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    China Media Express

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    shawn2207
    1) China MediaExpress (CCME) is facing short-seller attacks that have caused significant volatility in its stock price and disagreement between long and short investors. 2) The author believes CCME faces risks similar to other attacked companies, including potential long-term damage to its business from negative publicity and uncertainty around its auditor and financial reports. 3) For investors with substantial risk positions in CCME, the author warns of potential significant downside if any new negative information emerges about the company.

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    China Media Express

    Uploaded by

    shawn2207
    56 views2 pages
    1) China MediaExpress (CCME) is facing short-seller attacks that have caused significant volatility in its stock price and disagreement between long and short investors. 2) The author believes CCME faces risks similar to other attacked companies, including potential long-term damage to its business from negative publicity and uncertainty around its auditor and financial reports. 3) For investors with substantial risk positions in CCME, the author warns of potential significant downside if any new negative information emerges about the company.

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    http://www.linkedin.com/pub/shawn-mesaros/2/410/3b7

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    1) China MediaExpress (CCME) is facing short-seller attacks that have caused significant volatility in its stock price and disagreement between long and short investors. 2) The author believes CCME faces risks similar to other attacked companies, including potential long-term damage to its business from negative publicity and uncertainty around its auditor and financial reports. 3) For investors with substantial risk positions in CCME, the author warns of potential significant downside if any new negative information emerges about the company.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    56 views2 pages

    China Media Express

    Uploaded by

    shawn2207
    1) China MediaExpress (CCME) is facing short-seller attacks that have caused significant volatility in its stock price and disagreement between long and short investors. 2) The author believes CCME faces risks similar to other attacked companies, including potential long-term damage to its business from negative publicity and uncertainty around its auditor and financial reports. 3) For investors with substantial risk positions in CCME, the author warns of potential significant downside if any new negative information emerges about the company.

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    Pacific Asset Management Direct (206) 933-1600 Toll Free (877) 637-2767 Fax (206) 600-3175

    600

    China MediaExpress in a Bind Against Shorts


    -- In China's small-cap
    cap space, the short
    short-attack phenomenon is relatively new, so it is hard
    ard to know what the
    long-term
    term effects will be on individually attacked stocks or on the space as a whole.

    China MediaExpress (CCME) is the la latest


    test company to be on the receiving end of a series of short-seller
    short
    attacks. The stock continues to trade with significant volatility on high volume, meaning that there is still a
    sizable amount of disagreement between the longs and the shorts.

    I have
    ave recently heard of investors "betting the farm" (sometimes on margin) on CCME because they "know" it
    is legitimate and should seemingly go straight back to $20 or more once it is legitimized. I also have heard
    from investors who have been aggressively w writing
    riting puts on the stock because they are confident it will go up,
    and the option premium they receive looks relatively high.

    In my opinion, CCME's future share-price


    price performance could face a similar, if not worse, fate than ONP for a
    number of reasons. I am not encouragin
    encouragingg anyone to sell, but rather I am suggesting that the aggressive risk-
    risk
    takers who are "betting the farm" and writing put options take a moment to consider the potential downside
    risks with CCME.

    The purpose of this article is not to attack CCME (that has b been
    een done enough already), but rather it is to
    highlight the very real downside risk that still exists, even after the share price has fallen by 50%.

    I would very much like to see CCME be completely validated. However, for those taking substantial risk
    positions,
    itions, I feel that investors should be aware of the potential for significant downside, potentially in a single
    day, if any negative information is suddenly confirmed by the company or if research analysts change their
    views.

    While many of the short-sellers'


    ers' claims seem to be refutable and without merit, the attack itself could be a self-
    self
    fulfilling prophecy for the share price. The problems are as follows:

    • Problem No. 1:: The burden of proof lies with CCME and not with the short-sellers.
    sellers. Short-sellers
    Short
    deliberately exaggerate their claims and often use dubious evidence to incite maximum panic on the
    day of the report's release.

