deloitte Touche Tohmatse would require some very sophisticated fraud, especially since it's a simple thing they have to check; if the company has the cash and cash flow as stated in the previous annual report the shorts do not have a case. It doesn't get more basic than that.

High short interest (shorts +1)
This is worrying. Although so far the published short case seems to be weak, it is still an indication that significant money is betting against this stock. And although in the past weeks a lot of people have questioned the ethics of short sellers - and given the evidence so far, probably rightly so in this case - most shorts are forced to do more due diligence than longs; simply because they are betting against the natural direction of the stock market and the fact that they have a way worse risk profile in case the stock goes up.

Dividend policy/share buybacks (longs +1)
These two have only been announced so far, but why would a fraudulent company do this? It's easy to announce buybacks and not carry them out, and I guess it's still possible for them to cancel the dividend policy; but it would impose a time limit on how long they can get the fraud going, and it would require them to try to cash out fast.

CEO response to attacks (shorts +1)
I personally found this response to be pretty weak. It contains a lot of strong language, but little evidence. If the company would be a fraud, most things they would produce would be worthless anyway, since they have the biggest incentive to lie in that case. But it would have been nice to get for example some confirmation from for example media partners.

Insider buying (longs +1)
CCME's CFO buying 1,5 million worth of shares on the open market should count for something. It's a very significant amount of money, and it's from the person that should know the financials of the company very well.

So far it seems that the shorts have been unable to provide a strong case. Some points are hard to prove or disprove, and there certainly remains some doubt about the business. But when the majority of the shorts research is proven wrong and perhaps even fraudulent the remainder of the research loses a lot of credibility in my eyes. At the same time the long case is very strong with Deloitte Touche as auditor, Star International as a big investor, some smaller analyst shops doing due diligence, and insider buying.

And some final considerations; obviously shorts have tried hard to prove that CCME is a fraud, if the best they can come up with is a list of points that mostly can be proven wrong, and some points that are very hard to prove or disprove. At the same time there is also another question; how exactly is this fraud supposed to work?

No positio, may go long or short