Saturday, August 14, 2010

China MediaExpress Holdings (NASDAQ: CCME) Shorter's Playball

What do short sellers know, what we don't know?

China MediaExpress Holdings, operates the largest television advertising network on inter-city express buses in China. Flat panel display screens are installed on 23.200 buses throughout China. Top and bottom line growth is coming primarily from the airport buses where premium advertisers are looking to get their message out to air travelers- the most affluent in China. Over 400 companies advertise with CCME, the client list includes local brand names as well as well-known international and national brands such as Coca Cola (KO), Pepsi (PEP), Siemens (SI), Hitachi (HIT), China Telecom (CHA), China Mobile (CHL), China Post, Toyota (TM), Bank of China and China Pacific Life Insurance.

The company's Q2 results were astonishing. CCME delivered $52 million in revenues in Q2- up 180% from Q2 '09. Margins were better, coming in at 70% vs 62%. Net profits were up 244% to $28.5 million, Earnings Per Share were $0.80. The company has a nice margin of safety with $140 million in cash, about $4 per share. The company expects to make $82 million in profits this year or an EPS around $2.30. Despite their own projections I guess an EPS of $3.00 is a real possibility. If we calculate 10x EPS, you have a $30 stock.

The company is doing its part, but I'm not sure the market is ready to do its part. Short sellers are punishing the stock for something a normal value investor doesn't understand. The reported short interest has doubled since June from about 1 million shares to 2 million shares, and the shorts don't seem to be scrambling to cover on the earnings. It's about 7 trading days of volume to cover this short. This short interest is the rocket fuel that will someday fly this stock to heaven and many short sellers hands are going to be burned.

Short sellers are no doubt emboldened by their success with the smear campaign of Orient Paper (ONP), so one wonders if the same sort of thing is planned in this case. Their auditor is not an outsourced version of BDO in China as was the case with ONP- it is Deloitte Touche- a big 4 auditor - and a well respected name in the audit world.  A major investment firm- Starr International, performed months of due diligence before investing $30m in CCME. June 3 the company became listed on the Nasdaq Global Select market which has the highest corporate governance requirements.

The fight between longs and shorts will go on. The longs have the upper hand on the fundamentals and ask themselves when this stock is going to heaven. The shorts are guessing what to do and in the worst case bring controversial rumors in the market to defend their position.

One day we all will know who was right and who was wrong.


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