Sunday, September 30, 2012

Canny Chinese Securities Firms

The WantWant China Times just published a short article under the title Canny securities firms shower fund companies with treats.

What is amazing about the article is how they describe an utterly contemptuous system so blandly.

The article reveals that Chinese securities firms routinely deliver fund managers gifts including "envelopes containing cash" thus "undermining the rigorous research-based approach."

The article is coy about what it is saying - but here is my interpretation. Fund managers buy securities from brokers without due diligence and those securities may be worthless or dramatically overpriced. The brokers are thus looting the funds. To make this work they are kicking back "envelopes of cash" to the fund managers who are thus participants in the scheme to loot their own funds.

Losers of course are clients.

But it is not just cash that is being delivered to fund managers. The article talks about "attractive saleswomen" delivering "breakfast" to "the manager of a fund company".

Euphemisms abound. To quote the article:
A recent recruitment ad placed by a securities firm in Shenzhen also spelt out clearly that it was looking to recruit attractive and "open-minded" women as sales representatives.
The system they describe is where "attractive and open minded women" deliver "breakfast" to men responsible for allocating other peoples money and where this will undermine research-based investment.

Are you a client or limited partner in an China based investment partnership or private equity fund?

Are you uncomfortable yet?





John

Wednesday, September 26, 2012

Focus Media: what happened to the airports?

The adverts on an LCD screen are worth more in a high-traffic location than a low traffic location. They are worth more when people are predisposed to shop rather than say on the way into their apartment.

They are worth more where rich people congregate.

Airports are top-of-the-pile. At airports people of well above average income sit around and wait. And they are surrounded by shops or about to go to exotic locations where they will spend-up.

So it is worth exploring Focus Media's history in placing LCD advertisements at airports.

The 20-F filing for 2005 described their plan to expand their LCD network:

into new cities and regions in China and diversify into new networks and advertising channels such as airports, hospitals and other possible commercial locations;

And they already had some panels placed in airports as well as airport shuttle buses and on flights as per this disclosure:
our commercial location network, which refers to our network of flat-panel television displays placed in high-traffic areas of commercial buildings, such as in lobbies and near elevators, as well as in beauty parlors, karaoke parlors, golf country clubs, auto shops, banks, pharmacies, hotels, airports, airport shuttle buses and in-air flights. Our commercial location network is also marketed to advertisers as six separate channels targeting different types of consumers: our premier A and B office building channels, our travel channel, our fashion channel, our elite channel and our healthcare channel.
Exactly the same disclosures occur in the 20-F filing for 2006. 

In the 2007 filing the panels placed in airport shuttle buses and flights disappeared, but they still had the panels in airports. The loss of the shuttle buses and in-air flights was never explained. Did they sell the business? Did the owners of the sites kick them out? Simply unexplained.

By the 2008 filing the only airport disclosure remaining was that they planned to expand into new channels such as airports (the exact wording from the 2005 filing remained). They no longer operated in airports.

Was the airport business disposed of? Did they forget they owned it?

The word "airport" does not occur in the 2009 filing or in any of the amended filings that year.

By the 2010 filing they are back in airports as per this disclosure:
The majority of displays on our LCD display network are currently placed in heavy-traffic areas of commercial office buildings. The locations in our LCD display network also include shopping malls, banks, hotels and certain airports. We market our LCD display network to advertisers of consumer products and services, such as automobiles, home electronics, mobile communications devices and services, cosmetics, health products and financial services.
By the 2011 filing the airports had disappeared again.

So I will leave it as a question for the due diligence team. What happened to the business placing screens in airports, airport shuttle buses and in-air flights?

You can of course ask Jason Jiang, the CEO, because all the standard biographies of the man indicate that is how he cut-his-business teeth - installing screens in airport shuttle buses.


