The Final Nail in the China MediaExpress Holdings Coffin

12 Mar

In what I think is one of the best investigative works I’ve ever read, Roddy Boyd went to China to meet with the CFO of CCME, but his meeting was cancelled. He and his experienced Chinese investor friend decided to visit CCME’s main office without notice, anyway.  What Roddy saw I can only describe as worse than even I suspected.  It appears the company is 100% absolutely positively a complete and utter fraud, top to bottom, inside & out.

If there was any audit done at all, it looks like this is a classic case of the coach tipping-off his player when the “piss man” is coming to test him for performance-enhancing drugs.  That is, at best, management defrauded Deloitte, and at worse, Deloitte completely failed their professional and legal responsibilities and/or was complicit in the fraud.

I cannot possibly see CCME management being able to refute Roddy’s conclusions and observations.  Roddy tells me he has no position in the company, so I don’t think anyone can accuse him of being just another short-seller trying to pump his position.

Barring some seemingly impossible refutation of Roddy’s account and analysis, I’m ready to call this game over.  CCME is a massive and entirely obvious fraud.

It seems CV Starr, despite having the authority (if I’m reading their 10-k correctly) to put one of its representatives on CCME’s Board and to decide which committee that member joins, didn’t do the sort of basic due diligence such a large and supposedly sophisticated investor should.

Their investment lets them put-back their shares to certain other shareholders (I’d assume senior management, mostly the CEO)  if CCME fails to hit financial performance targets, and if those shareholders do not or will not comply with the exercize of those put-back right rights, Starr can sell CCME capital stock.  This would be a prudent investment approach, but as Roddy put it in conversation I had with him earlier:

Yes. the make good is pretty compelling as far as those investments go. But: they have no real business. So they are long a call on a piece of crap. They have no contracts or anything. They have an IP, relationship enterprise that has no IP or relationships. A total fraud.

Additionally, if you look at CCME’s structure and nature of relationships and fund flows between the subsidiaries/firms, I can’t see any way this doesn’t end in tears for Starr and every other long.

The CEO & mother own 80% and 20%, respectively, of the operating entity, Fujian Fenzhong Media Co (PRC), but a lower % of CCME shares.  The only way money flows to CCME from the operating entity is through what seems to be mostly questionable “contractual arrangements” (see page 22/23 of the 10-k) between the entities.  Does no one else think it was a red flag that the CEO & family own all of the operating entity in CHINA yet less of the supposedly effective managing entity?  If there is or was ever any money actually coming out of the operating company, where do you think it’s really going?  To CCME shareholders, or to the CEO & family?

I welcome CCME’s response to Roddy’s excellent work and I STRONGLY recommend you read his entire article in the mean-time.  Great job Roddy, thanks for rolling up your sleeves and doing some real due diligence!

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10 Responses to “The Final Nail in the China MediaExpress Holdings Coffin”

  1. long time listener, firt time caller March 12, 2011 at 4:10 pm #

    So, good old fashioned detective work does it – nothing new there. But who’s got the resources (time, money, manpower) to conduct this kind of research all the time, or do you even think it’s feasible to do it.

    • The Analyst March 12, 2011 at 4:33 pm #

      Glad you called. If I’m running a hedge fund plays like this could be worth tens of millions, how much do you think Roddy spent in time, $, etc? Maybe 5-10g’s. If I ran a fund I would have sent an analyst and an auditor to pay ccme a surprise visit at least a month ago. Imagine buying deep otm puts when the stock was close to 20 for nothing, you could make a fortune. When this thing opens again its gonna nosedive, unless like I said, management can somehow, seemingly impossibly counter Roddy’s observations and analysis.

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