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Why There is No Mismatch in China MediaExpress Holdings's Filings in China and the US

February 08, 2011 | About:

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:

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

Rating: 4.2/5 (45 votes)


Streetdog - 9 years ago    Report SPAM
Thank you. Few investors know or understand the structures. Sharing your understanding and experience is appreciated.
Profitiser - 9 years ago    Report SPAM

Nice article, congrats. If you want another strong confirmation of your findings please read

http://ccme-info.xanga.com/ . Stay tuned !
LwC - 9 years ago    Report SPAM
" in order to circumvent the Chinese regulations"

I'm not sure that I should view that as a ringing endorsement of the subject company's business practice even if such practices are common in China. That just means that at any time the Chinese regulator(s) who are being paid to look the other way might suddenly find it's no longer possible to cooperate.

Guruek - 9 years ago    Report SPAM
LwC: The risk of setting up the complex structure is discussed thoroughly in 10-K, so don't think for a second that CCME is trying to tricking investors.

Truth is, every body does it. Somebody was saying Baidu (BIDU) and Sina are doing the same thing. There is a law that prohibit certain activities, and there is a way to get around it.

If you want to get business done in China? or not?

LwC - 9 years ago    Report SPAM
"every body does it."


Well I used to try that on my parents when I was kid. Seriously though, I won't try to enumerate the many examples that have been publicized in which unsuspecting foreign business men/women have fallen for that in China, to their regret.

And as for your comment : "There is a law that prohibit certain activities, and there is a way to get around it." Well yeah, it's often called corruption.

On another note, a couple of weeks ago I read a report that asserted that the Chinese government pays computer geeks to monitor forums, blogs and news reports for negative expressions about China and to respond to try to undermine those comments. Indeed I've noticed that here on GuruFocus it is not uncommon for such replies to messages to appear under articles about China and its investment environment, usually by aliases that I had not previously seen.

And for the record, I have no financial interest in the subject company or any other Chinese company, nor do I care. After all, anyone who invests without due diligence deserves what they get. I happen to agree with Canadian Value, who posted the original article about MW's view on this company. Why invest in a company where there is some doubt, when there are numerous other opportunities for investment where the only risk is normal investment risk?

And finally, no, I don't what to get business done in China. I'll leave that activity to those who don't mind getting a little dirty to try to make a buck, or a quai in this case.

Guruek - 9 years ago    Report SPAM
LwC, The structure we are talking about is not illegal. Lawyers came up with those, and so far the Chinese Government seems to be OK with it so far.

The company is not trying to hide anything here. Read the 10-K and you can understand what I mean.

One of the things Starr Investments insisted CCME to do is to set up a procedure within CCME to comply with US Foreign Corrupt Practices Act not later than April 30, 2010.

That is in the 10-K too.

I respect your sentiment and caution towards China. You are a prudent man.
Zatowichi - 9 years ago    Report SPAM
Your point would be valid if the document in question reported profits only. However, it also shows revenues.

"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."

Revenue is sales, not profit. Even if all the profit at Fenzhong is paid to Express as the contracts stipulate, that still does not explain why Fenzhong is reporting virtually no revenue to the Chinese Authorities.
Lttzz - 9 years ago    Report SPAM
Apparent this practice does not only apply to Chinese companies. I've seen illustration showing how Google avoids taxes by setting up Google Ireland and Google Netherland. I didn't see their numbers but I've seen lot of US companies without any loss carry-over or special tax credits report ~10% effective tax rate. Just a few days ago, someone on a NPR early morning talk show discussed this issue, GE/EBAY were mentioned. Again, I didn't check their numbers to see how much a difference to ~30% tax one would natually expect. I understand LwC's point of this thing going away when goverments change regulations. But it seems every businessman around the world is creative :)
Guruek - 9 years ago    Report SPAM
Zatowichi: I do not know the answer to that one. I know there is a contract between Fenzhong and Express, but I do not know the exact terms. You really have to ask the auditor and the company itself. The company has a very reputable auditor, Deloitte Touche Tohmatsu in Hong Kong. Why people who choose to trust self-interested guys like MW instead of the auditors of the worlds is beyond me.

Zatowichi - 9 years ago    Report SPAM
I know there is a contract between Fenzhong and Express, but I do not know the exact terms.

Well, you would know the read the SEC filings. The contracts are posted as exhibits.


Lender, Shareholders of Fujian Fenzhong, Fujian Fenzhong and WU Xiujuan, a Chinese natural person, entered into two agreements on January 2, 2008 and July 10, 2008 respectively (the 2008 Two Agreements, together with the 2003 Two Agreements, the Four Agreements); as provided in the 2008 Two Agreements, the total profits occurring from Party B shall be paid to Party A after deduction of certain taxes and expenses as a consideration for the support and services provided by Party A

Fenzhong distributes profits, not revenue, to Fujian Across Express.
LwC - 9 years ago    Report SPAM
"Why people who choose to trust self-interested guys like MW instead of the auditors of the worlds is beyond me."