John

PS. Possibly the most spectacular Chinese reverse merger fraud, China Media Express supposedly had screens on airport shuttle buses. Indeed even today you can see Youku videos purporting to count the (non-existent) CCME screens on airport shuttle buses.

I will never look at a video on an airport shuttle bus the same way.

Monday, September 24, 2012

Visiting New York, speaking at the Santangels conference


I am in New York on 25 October presenting at the Santangels Review investor forum. I am thrilled.

I know only a few of the other speakers - but I will tell you how I found the name of one.

There was an attendee - a very clever woman at a Goldman Sachs commodity conference in Asia. When asked about her the response was - she is fabulous. Really clever. Not Jane Siebels - but really clever.

I had never heard of Jane Siebels (and I still really don't know anything about her) but I gather that far-and-wide in that field she is considered the benchmark.

And I have been invited to speak at the same conference as the benchmark.

The other speakers look just as intimidating.

Good thing I like a challenge.

Saturday, September 22, 2012

Weekend edition: Mark Seymour and Eddie Vedder

A classic of Australian rock played at the Garden. Wish I was there...




 And some more Mark Seymour:


 

Thursday, September 20, 2012

Focus Media revenue plausibility test: Part two


Focus Media makes a lot of revenue per screen compared to US Television.

Many people in the comments to the last post worked out rough ratios. There are at Focus Media roughly 130 thousand screens (more now, less at the beginning of the year) generating 221 million in revenue in the last six months (see press release).

That is rough $3400 per screen per year per year.

In the fourth quarter of last year the revenue from LCD screens was 150.4 million. There were about 120 thousand screens average over the quarter. Annualized that is almost $5000 revenue per screen.

Television advertising revenue in the US is about $72 billion

There are roughly 310 million televisions in the US. (See here suggesting lower or here suggesting higher...)

Revenue per screen is roughly $235.

It depends a little on quarter - but Focus Media revenue per screen is 14 to 20 times higher than US Television revenue per screen.

Almost (but note entirely) everyone I have shown this to thinks that the revenue-per-screen at Focus Media seems high. [That includes many industry insiders.]

Overstated revenue per screen is consistent with interpretation (c) as per this post.

Other possible comparisons

It seemed to some people unfair to compare advertising in lift wells (which sometimes 20 people are forced to watch) with the TV in your kitchen (which may be on in background with one person or nobody watching). Some people thought I should compare with other out-of-home advertising companies.

The problem is that not all screens are born equal.

Screens are more valuable where rich people with high disposable income congregate. That are even more valuable if viewers have a willingness to spend that income.

They are more valuable where you are forced to wait (and hence watch the screen).

They are less valuable where only a few dozen people pass them per hour (say in the lobby of residential building). Also in the lobby of a residential building you see the screen when you are going home. Advertisers would prefer show their adverts to people who are near shops or about to go to the shops.

Probably the single most valuable screens are in airports. Airports are full of relatively well-to-do-people. They are also full of shops with fatter than average margins. People are forced to wait. Often they are travelling and extremely willing to spend on hotels, tourist attractions, luxury goods. Some even have expense accounts.

One comparable is Air Media - who probably have the best-placed screens in China - they dominate the airport space.

One part of that business is directly comparable to Focus Media. It has 42 inch panels which intersperse advertisements and content in airport waiting areas as per this quote from the annual:


We strategically place our digital TV screens in high-traffic areas of airports such as departure halls, security check areas, boarding gates, baggage claim areas and arrival halls, where there tend to be significant waiting time. A majority of our standard digital TV screens are 42-inch plasma display panels or LCDs. As of March 1, 2012, we operated approximately 2,690 digital TV screens in 36 airports in China under various concession rights contracts. These 36 airports accounted for approximately 81% of the total air travelers in China in 2011, according to the General Administration of Civil Aviation of China.
That business generated 21.9 million dollars in revenue in the last year. That is just over $8000 per screen - or more than double Focus Media. However these screens are at least 4 times the size of Focus Media screens and have many times the views.

