UPDATE: In March 2011, CFO Jacky Lam of China Media Express and the auditors (Deloitte) resigned. Deloitte said they could no longer rely on the representations of management, and they suggested an investigation was in order. Ping Luo, the analyst from Global Hunter who gave CCME rave reviews resigned. Maurice Greenberg’s Starr Investments sued CCME for fraudulently inducing it to invest $13.5 million. The stock was delisted from the NASDAQ in May 2011.

Deloitte raised the following issues: questionable authenticity of bank statements, supicioius bank confirmation procedures, existence of advertisers/customers, undisclosed bank accounts and bank loans, financial filings with the State Administration of Industry and Commerce differing from information provided to auditors, questionable authenticity of tax filing documents, cash payments to employees, and double counting of buses.

Last month, I wrote a piece on China MediaExpress Holdings (NASDAQ: CCME) and the allegations of fraud by researchers at Citron Research and Muddy Waters. The story grew quickly with the reaction of the company and its supporters. China Media Express Holdings responded to the allegations with a letter posted on their website, but the letter failed to definitively address several of the issues. The supporters of CCME were rabid, attacking anyone who would question the company.

Citron and Muddy Waters made many accusations, but the most concerning items included:

• The company’s numbers are too good to be true, with revenues growing much to quickly and margins way too high to be believed. (I don’t buy the explanation that management is just good at controlling expenses.)
• Competitors and supposed clients have never heard of China MediaExpress.
• Significant discrepancies between numbers reported to the Chinese government and the numbers reported to the U.S. Securities and Exchange Commission.
• Significant discrepancies between the reported number of buses showing CCME content per the SEC filings and the information given to potential advertisers.

Fans of CCME cite the following as proof that the company is not a fraud:

• Citron and Muddy Waters are lying
• A sizable investment by Hank Greenberg’s C.V Starr & Co. Inc. was made following due diligence
• Global Hunter Securities has done due diligence on China Media Express (Yet there is at least one irregularity found in this report)
• The financial statements have been audited by Deloitte Touche Tohmatsu

I don’t dispute that Greenberg and Global Hunter have done due diligence, but that doesn’t necessarily prove CCME isn’t a fraud. And audits rarely detect fraud, so citing an audit (even by a reputable firm) as evidence that fraud has not been committed is just silly. Even sillier is the argument made by fans of CCME that Deloitte audited the cash, and if the cash is in the bank, then there is no fraud. I debunk that idea in detail here.

Last week Muddy Waters released what it called “irrefutable evidence of fraud” at CCME. Herb Greenberg felt something was a little off with this news, and I have to agree.  Something just didn’t sit right with this recording, and the jury is still out on it.

Things got more interesting yesterday. Trading of China MediaExpress Holdings was halted with a Nasdaq code of T1, which means the company is going to be releasing material news. Trading never resumed on Friday, and as of now, no information has been released.

Supporters of CCME are speculating that there is good news coming! The silliest idea is that the auditors are going to give China Media express a clean bill of health. As if trading would be halted pending the release of news that an annual audit was completed and all was well. Supporters are alternatively hoping that there is an acquisition in the works, or other good news.

I have little fear that this news from CCME will be positive in any way.  There are so many red flags of fraud, and I think at least some of them have real merit.

As if China MediaExpress needed any more bad news, today Roddy Boyd released a piece on his visit to China for some CCME due diligence of his own. Boyd paid CCME headquarters in Fuzhou a visit, even though his scheduled visit with the CFO was canceled at the last minute. He and a traveling companion were given a tour by Vinne Ye, the assistant to the chairman.

Virtually nothing was going on at the company. Employees were not engaged in anything that could be mistaken for work. They were doing things like napping and playing cards. No phones rang for the entire hour Boyd was there, no one was making copies, no on was working on a computer or looking at spreadsheets. The programming room, where the tour guide said all the important work happened, was devoid of work as well.  No work was being done at China MediaExpress. Nada. Zilch.

A little odd, don’t you think, for a company reporting $187 million in revenue for the four quarters ended September 30, 2010?

Boyd checked out the company’s competition. The advertising business is competitive, and those who buy and sell advertising space for the big companies like to keep tabs on the others…. unless CCME is one of the “others,” who no one seems to have heard of until researchers started asking them if they had ever heard of CCME. Add to this the fact that CCME is claiming to be much more profitable than these other media companies, even while their product is being put in front of a lower class demographic? (Common sense tells you that lower class viewers of advertising with less money to spend are likely not capable of generating top dollar from advertisers.)

And in a recurring theme, major international companies with which CCME claims it does business deny doing business with them.

My favorite part of Boyd’s analysis is the calculation of CPM – – the advertiser’s cost to get 1,000 viewers of an advertisement. Boyd calculated CCME’s CPM at $22.98, in comparison to a CPM of $27.02 for the Super Bowl. That’s right… one of the most expensive advertising opportunities ever costs $27.02 to reach 1,000 viewers, while China Media Express advertisers spend $22.98 to reach 1,000 lower income viewers. Outrageous!

And there are more numbers. Boyd says that the most successful publicly traded advertiser in China brings in $168,000 revenue per employee. CCME’s numbers work out to $907,000 revenue per employee. This is even more laughable when Boyd calls the CCME headquarters and “adult daycare center” based on the fact that no actual work was being done when he visited.

The sales to marketing expense ratio is also skewed at China MediaExpress Holdings, which spends only 3.7 cents to generate a dollar in sales. Vision China, a large established competitor, spends 20.4 cents to generate a dollar in sales. (I’m sure the argument is that CCME is more efficient or has a better process. I don’t buy it.)

Boyd highlights more curious data and details in his piece. It’s a long but worthwhile read. I can’t see any way that China Media Express turns out to be anything other than a fraud. It will be interesting to see what the big news is, and how quickly the stock price drops. My condolences to those who are long the stock. It must be a painful weekend for you, with only more pain to come.