This morning, the CEO of the China-based China MediaExpress Holdings issued a forceful statement, refuting some of the key allegations made by short sellers. In the letter, he promised:”We also note that the attacks are continuing and we fully expect to continue to have to take appropriate countermeasures.”
He did not have to wait for long.
Hours later, by mid day, there was an article appeared on SeekingAlpha entitled Red Flags at China MediaExpress: Significantly Mismatched Filings in China, U.S. by author Chimin Sang. Based on the last name, the author is a Chinese or Chinese American, and his profile in Seekingalpha states he collected a PhD from SUNY Buffalo and a MBA from Chicago Booth School of Business.
With such an impressive resume, I wish he could know better or at least, think harder!
Essentially, he dug out documents that CCME’s local operating company Fujian FenZhong Media Company filed with local Chinese government agency SAIC and SAT. After some thorough analysis, the PhD and MBA made the following allegation against CCME:
If only the PhD and MBA can stop and think, instead of making hasty accusation! Of course he knows that as small and insignificant as he think CCME’s operation really is, its annual revenue has to be larger than one million dollars in the past three years. The numbers are simply ridiculous.
Discrepancies like this should prompt one to think instead shouting out prematurely and making a fool of oneself.
So how should we reconcile the disagreement?
It is really not my job to beat back the short-sellers’ every attack. That honor belongs to Mr. Cheng, the Chairman and CEO of CCME. What’s more, if you are a determined short seller, you will see everything the company does or says through a pair of colored glasses. It does not matter what I have to say.
But for this once, I decide to enlighten Mr. Sang the very educated short seller.
The answer to Mr. Sang’s questions is in the company’s structure and the contracts it signed with its local operating company.
You see, the current law does not allow CCME a foreign company without prior advertisement experience to conduct advertisement business legally. So through its HongKong subsidiary, it set up a wholly-owned subsidiary company called Fujian Across Express Information Technology, Ltd. (“Fujian Express”).
Fujian Express, however, still cannot operate advertisement business. The company that can run an advertisement business is Fujian FenZhong Media Co. (“Fujian FengZhong”). Now Fujian Express does not really own Fujian FenZhong in a traditional equity ownership sense, but as the 2010 10-K states, “through the contractual agreements CME controls the activities and receives the economic benefits of Fujian Fenzhong’s operations” (Page 3).
Specifically, through an so called “Exclusive Business Cooperation Agreement” (Page 22, emphasis mine):
Simply put: Fujian FenZhong collects revenue from the advertisers, but it turns around and gives the money to Fujian Express as Service Fee, almost all of it. Since it is a service fee, it is an expense.
Since FenZhong paid out all that money as expenses, it does not pay much corporate income tax.
Fancy? You bet.
I do not work for CCME, but I did work for a Sino-US joint venture in China before. Yes, we did set up a structure like the one CCME has in order to circumvent the Chinese regulations, and I can tell you this is most likely what is going on.
I hope this answer satisfies your curiosity.
If you want to find a mismatch between the company's US SEC filing and China's SAT filing, you need to dig out the documents for Fujian Express.
By the way, I understand one can get the SAIC files through credit agencies, but very few people can obtain SAT – the Chinese equivalent of IRS -- documents legally.
So I am curious, how did you, Mr. Sang, obtain the SAT files legally?
Disclosure: Long CCME
He did not have to wait for long.
Hours later, by mid day, there was an article appeared on SeekingAlpha entitled Red Flags at China MediaExpress: Significantly Mismatched Filings in China, U.S. by author Chimin Sang. Based on the last name, the author is a Chinese or Chinese American, and his profile in Seekingalpha states he collected a PhD from SUNY Buffalo and a MBA from Chicago Booth School of Business.
With such an impressive resume, I wish he could know better or at least, think harder!
Essentially, he dug out documents that CCME’s local operating company Fujian FenZhong Media Company filed with local Chinese government agency SAIC and SAT. After some thorough analysis, the PhD and MBA made the following allegation against CCME:
While China MediaExpress claimed $63m revenue to the SEC for 2008, it only reported $0.3m to the Chinese authorities. The difference is 210-fold. While it claimed $96m revenue to the SEC for 2009, it only reported $0.8m to the Chinese authorities. The difference this time is 120-fold. While it is estimated to reach $214m revenue to the SEC for 2010, it only reported $0.6m to the Chinese tax authority; that difference is 356-fold.
China MediaExpress told the SEC that it paid $8.9m to the Chinese tax authority; the China source check showed $200. The difference is 44,500-fold. It reported it paid $15m to the Chinese tax authority in 2009, but the Chinese document shows that it did not pay any. No ratio can be calculated due to the denominator being zero. For 2010, Global Hunter estimated that it would report $35.6m in tax, but the SAT number we have shows zero.
If only the PhD and MBA can stop and think, instead of making hasty accusation! Of course he knows that as small and insignificant as he think CCME’s operation really is, its annual revenue has to be larger than one million dollars in the past three years. The numbers are simply ridiculous.
Discrepancies like this should prompt one to think instead shouting out prematurely and making a fool of oneself.
So how should we reconcile the disagreement?
It is really not my job to beat back the short-sellers’ every attack. That honor belongs to Mr. Cheng, the Chairman and CEO of CCME. What’s more, if you are a determined short seller, you will see everything the company does or says through a pair of colored glasses. It does not matter what I have to say.
But for this once, I decide to enlighten Mr. Sang the very educated short seller.
The answer to Mr. Sang’s questions is in the company’s structure and the contracts it signed with its local operating company.
You see, the current law does not allow CCME a foreign company without prior advertisement experience to conduct advertisement business legally. So through its HongKong subsidiary, it set up a wholly-owned subsidiary company called Fujian Across Express Information Technology, Ltd. (“Fujian Express”).
Fujian Express, however, still cannot operate advertisement business. The company that can run an advertisement business is Fujian FenZhong Media Co. (“Fujian FengZhong”). Now Fujian Express does not really own Fujian FenZhong in a traditional equity ownership sense, but as the 2010 10-K states, “through the contractual agreements CME controls the activities and receives the economic benefits of Fujian Fenzhong’s operations” (Page 3).
Specifically, through an so called “Exclusive Business Cooperation Agreement” (Page 22, emphasis mine):
Pursuant to the exclusive business cooperation agreement entered into on April 17, 2009 between Fujian Express and Fujian Fenzhong, Fujian Express provides technology support, consulting services and other commercial services related to the business operations of Fujian Fenzhong. As consideration for such services, Fujian Fenzhong has agreed to pay service fees. The term of this agreement is ten years from the date thereof, and it can be automatically renewed for an additional ten years upon expiration, provided that no objection is made by Fujian Express within 20 days prior to each tenth anniversary.
Simply put: Fujian FenZhong collects revenue from the advertisers, but it turns around and gives the money to Fujian Express as Service Fee, almost all of it. Since it is a service fee, it is an expense.
Since FenZhong paid out all that money as expenses, it does not pay much corporate income tax.
Fancy? You bet.
I do not work for CCME, but I did work for a Sino-US joint venture in China before. Yes, we did set up a structure like the one CCME has in order to circumvent the Chinese regulations, and I can tell you this is most likely what is going on.
I hope this answer satisfies your curiosity.
If you want to find a mismatch between the company's US SEC filing and China's SAT filing, you need to dig out the documents for Fujian Express.
By the way, I understand one can get the SAIC files through credit agencies, but very few people can obtain SAT – the Chinese equivalent of IRS -- documents legally.
So I am curious, how did you, Mr. Sang, obtain the SAT files legally?
Disclosure: Long CCME