Bluntly: these are optimally placed large screens. Amongst locations in China really.

By contrast, Focus Media screens have been spotted in the basement of office buildings where the janitors and maintenance staff congregate. They also place screens on every floor of some office buildings - this one is on the 21st floor of an office building in Shanghai:




It has the usual number of people watching it. (Nobody...)

They are in lobbies of residential buildings in third-tier cities - where people watch them before they  go back to their apartment rather than before they shop.

My guess: either revenue per screen at Air Media is low and likely to rise - or the revenue per screen at Focus Media is high or possibly overstated and likely to fall.

==============

Some further calculations:

I work on the 21st floor of an office building in Sydney. It is unlikely that more than 20 people per hour catch the elevator at this floor. (That still makes the lobby busy...)

Work on 9 hours per day, 275 days per year, and you get about 50 thousand impressions per year.

The cost per thousand impressions for a Superbowl advertisement is about $35 (probably less). At Superbowl rates this screen would garner roughly $1500 revenue per annum.

Residential buildings in third tier cities would produce lower revenue.

If the revenue really is over $3000 a screen I doubt it is sustainable.

Being a cynical fellow I keep getting drawn back to interpretation C in this post.




John

PS. Air Media revenue per screen has been falling. I have talked to several people in the industry and they all say the same things. Revenue is growing but only because number of screens is growing. The pricing pressure in this industry is down simply because there are increasing numbers of screens.

Tuesday, September 18, 2012

Focus Media plausibility test part one


This post is being written for everyone on the deal-team bidding for Focus Media.

It is also been written for everybody who is considering whether to lend the bid 1.5 billion dollars to consummate this deal.

Finally it is being written for Ashish Goyal from Prudential Investments who is Focus Media's largest shareholder and was quoted in the WSJ stating he wanted more than $30 for his shares. [Someone please forward this to Mr Goyal. He seems a reasonable man.]

I just want you to guess the numbers. Don't look them up. Don't calculate. Just guess. Put your guess in the comments - anonymously if you wish.

TV Revenue per screen in the US

There are about 310 million TV sets in the US - roughly one per person. People deliberately watch these for several hours a day. Indeed people sit their family down in front of them to eat dinner.

Their main economic purposes is to show advertisements - the content on them is the lure to get people to sit in front of them.

And there is an enormous industry producing content for them (whose costs have to be covered by advertising). A good part of the city of Los Angeles exists to produce TV content. TV advertising supports the lifestyles of every camera grip and editor and some very large indulgent lifestyles (Charlie Sheen).

TV advertising is still the biggest advertising category in the US.

So take a guess at the advertising revenue per screen. Per month, per year, I don't care. Just guess the revenue per screen.

LCD Revenue per screen in China

Focus Media has about 130 thousand LCD screens - the main format being 17 inch LCDs displaying almost entirely adverts.

The majority of these screens are in elevator lobbies and other low-traffic locations.

Here is a typical screen from a low-traffic area - this one 1030 Hua Min Empire Plaza Shanghai.



Nobody sits themselves down in front of these screens - but they are forced to watch (or at least be around) the adverts when waiting for an elevator.

On the plus side these screens don't waste precious time with content - they just show adverts (which would tend to make them more valuable). And you can't fast-forward through the adverts.

However they are in China where advertising rates (per thousand impressions) are generally lower than the US.

Moreover, nobody sits their family around these screens to eat dinner.

So take a guess at revenue per screen for Focus Media's LCD screens. Per month, per year, I don't care. Just guess the revenue per screen.

Ratios

Have a look at your guesses.

Calculate the ratio of Focus Media revenue per screen to US Television revenue per screen. Is Focus Media:

* 5 pernent of the revenue per screen of US TV?
* 10 percent of the revenue per screen?
* 25 percent of the revenue per screen?
* 50 percent of the revenue per screen?
* About the same revenue per screen as US TV?
* Double the revenue per screen of US TV?
* Four times the revenue per screen of US TV?
* Ten times the revenue per screen of US TV?
* Twenty times the revenue per screen of US TV?

