Tuesday, September 11, 2012

Focus Media: some follow up to the post about the loan from Jiang Weiqiang to the company

In the the second to last post I raised a disclosure about Focus Media needing a $2.5 million loan from the CEO's father to "relieve a temporary shortage of Renminbi":
In March 2006, Weiqiang Jiang, the father of Jason Nanchun Jiang (the CEO/controller of Focus Media), provided a short-term loan to the Group of approximately $2.5 million to relieve a temporary shortage of Renminbi the Group experienced at that time. The loan is unsecured and was provided to us at no interest. The loan will become due and payable in full on June 30, 2006.

I wondered whether the Jiang Weiqiang was the civil servant who worked for the State Council Information Office. Despite gossip from usually well informed sources in China I doubt the link. The reason (links after this post) is that the man who is presumably the father-of-the-groom in Jason Jiang's wedding photos does not resemble the government official.

That said, I am far more interested in content of the disclosure than the personage of the dad.

The company reveals that in March 2006 it was facing a "Renminbi shortage".

This is a super-profitable company generating great gobs of cash in China (presumably great gobs of Renminbi). It is surprising they had a "Renminbi shortage" however I went looking for 2006 accounts to see if I could piece it together.

The March 2006 accounts

Here is the balance sheet from the March 2006 results which show a healthy cash balance both at December 2005 and in March 2006 with no obvious expenditure that would cause a Renminbi shortage in that period.


                         Focus Media Holding Limited
               UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

                         (U.S. Dollars in thousands)

                                                       2006-3-31   2005-12-31
                                                          US$          US$
                                                      (unaudited)  (unaudited)
     ASSETS
     Current assets
     Cash and cash equivalents                          $41,863      $36,653
     Investment in available-for-sale securities         34,792       34,836
     Accounts receivables, net                           37,275       22,235
     Inventories                                            605          480
     Prepaid expenses and other current assets            7,786       45,364
     Amount due from related parties                      2,982        2,073
     Total current assets                              $125,303     $141,641
     Rental Deposits                                     13,245       11,819
     Equipment, net                                      70,993       43,695
     Acquired intangible assets, net                     30,881        1,158
     Goodwill                                           406,791       13,298
     Long term investments                                1,118           -
     Other long term assets                                 221           -
     Deferred tax assets                                    193          743
     Total assets                                      $648,745     $212,354

     LIABILITIES AND SHAREHOLDERS' EQUITY
     Current liabilities
     Short term bank loans                               $1,247         $991
     Short term other loans                               6,778           -
     Accounts payable                                     8,280        5,848
     Accrued expenses & other current liabilities        71,414       11,747
     Amount due to related parties                        2,496           -
     Income taxes payable                                 2,188        2,108
     Total current liabilities                          $92,403      $20,694

     Minority interest                                      460          246

     Shareholders' equity
     Ordinary shares                                         25           19
     Additional paid in capital                         530,088      177,420
     Deferred compensation charge                            -          (247)
     Retained earnings                                   22,430       12,997
     Accumulated other comprehensive income               3,339        1,225
     Total shareholders' equity                        $555,882     $191,414
     Total liabilities and shareholders' equity        $648,745     $212,354



Cash has gone from $36 million to $41 million over the quarter. There was an acquisition in the quarter (Target Media) but they paid for that partly in stock and partly by doing a capital raise. (The observant will notice shareholder equity going from $191 million to $556 million.)

Bluntly, the acquisition Target Media could not cause a cash shortage - it was USD44 million in cash and the rest in stock. USD44 million was less than the cash raised.

In other words there is nothing in the accounts that quarter that suggests a pressing Renminbi shortage in March 2006.

I thought that there might be a Renminbi shortage because all of the above cash was held in USD. That would be unusual - but it was at least theoretically possible, however the prospectus issued in January 2006 disabused me of that notion. That prospectus raised US Dollars but the company in the prospectus said that the accounts were pretty well entirely in Renminbi (including the cash). To quote:
Foreign Exchange 
We maintain our accounts in Renminbi and substantially all of our revenues and expenses are denominated in Renminbi, while we report our financial results in U.S. dollars. Fluctuations in exchange rates, primarily those involving the U.S. dollar against the Renminbi, may affect our reported operating results in U.S. dollar terms...


It goes on - but we are informed this cash was all in Renminbi.

