The Burden of a Low Share Price
posted by The Traveller on Friday, September 17, 2010

China MediaExpress (CCME) is currently trading at $8.59, down 18.97% for the year and down 41.93% from its March 24 high at $7.58. The Trading China Tracker Score is 17 (Strong Buy).

CCME's biggest problem is its low share price. At yesterday's closing price of $8.59 the shares are trading at just 3.8x our 2010 EPS estimate with $139.3 million in cash or $3.89 in net cash per share. If we back out that cash the forward P/E-ratio drops to just 2.0. And that compares to double digit ratios for CCME's peer group with Focus Media (FMCN, $21.59) currently trading at 28.2x projected EPS of $0.78 for the current year.

That kind of seemingly unwarranted huge discount to the peer group is seen as a strong warning sign by many investors. Something has to be fishy there, why do CCME shares not attract tremendous buying interest at those depressed levels? Rumors have been spread, from the tiresome discussion about discrepancies between financial statements filed with the SAIC and SEC to claims the company would be an outright fraud. Short interest has risen significantly over the past few months which contributed to the 25% drop from a month ago when the company reported strong second quarter results.

None of the accusations have been substantial or verifiable, yet the stock came under increased pressure from negative developments at completely unrelated but fellow Chinese companies like Duoyuan Printing (DYP) and China Sky One Medical (CSKI). The sentiment for U.S.-listed Chinese stocks couldn't be worse right now.

China MediaExpress is followed by only two small brokerage firms. Global Hunter and Northland Securities both rate the stock a BUY with an average price target of $23, or 167% above current levels. But there isn't much those small firms can do to CCME's defense, so the company decided to defend itself by announcing a share buyback program yesterday.

Its Board of Directors has approved a program, effective immediately for one year, to repurchase up to $30 million of its stock, using the company's available cash for funding. CCME reported $25 million in operating cash flow for the second quarter alone, so even if executed in full the buyback program won't leave a dent in the company's cash balance. However, if executed in full, the company will repurchase one third of the current public float of approximately 9 million shares. This is a significant amount.

All those numbers - $30 million buyback program, $38 million operating cash flow and $46 million net income in the first half of 2010, $139 million cash on the bank, ex-cash P/E-ratio of 2.0 - make this stock a screaming buy. Yet the stock price doesn't reflect any of this, it strongly suggests that the market doesn't believe all those numbers. So can we believe them?

Last December CCME hired Deloitte Touche Tohmatsu as its independent auditor. Deloitte is one of the "Big Four" that meets the highest standards, proven again by uncovering the problems at Duoyuan Printing (DYP) shortly after having been appointed. Deloitte audited CCME's annual report for 2009 and reviewed both quarterly reports for the current year.

And with Starr International, a well-known New York based private equity firm, CCME has an institutional investor ($30 million in December 2009) that hired independent third parties to do business due diligence, financial due diligence and legal due diligence. Starr has a board seat and, according to Global Hunter, monitors the company's financials on a monthly basis.

Global Hunter Securities reiterated their BUY rating and price target last night and commented that "in the past two months, we have talked to a number of bus operators and advertisers, who have been working with the company for 3-5 years. They have provided positive feedback on their working relationship with CCME."

Now it's up to every individual investor to decide whether to believe CCME's numbers or not.

Disclosure: no position in CCME



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