Please put your estimate in the comments.

More tomorrow.







John

Monday, September 17, 2012

Focus Media: Three interpretations - which one is right


This blog has demonstrated a bunch of bizarre transactions in Focus Media's accounts. In particular I have focussed on transactions during 2009 in which vast sums appear to have been lost in businesses that were acquired from companies formed only months before acquisition. In each of these cases the business was sold or mostly given back to the original owner.

Here is the disclosure I focussed on (but there are other strange disclosures I could pick):

2009 Disposition
In 2009, we aborted a contemplated initial public offering for its Internet advertising segment due to the economic recession in late 2008. As a result, between August and December 2009, we disposed of six underperforming subsidiaries in that segment through a series of individual transactions with their respective original owners. Each of the subsidiaries was considered a component of our company, and their results have been included in discontinued operations in the consolidated statements of operations. The results of discontinued operations include net revenues and pretax losses of $127.6 million and $45.4 million, respectively, related to these subsidiaries. We recorded a loss on disposal of $44.1 million.

The following table summarizes the acquired subsidiaries in the mobile handset advertising services segment and Internet advertising segment that were sold back to their original owners in 2009:

Acquisitions
Date of
acquisition
Business segment
Proceeds paidDate of
Disposal
Loss on
disposal
1.
Catchstone(1)
2007-4-16  
Internet advertising
$14,489,647  2009-12-22  $11,560,617  
2.
WonderAd(2)
2007-9-15  
Internet advertising
$14,926,003  2009-11-30  $14,926,003  
3.
Jiahua(3)
2007-8-15  
Internet advertising
$7,659,158  2009-12-1  $7,659,158  
4.
Wangmai(4)
2007-9-1  
Internet advertising
$2,749,158  2009-12-14  $2,749,158  
5.
Jichuang(5)
2007-12-1  
Internet advertising
$366,032  2009-8-24  $366,032  
6.
1024(6)
2008-3-1  
Internet advertising
$3,397,124  2009-12-18  $3,397,124  
7.
Dongguan Yaya(7)
2007-10-1  
Mobile handset advertising services
$1,540,612  2009-2-28  $1,588,110  

(1)The original sellers which subsequently repurchased Catchstone were Only Education Holding Limited and Maxnew Holdings Limited, BVI companies owned by a single PRC individual unrelated to our company.
(2)The original seller which subsequently repurchased WonderAd was Megajoy Pacific Limited, a BVI company ultimately owned by seven PRC individuals unrelated to our company.
(3)The original sellers which subsequently repurchased Jiahua were two PRC individuals unrelated to our company.
(4)The original seller which subsequently repurchased Jichuang was Richcom International Limited, a BVI company owned by a single PRC individual unrelated to our company.
(5)The original sellers which subsequently repurchased Keylink Global Limited were four PRC individuals unrelated to our company.
(6)The original sellers which subsequently repurchased 1024 were two PRC individuals unrelated to our company.
(7)The original sellers which subsequently repurchased Dongguan Yaya were Sinoalpha Limited and Max Planet Limited, BVI companies each of which is owned by a separate single PRC individual unrelated to our company.

The main thing demonstrated was that all the British Virgin Island (BVI) companies above:

* had the same address despite being explicitly unrelated parties, 
* had the same phone number despite their non-related status, 
* in all cases except one had been formed only a few months before they sold a business for millions of dollars to Focus Media 
* in the exception had been formed after they sold the business to Focus Media 
* had in all but one case later been struck off the register for non-payment of a fee.

Moreover the companies given back in 2009 were given back with a lot of cash (some 27 million dollars) embedded in the companies as they were given away. Focus Media on the disclosed accounts appear to have given away cash.

