Would Deloitte Sign the Deed to the Brooklyn Bridge?

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Citron Research is amazed at the amount that has been written on China MediaExpress (NASDAQ:CCME).  But amid all the noise, everyone seems to be overlooking the obvious doubt that should lie in the minds of shareholders, short sellers, and most importantly their auditors.   Yesterday, in the most definitive piece of research since the controversy boiled over, analyst Ping Luo explained that CCME’s “unique approach has made them less visible but kept them very profitable”.

What she doesn’t mention is that if CCME’s numbers are to be believed, they would be the most operationally successful company in the world, on a percentage basis, on the whole stock exchange…..EVER.

Instead of refuting the Global Hunter piece on its many inconsistencies and omissions, we are asking everyone to stop, breathe, and use a little common sense. As this report is being written, Citron is sure that the diligent employees of China MediaExpress are “cooperating” with Deloitte Touche audit personnel as they execute the annual audit of the company’s financials for its 10-K due in just ten days.  We would like to congratulate Deloitte for having been chosen auditor of this most successful company.

China MediaExpress is not your average company:  it has leaped past Google, Apple, and Microsoft in most fundamental metrics for judging successful companies:  return on assets and profit ( if you are to believe the numbers).   Meanwhile, they have done all of this without ever attracting any material attention in mainstream business news in either the US or China .   We are supposed to believe they have built a company under the radar that will be studied in business schools for the next 100 years — all without  having a traditional underwriter for an IPO or top tier analyst coverage.   Maybe Goldman Sachs is just intimidated by their success?

How did this happen?    Did they start a search engine that took over the country?   Did they find a huge gold deposit?  A giant gusher of oil?   Maybe they started a social network that was so compelling they made a movie about it.   Nope.  They sell advertising on buses to lower income people in rural China … people whose average income is around $200 a month.

And who are their customers?  Well that is a company secret intentionally kept from Wall Street.   In a recent piece of research put out by Global Hunter, we are told that the company does not want to disclose its customers, so the analyst just lists them as:

Competition?  Bring on the world!

We challenge anyone from Deloitte, or for that matter any shareholder of China MediaExpress, to identify a single credible telecommunication, media, or technology (TMT) company that has operating margins or return on assets even in the same league with CCME. The closest we found was BIDU, whom CCME still beats by 25% … a country mile in stock market terms.

So here you go.   All of these figures came directly from Yahoo finance so you can check them for yourself.   Citron compares CCME in 3 different sectors: US Market leaders, China leaders, and their direct competition in public venue advertising.  What makes these comparisons so compelling is that in the sharp-pencil world of corporate competition, even 3-10% differential is enormous.   But CCME just blows past everyone.  It would be equivalent to a major league baseball player batting .700 … and hitting 100 home runs!


CCME compared to world-class respected companies


CCME compared to Chinese high growth companies


CCME compared to stated Chinese competitors
(plus Lamar in the US for comparison)

We are asked to believe that for every dollar invested in the business, CCME returns over 50c per year.  If Enron had been reporting returns like that, how long would they have lasted?  Not only that, they have accomplished this feat without any substantial institutional ownership or analyst coverage.

If  this scale of profitability does not invoke some level of professional skepticism as mandated by the PCAOB or its Hong Kong counterpart, then we can confidently state that Deloitte is a collaborator in the fraud.  And yes, we welcome a challenge from Deloitte on that statement.

http://web.ifac.org/download/a008-2010-iaasb-handbook-isa-200.pdf

A Brief History Lesson

In 2005, Deloitte was fined $50 million for their part in the Adelphia fraud. http://www.sec.gov/news/press/2005-65.htm

The SEC stated that:

“Even though Deloitte identified Adelphia as one of its highest risk clients, Deloitte failed to design an audit appropriately tailored to address audit risk areas that Deloitte had explicitly identified.”

Deloitte has actually released a study on corporate fraud that could serve as a handbook to the local auditors on the job at CCME.

http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/FAS_ForensicCenter_us_fas-us_dfc/us_dfc/us_dfc_ten_things_about_financial_statement_fraud_presentation_011310.pdf

Citron notes that the Telecommunication, Media, and Technology industry (TMT) is called out as most vulnerable to fraud and the most common type of fraud is revenue recognition.  The fine people of Deloitte should study this document closely before electing China MediaExpress into the “business hall of fame”.

Conclusion

All of this reminds this writer of being a kid watching David Copperfield make the Statue of Liberty disappear.  As a stared at my television in amazement, I most certainly saw the Statue vanish from the Hudson River.  Yet, if  you asked me to sign the deed to the vacant island where it had just stood  … not a chance.  Even a 13 year old knows when not to believe their own eyes.

Watch the whole thing here:  http://www.youtube.com/watch?v=VAEw-gtDkO4 .

Cautious investing to all.