So I am left puzzled as how there could possibly be a Renminbi shortage which required the CEO to touch up his dad for a loan? I have no plausible explanation.

Two theories - both ugly - though only one very ugly

I have two theories to explain this sudden loan to cover "Renminbi shortage" when there was no Renminbi shortage in the accounts.

The first theory is that dad never lent $2.5 million to Focus Media however dad (or somebody else) was repaid $2.5 million from Focus Media - and the "loan" was just a mechanism for disguised looting. However in this case the dad might not actually be the beneficiary - it could be anyone associated with a large management team - just dad's name was put in as a place-holder.

The second theory is that Focus Media never had sufficient Renminbi cash because all the Renminbi cash generation and cash holdings are fake. In this case the company had US dollar cash from selling to US shareholders (also known as suckers) and had a "for-show" business in China which does not actually generate cash, but does generate plausibility to gain more suckers (and hence raise more US cash). In that case they needed Renminbi cash to keep the whole charade going.

I can't see any other plausible explanation but I am open to suggestions.

The first theory is ugly - it is the theory that Focus Media is being continuously looted. If that theory is correct then it bad for shareholders - but not awful. That theory is that Focus Media is hugely cash generative, only it is being looted by management. In that case the deal can close because once they own it the PE buyers can grab control of all that cash flow and put existing management on a very tight leash.

The second theory however is devastating for shareholders. It is the theory that there is no cash generation here at all - just pretend cash generation. If they really did want for a few million Renminbi the whole business can't be worth very much at all. Probably less than 100 million Renminbi based on demonstrated lack of cash generation. This theory is awful for shareholders because if that is true this stock settles BELOW ONE DOLLAR when the big goes away.

Note to the arb funds

There are a lot of arb funds who hold this stock. Don't think for a moment your downside risk is the stock goes back to $20.

If this is just a looting story (and that really a possibility) this stock goes to $27 and the deal closes.

But if the $2.5 million loan from Dad was necessary because this company actually generates no cash then the stock should settle somewhere between zero and one dollar.

I don't know the answer. Truly. But this is a company with very strange accounts - and there is a high risk the stock is a true debacle.

Arb this at your own risk. I for one will stay on the other side of your trade.





John

One reader sent me a link to some wedding photos for Jason Jiang and his very pretty bride. The Father-of-the-Groom (presumably the man on the far right) does not resemble the man in photos of the senior Chinese officials. So I withdraw the suggestion made to me by several well connected Chinese sources that there is a family link to officialdom.

16 comments:

Anonymous said...

interesting twin theories - but how could it be that the business generates no cash? doesn't seem possible. just given the nature of what they are doing, there isn't going to be high capex, and as you said in an earlier post, like when jc decaux did its first negotiations with ignorant city govts, they seriously mispriced the contracts


btw "very pretty bride"? skin looks like sandpaper and face looks like ass

Anonymous said...

probabbly not related, it seems jiang was a victim of a money laundering scheme. according to this court document, he and his dad sued an investment firm for 5 million rmb.
http://www.cnarb.com/sjyf/Print.asp?ArticleID=70015

his wife is a famous news host of phenix tv in taiwan. they have a son now who has taiwan citizenship.

Anonymous said...

john - just dont go to china anytime soon

http://ftalphaville.ft.com/blog/2012/09/10/1151281/the-growing-risk-of-shorting-china-stocks/?utm_source=dlvr.it&utm_medium=twitter

buyersstrike said...

Of course Focus Media might have had a RMB shortage if they pulled a Suntech (STP) and put the money in some shady fake bond deal...but more likely they just stole it.




Anonymous said...

Why not ugly and very ugly? Maybe they do both.

Off topic: noticed how the companies in luxury goods are doing today (CFR, BRBY, RITB).

John Hempton said...

I am disappointed in my readers. Some chose to take on the physical appearance of the bride.

Not fair. Not reasonable. Not right.

Comment vetoed.

John

Anonymous said...

John, for what reason does goodwill jump 390m in the quarter? I haven't been tracking the acquisitions and dates too closely, but this jumps out to me -- have they made acquisitions this large at that point in time?

Given all the accounting irregularities and odd disclosures, why do you think the PE group put in the bid? Is that just the first and necessary step in gaining access to the full records for DD? It just seems strange to me and a potential blackeye in the media for these companies (mainly Carlyle.. the others could have a different agenda) to put in a bid when there is so much question about the accuracy of the financials.

Anonymous said...