Three interpretations 

originally had three interpretations of this disclosure. These were

(a). The accounting statements absolutely straight, Focus Media really did buy all these businesses, lose a huge sum of money on them and gave them back to their original owners,

(b). Focus Media used these transactions facilitate the mass looting of the company. That is the money was not really lost, but rather the business were purchased and given back to their original owner as part of some scheme to steal from the company.

(c). That the losses were fake - a form of profit washing. In this interpretation Focus Media reports fake earnings (say inflated revenue or deflated cost, most likely inflated revenue) and this loads the balance sheet with fake cash. The fake cash needs to be removed (or the auditors will find it or shareholders demand it) so the fake cash gets removed from the balance sheet with fake losses on rubbery transactions.

Two interpretations left

On the information as discovered so far interpretation (a) above requires one to believe that all these seemingly unrelated parties found the same lawyer to register their BVI entities and that these businesses generated millions of dollars in net worth in a few months before they were sold to Focus Media.

Indeed you need to believe that Richcom, which was not even in existence, had a business that Focus Media was happy to buy for millions of dollars.

There are scenarios where interpretation (a) remains possible. For instance if all the Chinese entrepreneurs had the same lawyer and hence all the addresses are the same, and that lawyer was sloppy and forgot to actually register Richcom. They might have the same lawyer because they socialize at the same Karaoke bar.

However interpretation (a) requires this unlikely combination of circumstances.

This leaves two remaining interpretations (b) and (c) above. Either the company was being looted or there were fake profits and the losses described above were fake losses whose accounting function was to make the books balance when there were fake profits elsewhere.

These two interpretations have wildly different implications for the future of Focus Media

The main response to my posts is to say that all I have demonstrated was that Focus Media prior to 2009 was a very dodgy company. Bill Bishop - one of the more sophisticated China watchers - tweeted as much:


  Pre crash fmcn had lots of the crap you and muddy waters have documented, post crash fmcn cleaned up


Indeed this was also the response to Muddy Waters who alleged fraud at Focus Media about a year ago. There were just a bunch of dodgy transactions.

But my interpretations (b) and (c) above have wildly different outcomes for the stock.

If the company was being looted - as say Bill Bishop and many others imply - then there was something there to loot.

Something there to loot suggests the company really is valuable.

Once the looting stops (and you would presume it would stop after being taken private) then the cash flow is real and can service lots of debt and make the PE buyers rich.

If however (c) is true then the losses recorded in 2009 were fake losses - then the profits recorded were fake profits. If this is the case then the company can't service lots of debt (the profits were fake and you can't service real debt with fake profits) and the PE deal will collapse.

Indeed if the profits were not real then there is nothing there to loot, nothing of any real value - and an end value for the stock is below $2 (and I think probably below $1).

The accounts since 2009

The accounts since 2009 have shown a fairly steady build up of cash and financial assets. The two interpretations have something to say about that.

In interpretation (b) the company was heavily looted in 2009. However it is a valuable company and since then that value has accumulated as cash on the balance sheet. To believe this you have to assume that the management were evil but they somehow turned good.

In interpretation (c) the company was not looted in 2009, just a huge pile of accumulated fake cash was removed from the balance sheet by having fake losses. Since 2009 the company has continued to accumulate fake cash. Eventually that fake cash will also need to be removed from the balance sheet. This situation is just like at the end of 2008 where this interpretation would imply the company had also accumulated a bunch of fake cash only to have it removed by fake losses in 2009. To believe this you have to believe the company is currently accumulating fake assets (including some fake cash).

It is of critical importance to the stock to work out which is true. If (b) is true this deal will close and you will get $27 a share. If (c) is true the deal is likely to fail - and the downside is to maybe a dollar or two a share. [There are reasonable scenarios where the downside is to zero...]

Indications that it might be C and the shares are nearly worthless

There are several things that indicate that it is more likely to be (c) than (b). Here are a few.