    However, in the case of CCME, even if 90% of the information is wrong, that would still make CCME
    C a
    10% fraud, resulting in a stock price that could potentially trade near cash value, which is around $7 a
    share.

    The shorts only need to be 10% correct, whereas CCME needs to be 100% correct on all details.
    CCME is in the media and advertising busine
    business,
    ss, and its operations are spread over a wide area,
    making it a very difficult company to accurately audit for any auditor, Big 4 or otherwise. And as a
    result of the short attacks, the company will now be under the microscope by auditors, investors, law
    firms
    irms and research analysts.

    Pamria, LLC “Pacific Asset Management “ WA State & SEC Registered. SIPC, FDIC through C.S. & Co., Inc.
    Pacific Asset Management Direct (206) 933-1600 Toll Free (877) 637-2767 Fax (206) 600-3175
    600

    • Problem No. 2: Long-term


    term damage to the company's business prospects has already been done.
    CCME is a media company, and the media industry is notoriously sensitive to any type of bad press or
    negative imagery.

    One claim by the shorts is that a Baidu search for CCME (in Chinese) yields very few results. That is no
    longer the case. Now, a Baidu search results in numerous stories of a company potentially committing
    a massive fraud. In the image
    image-sensitive advertising business, this has the clear potential to scare off
    tier one customers. As in the case of ONP, even if the company is ultimately validated, the smear itself
    can result in permanent damage to the business and the share price.

    • Problem No. 3 Deloitte is only the auditor un until it is not. Deloitte is a top-quality,
    quality, Big 4 auditor, but
    the reality is that in a complicated and fairly opaque business like advertising, a standard audit does
    not necessarily confirm every minute detail of every piece of revenue and expenses. A standard stand audit
    is not a forensic audit.

    Deloitte also was the auditor for Duoyuan Printing (DYP) until just before the 2010 10-K
    10 was filed
    when Deloitte
    tte was suddenly "dismissed."

    The shares are now down by 70% and trade at a 30% discount to last reported cash on the balance
    sheet. I am by no means criticizing Deloitte. The fact is that during the course of 2010, certain things
    "changed" at DYP that prevented
    evented Deloitte from signing off on the numbers. Just because Deloitte has
    signed off on CCME's numbers in the past does not preclude the possibility that "things have changed"
    for CCME during 2010, which on paper was very much a standout year.

    Problem No. 4 : CCME's response to date has been very weak, and after an initial pop, the share
    price has continued to fall. Investors overall are clearly not fully satisfied yet. Unlike ONP, CCME has
    not had a conference call to address concerns and has released o only
    nly a fairly brief statement stating
    that SEC financials should be relied upon and a few other clarifications on its advertising of Apple
    products via a local distributor.

    The company also contradicted several factual errors in the short


    short-sellers' reports. Investors are all still
    waiting for a point-by- point rebuttal as well as concrete proof of client relationships, revenue and
    cash.

    However, it is looking like we may need to wait until the release of the 10
    10-K
    K in March to get full
    information. The risk for
    or those who are selling options or trading on margin is that many holders will
    not want to bear the risk of holding until after the 10
    10-K
    K is released, and as a result, the share price
    could see a substantial dip even before it hopefully recovers.

    It is worth
    rth repeating, for the good of the China small
    small-cap
    cap space, that I would like to see CCME be completely
    validated and its share price recover. However, past experiences with short
    short-sellers'
    sellers' attacks on stocks including
    ONP, CVVT, and TSTC have shown that the d damage
    amage done can be severe and difficult to reverse, even when
    the arguments of the shorts are mostly without merit. For those investors who choose to play CCME, I would
    strongly suggest they consider scaling their risk accordingly.

    Shawn A. Mesaros, Pacific Asset Management

    Pamria, LLC “Pacific Asset Management “ WA State & SEC Registered. SIPC, FDIC through C.S. & Co., Inc.

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