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Focus Media Holding Ltd. Message Board

  • nugget3434 nugget3434 Mar 9, 2012 10:27 AM Flag

    Thoughts from a long time investor

    I must admit that the Muddy Waters report makes me hesitant. As an individual investor living in the US, there is some level of trust I must have in a company. I own some stock in Apple, Monsanto, Vimpelcon, and others. I must have some trust that their reports are correct.

    Many of the items in the Muddy Waters report are issues that we already knew about and do not constitute fraud. Bad investments or bad decisions by FMCN aren't necessarily fraudulent. The bad investments or decisions are already priced into the earnings result and stock price. That is why FMCN is no longer over $60 like it was a few years ago. RIMM made some bad decisions with their phone and their stock went from $140 to $14 while Apple went from $200 to $540. It means RIMM made bad decisions and Apple made good decisions, not that RIMM committed fraud.

    I have read Matt's opinions and he doesn't understand half of what he is talking about. He talks about the change in theater count. I agree that it was changed, but then he claims that they came upon their initial number of approximately 27,000 by using total number of ads run on movie screens. That is not how they calculated it previously according to company documents.

    Also, the LCD count. I agree that it is odd that cardboard posters were counted in the LCD number. However, the company has explained why and how they classify everything and that is legit. The problem would be if an advertiser (example Coca-Cola) thought they were paying for digital LCD when they were really only getting cardboard posters. The other problem would be investors who felt the company had more assets than they really do (digital screen obviously has more net worth than cardboard). Of course if the assets, profits, revenues, etc. are reported correctly, then there is no fraud.

    I am not convinced that FMCN has been as transparent as they should be. I am also not convinced they committed fraud. There are some holes in some of FMCN's stories, but plenty of holes in Matt's stories as well. He is accusing FMCN of making stuff up, but then fabricates plenty of his own. As an investor I have seriously trimmed my position, and will wait out the storm a little longer with a small long position. I think the final direction will be up, but I'm not much of a gambler.

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    • Nice post. I recommend Prof. Gillis to all involved with US listed PRC companies. It has been an education. His blog is here: http://www.chinaaccountingblog.com/

    • >>3. MW accused FMCN of making up six companies out of thin air. The company's response provides nothing in return. They count on investors taking claims at face value without doing any checks, and they have done well with that reliance. BVI companies cannot directly "own" PRC operating companies. There must be a WFOE between the BVI and the VIE-Operating Co, and even then none of it makes sense if the PRC based nominee does not belong to one's own organization. The Nominees of the companies FMCN claimed had not changed and we are still waiting for FMCN to reveal the necessary WFOEs to complete the "transaction."<<

      Bulls are always telling you Matt, who cares about LCD's it's all about the earnings. Well here is an issue that relates to earnings. If they do not have a contract that satisfies auditors to the earnings of these VIE's then earnings are impacted negatively.

      Furthermore, after reading that Gillis piece, if I want Chinese exposure, I would buy a H listed or A listed share. It's illegal per Chinese law for a foreign company to own a Chinese company. Hence this Rube Goldberg VIE WFOE contract structure to a right (not ownership) to the earnings stream. And that right or contract is with one person (nominee??). Gives me the willies.

    • Nugg:
      Why do you still try to reason with Matt? He is a mental case.

    • Again you neither present any facts of your own nor do you point out any flaws in reasoning.

      1. The company claimed a theater network of 27,000 theaters when there were only 1,600 theaters in all of China.
      2. When caught inflating their LCD count the company "explained" that cardboard posters had been called LCD devices.
      3. MW accused FMCN of making up six companies out of thin air. The company's response provides nothing in return. They count on investors taking claims at face value without doing any checks, and they have done well with that reliance. BVI companies cannot directly "own" PRC operating companies. There must be a WFOE between the BVI and the VIE-Operating Co, and even then none of it makes sense if the PRC based nominee does not belong to one's own organization. The Nominees of the companies FMCN claimed had not changed and we are still waiting for FMCN to reveal the necessary WFOEs to complete the "transaction."
      4. Self-dealing.
      6. Insiders have netted $1.7 Billion in stock sales.
      5. Massive write downs of up to $1.1 Billion out of $1.6 Billion of acquisitions since 2005. Recently acquired businesses written down and given away will no consideration even though many of them were healthy.

