China MediaExpress Holdings (CCME): Due diligence supports Buy – Bounce?

I’m sure most of the trading community is familiar with a Chinese advertising co called China MediaExpress Holdings (NASDAQ:CCME). The company has been under attack by several short-sellers recently, causing a 10 pt drop in its share price over the past 2-3 weeks. Short-sellers have claimed the company to have overstated its revenues, among other things.

– This morning a small outfit called Global Hunter is out with a rather strong defense of CCME. Firm notes they were in China last week to conduct additional due diligence on the co.

Here are the details:

We visited CCME’s headquarters again, and reviewed all of its contracts with advertising clients and bus operators, tax filings, and bank statements for the last three years. We called or met 16 top advertisers, who verified a total of approximately $105MM of revenue or ~50% of our estimated 2010 revenue. We called China Telecom, and the exclusive advertising agents for Coca Cola and L’Oreal, who confirmed they have placed ads on CCME’s platform. We also spoke to 17 bus operators, who confirmed that they have signed in aggregate 14,191 buses with CCME, or 52% of the total number of buses CCME reported. The amount of revenues and buses these advertising customers and bus operators confirmed with us matched the numbers in the contracts we reviewed at CCME. Shanghai Ba-shi Public Transportation and Eading Group also confirmed their partnerships with CCME. CCME until 2010 had been focused on expanding its intercity bus network in tier II and III cities, and has utilized regional advertising agencies which have extensive local relationships, rather than many of the national 4A agencies. We believe this niche market position and unique approach has made them less visible but kept them very profitable. Based on our due diligence to date, our thesis remains unchanged: CCME is a leader in the inter-city bus advertising market with a unique business model and large growth potential. We reiterate our Buy rating and $26 price target.

Reviewed contracts, tax filings and bank statements. The company presented to us all of its bus operator and advertiser contracts, tax filings and bank statements for the last three years. The taxes paid and cash balances appeared reasonable and matched GAAP reported numbers.

Verified advertising revenue. We called or met 16 of CCME’s top advertising clients. The revenue they confirmed to us matched what we saw in the contracts provided by CCME. Revenues from these advertisers added up to roughly $105MM, or ~50% of our estimated 2010 revenue. We believe the company currently has a total of 40 agencies and 20+ direct advertisers. The advertisers cited the large size of CCME’s bus network, the enclosed environment and captive audience thus a high “reach” rate, and availability of third party (CTR) media monitor as the reasons why they are engaged with CCME. The company in the past has been choosing regional agencies due to the regional nature of its bus network. These regional agencies have deep relationships with local brands, regional 4A agencies and other advertising agencies from which they receive orders.

Confirmed number of buses. We spoke to 17 bus operators which operate up to 14,191, or 52% of the total number of buses the company reported. We believe CCME currently has 65-68 bus operators. We visited Shanghai Ba-shi Public Transportation (Group) Co., which confirmed they have 1,892 buses engaged with CCME. We also verified other bus operators that some internet bloggers claimed did not engage as many buses with CCME as the company reported. The numbers these bus operators reported to us matched the contracts we reviewed at CCME. These bus operators confirmed their contracts were 5-8 years in length and cited the large and established network (no competitors with similar scale), good credibility (make payments on time), and quality services (repair equipment on time and change programs twice a month) as reasons for the engagements.

Met with management and Starr. We felt management was eager to prove the legitimacy and validity of its business. The company has been open and cooperative with our due diligence work. We believe the company is currently assisting Deloitte in completing its annual audit, and has been actively collecting third-party verifications. In addition, we visited Starr’s Shanghai office again. We believe Starr has done comprehensive DD and been closely monitoring the company. Our impression was that Starr continues to believe in CCME and is likely to remain as a long-term investor.

Eading and Switow. We called Eading Group, an authorized Apple reseller, who confirmed they have been selling Apple products through CCME’s Switow platform. Besides receiving a small revenue share, CCME intends to convert Switow’s consumer brands into advertising customers in CCME’s platform. Reiterate Buy. Our due diligence work further reinforced our thesis. We continue to believe CCME is a leader in the intercity bus advertising market with a unique business model and large growth potential. We reiterate our Buy rating and $26 price target.

Notablecalls: It certainly looks like the people at Global Hunter have done some work on CCME. Could we be in for a bounce, considering:

– The stock has pretty much been cut in half recently. From $22 to $12.

– Short interest stands at 50%.

– My guess is, CCME has become a bit of a retail short play. Not your usual tough-as-nails type of short sellers who stick around.

– I watched shorts get killed in a certain Chinese ‘fraud’ name yesterday. Made me say hmmm..

All in all, I think CCME warrants some attention in the n-t. This one could squeeze hard, once it does.

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4 Comments on China MediaExpress Holdings (CCME): Due diligence supports Buy – Bounce?

  1. These analysts are too conservative. They always move their price target little by little. If CCME can really report a $3.2 EPS next month and get a 20 P/E like focus media, then the price target should be $64.
    Remember how Citron attacked FFH in 2006? This time is quite similar to that. I also doubt if the smartest short sellers are quietly reversing their positions to long, and when the 10-K comes out, the same group of folks keep posting negative comments will change their IDs and keep posting positive comments so they can ride it up and make another round of money.

  2. All Global Hunter has shown is that 50% of the business ‘may’ be legitimate.
    I think shareholders might be more comfortable with 80%! The shares should be cut in half until the rest of the business is proven. Do you know how many high quality digital copiers there are in China. Right, its a big industry. If 20 years ago China could reverse engineer and manufacture a car what makes you think they now cant copy a few hundred invoices and bank statements to keep the auditors happy??

  3. Page 12 of the CCME Annual Report states that a substantial amount of the company’s shares are owned by a series of offshore companies under the Star Investments group, which is also listed as a related party. The Starr group appears to be owned by Maurice Greenberg, who was associated with a high-profile scandal a few years back.

    The Starr group consists of a series of entities registered in offshore jurisdictions including the Cayman Islands, Panama and Bermuda. Its US operations are registered in Delaware, which has the loosest disclosure rules of any US state.

    Four other entities listed as major Beneficial Share Owners of CCME are opaque offshore entities whose ownership and internal workings are difficult to determine.

    This could mean that :

    1) CCME’s insider trading can be easily disguised through the use offshore vehicles. For example, the Dec 2010 share purchase by the CCME directors could have been offset by share sales through offshore vehicles, or by share issues that occurred through low-jurisdiction entities.

    2) Assets can be easily siphoned from the publicly traded parent company and into opaque offshore entities — a common practice among Chinese companies.

    3) The CCME principals (and Greenberg — a related party) may have sullied or politically-exposed backgrounds. As previously stated, Greenberg was associated with a scandal at AIG and resigned as a result. In addition, one has to question whether CCME CEO Zheng Cheng’s government connections and close links with the Chinese Communist Party played a role in the rave reviews it has received from official organisations in the PRC.

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