I certainly wouldn't argue that one should "trust" MW and their ilk, but IMO considering the the debacle of Enron, MCI, etc. as well as the failure of the major auditors to properly evaluate Lehman, Citi, AIG, etc. should give pause to the skeptics of the world.

And with your forbearance I will point out that a contract in China may not be as reliable as those of us in the USA, Europe and so on are used to, considering the rule of law that we take for granted. In China, a dispute is adjudicated by a "judge" who is answerable only to his/her Communist Party boss.

Guruek - 9 years ago    Report SPAM
Lehman, Citi, AIG, and Enron are all black boxes, auditing them right is not humanly possible. MCI didn't had any problem. It was WorldCom.

Your examples demonstrated scams happen everywhere in the world, it is not just in China. Without check and balances,everyone can and will sin.

CCME is rather straightforward, as far as the Auditor's job is concerned.

You have a point with regard to the rule of law. One has to be more careful in China, not just because the judges who is answerable only to his/her communist party boss, you will find people's interest is more diversified than you think.

As an individual investor, one can avoid China. But as a nation, we have to learn how the Chinese system works. The fact CCME's of the China found a RTO route to the US stock market means the Chinese are learning and learning hard.

Guruek - 9 years ago    Report SPAM
Zatowichi: There are discussions that the forms (_http://www.scribd.com/doc/48276706/Ccme-Saic-and-Sat-Filings) Chimin Sang used are actually forged,

I looked the files, at least the SAT files are suspicious because they do not have signatures and red stamps. Without those two, everyone can fill out a form and claim it belongs to CCME's operating company. The final form even got the year wrong... pretty bad con job.

Even if the forms are authentic, it must be obtained from a local Chinese government agency illegally. Also, the 2010 year end result are not finalized and company has not announced any numbers yet. Is it legal to trade on the Non-public Material information? A question Mr. Sang can answer to the US authorities.

Based on the first page of the documents, Chimin Sang may have used a local consultant who could not obtain the SAT documents legally so the consultant forged. You know when you do evil, other people evil against you.

If the forms are forged, what do you expect me to say?

The company's website has a Q&A (http://www.ccme.tv/eng/ir/faqs.php) on the tax issue:

Q: What is CCME's tax rate?

We are paying 5% in business tax for our advertising revenue, 5% in business tax for the income transferred from the operating company to the WOFE, and 25% in enterprise income tax.

I do not know what WOFE in this text stands for, could it mean Fujian Cross Express? I would say yes but I don't know for sure. I will contact the investment relationship of CCME and try to get an answer.

LwC - 9 years ago    Report SPAM
Well my point was only that IMO the auditors' approval should be viewed with skepticism, especially in a situation where one is aware of claims of nefarious deeds (which may or may not turn out to be true). And BTW, MCI Worldcom was mostly MCI at the time of the merger, and it was MCI that emerged from the bankruptcy; I'm not sure it's fair to quibble over that.

And as we now know, many of the "scams" that the auditors failed to see were actually right in front of the auditors' noses. In all too many cases the auditors' failures were simply the result of just taking management's representations for granted, rather than doing their jobs and actually recognizing that they were being scammed.

Your observation that in China people's interest is more diversified than I think is a fair statement, except for the part about me not knowing something about it. I might know more than you think, and it doesn't change my opinion that at the end of the day it is the Communist Party's interest that will be served regardless of what the peoples' individual interests might be, or foreign investors' interests for that matter.

Anyway, as I stated previously I don't know if CCME is a good investment or not. Nor do I care.

Good luck.

Guruek - 9 years ago    Report SPAM
LwC: Thanks and good luck.

If the numbers are true, it is as good as it gets. If not -- don't even ask.

Our first line of defense is DTT the auditor. The fact Starr Investments got involved gives me a bit of confidence too.

So far MW, CR, and lately Chimin Sang turned up nothing. Chimin make break a few laws here and there in making his accusation.

My analysis shows that at least their reported revenue number are not totally out the whack.

Superguru - 9 years ago    Report SPAM
With so many opportunities as an investor why should I touch something which has suspicion of fraud however misplaced it might be?

I do not know who is right and who is wrong and no way of knowing it. It is all opinions at this time.

I will just put it on too hard pile and move on. Many people will make (and lose) money on this stock, I will just find another.

I have strict rule: not to take this particular risk knowingly.
Guruek - 9 years ago    Report SPAM
Superguru: Around the time GGP file for bankruptcy, I was thinking about the same thing.

This one is not a fraud and I just proved it.
Noblepaladin - 9 years ago    Report SPAM
There is a lot of evidence that Chimin forged documents and used it as "evidence". Right now CCME is at a P/E of about 3 ex-cash. Their cash flow is enormous and they don't need the money, which is why they declared a dividend. I can't say for certain that CCME is not a fraud, but the evidence backing the accusations seem very suspect. If a P/E of 15 is fair, then this is priced as if there is an 80% chance that it is fraud. I believe the odds are less than 50%, which makes this a favorable bet.
Guruek - 9 years ago    Report SPAM
Zatowichi: Called the IR of CCME and was told WOFE stands for 'Wholly Owned Foreign Enterprise", which in this context, is Fujia Across Express.

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