The company had a Renminbi shortage in 2006

I know it is a long time ago - but this is a startling disclosure:

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.

The company disclosed a "temporary shortage of Renminbi". At the time the balance sheet showed plenty of cash and cash generation. The only way that there could have been a Renminbi shortage is if the cash was fake. And the cash was only fake if the earnings were fake. Moreover a Renminbi shortage implies almost no net cash generation - consistent with a worthless or nearly worthless share.

The disclosure of a Renminbi shortage is consistent with interpretation C.

The company appeared to pay cash to a company that did not yet exist

In August 2007 Focus Media purchased a business from Richcom International for over $2 million. The only problem is that Richcom International was not formed until October 2007. In other words it appeared to pay cash to a company that did not exist.

A company that does not exist has a very hard time opening a bank account and hence has a hard time receiving cash.

But it has no problem receiving fake cash (you don't need a bank account for that).

This is consistent with interpretation C. Fake cash paid comes from fake profits.

In 2009 the company essentially gave away almost all the subsidiaries it disposed of, but the accounts showed that those subsidiaries had 27 million in embedded cash

Above there is a list of companies disposed of in 2009. All of those were given back to their original owners. In some cases a small consideration was paid.

However the cash flow statement for the year shows that in excess of 27 million dollars was embedded in the companies that were given back to their owners in 2009.

This could be looting - but is particularly blatant - just giving away cash.

The alternative hypothesis is that the cash embedded was fake. This appears more reasonable to me than actually blatantly just giving away cash.

The company used to overstate its number of movie screens

Overstating things like numbers of movie screens is consistent with overstating revenue. Overstating revenue will give you fake cash as per (c) above.

The company used to say that it had 27,164 theatres on which it displayed averts. There were less than 1600 in all of China at the time. This sort of overstatement leads one to question whether other things are being overstated - and hence fake cash is being produced.

That is supportive of interpretation (c) above.

The company claims extremely high revenue per movie screen

The company later restated down the number of movie theatres it displayed in - but it never restated down the revenue from those theatres. Revenue per theatre ran at over $27 thousand average last year - above the average and near the high-end of US revenue per theatre.

Moreover it was running at roughly a $40 thousand per theatre run-rate in the fourth quarter of last year. That is above the peak in the US.

Advertising rates in China are substantially lower than the US. Moreover my independent inquiries suggest the revenue per screen in China is closer to $7,500 per year.

Overstated revenues means fake earnings and fake cash as per interpretation (c) above.

The company overstated and restated down the number of LCD screens it has

The company recently reclassified a whole lot of screens in the LCD business to the poster-frame business. The reason given was that they were originated by the LCD business and hence counted as LCDs. Perhaps plausible but also consistent with generally overstating things and hence overstating revenue.

Overstated revenue leads to fake cash as per explanation (c) above.

The company claims to make huge margins from a business that nobody finds profitable elsewhere in the world

How many 17 inch displays showing adverts have you seen in residential buildings in countries other than China? They do not exist in Australia. I have not seen them in New York. Sometimes in office buildings or hotels (usually advertising the facilities of the hotel). Never in residential buildings.

That is because nobody can make them profitable in residential buildings outside China.

However they claim over $3000 per screen of revenue in China. If you could get that much revenue in China (where advertising rates are low) you could get more elsewhere and the screens would grow like mushrooms in dark elevator lobbies all over the planet.

They are not.

Either China is really different or the revenue and profits are overstated in China as per interpretation (c) above.

Summary

Most of the evidence is consistent with (c) above. The strange transactions are not looting as the bulls in the stock would suggest. Interpretation (c) is that these transactions are the washing of fake profits by producing offsetting fake losses.

In that case the business earnings are not real and the business cannot support all the debt that the PE firms will laden it with. The private equity deal will fail as the debt defaults.