One thing that's strange is how come his dad is so rich? 100m USD is a lot of money in China. Last night I spent about two hours searching on chinese websites, and the only thing I found on the internet is his dad is the Focus media's representative in its Beijing office. It seems his dad is neither a government officer nor a successful business man. Assuming his dad get that $100mn from his son, why doesn't Jason Jiang loan the company money himself instead of through his dad? Could it be that Jason Jiang transferred all his money to his dad (and his taiwanese wife and son)?

questions said...

John, I guess the PE "offer" is just a preliminary interest letter, which usually wouldn't be released by a company until several steps have been completed in terms of due diligence, financing, etc. I wonder why the company released this letter ahead of what is customary and if this actually would cause the private equity investors to walk away?

What I can't seem to get a handle on is how Focus Media at the transaction price would be $3.6+ billion whereas JCDecaux is a $4 billion enterprise value. I would wager that JCDecaux's French business is at least as big as Focus Media's in terms of number of displays and obviously the higher GDP per capita would suggest a higher revenue per display in a country like France.

GS751 said...

John,

Really glad you brought light to this. When reading their 10-ks this is something that I noted with a large ? mark.

We sit in the same boat with regards to positions.

Anonymous said...

John - Burberry fell 20% overnight. will you consider putting back on your richemeonts?

Anonymous said...

FWIW, "Dad" clearly has some sophistication in western ways. Note how he's holding his wine glass in the weddng photo, compared especially to some of the others.

Anonymous said...

I don't understand why a company would even mention a $2.5M loan at all if there were any serious fundamental issues. Wouldn't they just hide it? To appease an auditor that asked where that cash came from? To your theories I might add a very convoluted one: someone noticed an extra $2.5M had just "showed up". (Consider an under the table payoff, etc.) It was then retroactively called a loan.
Rich

BG said...

@Anonymous said...
"FWIW, "Dad" clearly has some sophistication in western ways. Note how he's holding his wine glass in the weddng photo, compared especially to some of the others."

FYI: In China it is often customary when you make a toast to hold the glass with one hand and place your other hand under or on the glass as a sign of respect. Clearly you have not done much business in China.

ET said...

John, further to your point:
(a). They had a 2.5 million dollar squeeze in Renminbi. Not exactly possible if the business is massively cash generating.

This seems to be a compelling argument but, as one of your readers alluded to above, raises the question about why the company would even disclose this (to anyone) if your fake/massively overstated revenues theory is correct.

If the underlying business is largely a sham and the acquisitions and then write-offs are used to account for the missing cash, then presumably the management are well versed in the art of faking revenues (invoices, receipts, orders, contracts, etc.). Why then truthfully reveal such a loan, which clearly raises concerns for such an ostensibly profitable business, and not cloak it as some sort of revenue? Wouldn’t this be easy for these guys?

The counter-argument would be that the management either couldn’t be bothered to cover up this track or deemed the investment community too lazy to even find it, or some combination of the two. Or what do you think?

ET

Anonymous said...

You have a really well thought out argument here...like a financial detective piecing together what happened! I went OCD on this all weekend and came to the same conclusion-- ie it has to be argument C. The biggest question I'm wrestling with at this point is this-- can a buy out still happen, for a reason that is not apparent, for an "argument C" type of company???

Some random thoughts:

--I wonder if the evidence for "argument C" was just as strong for the other completed buy outs like Harbin Electric? I haven't done the research, but it would be super valuable to know if the evidence pointed to valuable businesses at the core, or (seemingly) worthless businesses like FMCN??? Were any of the same firms involved with previous buyouts of "worthless" companies?

-- Argument against: why would the CEO allow and encourage all this due diligence, knowing that he will be exposed and outed as a running a fraud???

-- Note that a long drawn out due diligence process is great for anyone wanting to unload at high prices. Are there there any indications that insiders are selling???

-- covered an "all in" FMCN short today (Sept 17th, 2012)...totally conflicted, just a gut call, not based on the mountain of evidence...what narrowly tipped the scales was rereading that largest shareholder Eastspring hinting that they want $30 per share instead of $27. Again, totally puzzling, but they're not acting like a company just happy to wash their hands and get what they can. Could be a bluff, or could be that despite their size and experience they are in ignorance also, like John Paulson of Sino Forest...???

Thumbs up on your veto on that classless comment regarding the bride...totally irrelevant to the subject at hand...

David

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.