      On your end ... nothing.

      http://www.scribd.com/doc/78114133/A-Critical-Failure-in-the-Focus-Media-Story-FMCN

      http://seekingalpha.com/article/343191-focus-media-s-explanation-comes-up-short-part-1-the-lcd-count
      http://seekingalpha.com/article/343211-focus-media-s-explanation-comes-up-short-part-2-the-theater-count

      http://www.muddywatersresearch.com/research/

      http://geoinvesting.com/companies/duediligence/fmcn_thehandsetsix12022011.aspx

    • "Facts are imperative here. Muddy Waters Research has pointed to evidence adding up to the conclusion that management is unreliable, has engaged in self-dealing, and that assets have been falsified. If so, all info downstream must be thrown out the window. No one has demonstrated a refutation of the major points; fmcn has merely CLAIMED a refutation. Facts on the long side at this point are imperative. Where are they?"

      For whatever reason, you've categorized MW's allegations and your own conjectures as indisputable truth and all other information, whether that comes from FMCN, sell side analysts or third party auditors as merely "claims" or just blatant lies. How very convenient and delusional. I just hope that logic sticks as good collateral when you margin calls come knocking.

    • "No fact, just an understanding of the real world..."

      Facts are imperative here. Muddy Waters Research has pointed to evidence adding up to the conclusion that management is unreliable, has engaged in self-dealing, and that assets have been falsified. If so, all info downstream must be thrown out the window. No one has demonstrated a refutation of the major points; fmcn has merely CLAIMED a refutation. Facts on the long side at this point are imperative. Where are they?

      "I've been a manager at many companies and here's how it works."

      You can't fix a fracture in logic with business experience.

      "Ineveitably, I read the earnings release and it's got wrong information, but it doesn't matter to someone that understands the business."

      We are not talking typos here, but self-dealing, massive and questionable write-downs, and inflated and falsified assets.

      "# of screens might matter to your competitive intelligence team, but not the people running the business."

      It is not the number of screens or theaters that matter. It is the loss of credibility suffered due to having lied about them.

      "You are correct that these issues could be caused by fraud. I'm also correct that these issues happen all the time at reputable companies."

      You've got to be kidding.

    • No fact, just an understanding of the real world...

      I've been a manager at many companies and here's how it works.

      I'm busy running the day to day business and someone from the CEO's office comes down and says. "I need to know how many of this or how often that etc. etc. and I need to know by tomorrow" I say, I don't track that or measure it that way, they say 'too bad', I need the metrics pronto....
      My team looks at the data we have and try to match it back to revenue customers etc. The only think I care about is revenue, # of contracts etc. the numbers I have make sense in that context, so I send them off. Then we don't look at them again until the next quarter. Nobody asks me how it's getting reported to the street. Ineveitably, I read the earnings release and it's got wrong information, but it doesn't matter to someone that understands the business. Half the information in an earnings release sounds interesting but doesn't mean anything to someone who understands the business.

      # of screens might matter to your competitive intelligence team, but not the people running the business.

      You are correct that these issues could be caused by fraud. I'm also correct that these issues happen all the time at reputable companies.

    • "you are clearly biased" ...

      Whether biased or not, my state of mind is no match for the facts. Why don't you present some and set me straight?

    • No, the inflated and fake assets are only one part of the fraud. The other part is how it is going to come down.

      The SEC is suing Deloitte over the work papers for Longtop.

      Based upon this suit I believe that Deloitte will NOT escape scrutiny this year over the audits of FMCN and QIHU (I am short both). Deloitte-main will bring Deloitte-China under supervision, I believe, and will protect its reputation. The cases against FMCN and QIHU have been widely publicized and are solid.

      Also, see the correspondence between FMCN and the SEC. See
      http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_F/threadview?bn=25984&tid=25388&mid=25390

      Source:
      http://sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001330017&type=upload&dateb=&owner=include&count=40

    • Matt,

      Your accusation of fraud may ulitmately be true, but you are clearly biased and unable to entertain anything other than fraud. I hope you realize that your rants are no longer helpful (what a pity)

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