It is hard to tell what the stock is worth absent a PE bid. However as nobody can make an LCD business substantially profitable in (say) America what is it worth in China where advertising rates are lower?



John


PS. There is someone associated with this deal who has been arrogantly telling friends that they love this blog. They say I am keeping the pricing pressure down and making this deal easier.

If interpretation (c) is right this deal will collapse spectacularly after it closes (the debt will default, the PE buyers will get nothing). And you were warned and continued regardless.

The explanation for your recent arrogance is probably "deal fever". But as I said at the beginning of this sequence of posts private equity has the ability to due diligence and your limited partners will be expecting rigour over hubris.

If you do the deal and it fails spectacularly (despite ample warnings) your limited partners and the regulators will believe something worse than hubris. Probably far worse.

My guess for what they will believe: that you did this deal knowing it to be fraudulent and that you got kick-backs for doing it. They will believe you looted your own funds. That belief may or may not be true - but that is what they will suspect.

If interpretation (c) proves correct and you close this deal your career (and possibly your whole life) will get very difficult indeed.

Of course if I am wrong and interpretation (a) or (b) is true this will be a great deal. Go for it.




J

Sunday, September 16, 2012

Follow Bill Bishop's twitter feed now

Samuel Johnson declared that patriotism (and presumably its twin nationalism) was the last refuge of the scoundrel.

The Chinese regime has been doing a lot of it lately (of which attacks on Western short-sellers are a very minor example).

The latest burst of nationalism has come back to bite and if you want live updates follow Bill Bishop's twitter feed live from China:


Selected tweets:


Bill Bishop ‏@niubi
Panasonic Plant in China on Fire as Anti-Japan Protests Escalate - Bloomberg 


banner in shenzhen calling 4 "nuclear extermination of japanese wild dogs" good 4 US pivot, just need to put $$ in2 it 


kids attacking a Japanese car, supposedly in Zunyi per weibo

In Chengdu, police headed off 2,000 protesters who were trying to charge to U.S. consulate. They wanted U.S. "to listen to their voices".




John

Thursday, September 13, 2012

The choice of lawyers in Tortola: Focus Media counterparties edition


The main streets of Tortola are a little dusty. When I wandered down them they were surprisingly empty but then it was hot. Very hot. There were irregular English tourists who had wandered away from the coastal resorts for a look-see. You could tell them, they were sunburnt to a strange crimson. There was the odd local seeking those tourists out (and me at the time) to offer us marijuana. There were signs for the local poison (Pusser's rum).

Beyond that there were lots of low-slung, excessively air-conditioned office buildings that contained lawyers. Lots and lots of lawyers.

After all Tortola is tax-haven in the sun with British law. The lack of taxes and the lawyers to protect your rights are the industry in the British Virgin Islands - and lots of people structure their businesses there.

Including the people that Focus Media does business with.

Here is a list of 2009 dispositions made by Focus Media (you will find the original in the latest 20F filing):



2009 Disposition
In 2009, we aborted a contemplated initial public offering for its Internet advertising segment due to the economic recession in late 2008. As a result, between August and December 2009, we disposed of six underperforming subsidiaries in that segment through a series of individual transactions with their respective original owners. Each of the subsidiaries was considered a component of our company, and their results have been included in discontinued operations in the consolidated statements of operations. The results of discontinued operations include net revenues and pretax losses of $127.6 million and $45.4 million, respectively, related to these subsidiaries. We recorded a loss on disposal of $44.1 million.

The following table summarizes the acquired subsidiaries in the mobile handset advertising services segment and Internet advertising segment that were sold back to their original owners in 2009:

Acquisitions
Date of
acquisition
Business segment
Proceeds paidDate of
Disposal
Loss on
disposal
1.
Catchstone(1)
2007-4-16  
Internet advertising
$14,489,647  2009-12-22  $11,560,617  
2.
WonderAd(2)
2007-9-15  
Internet advertising
$14,926,003  2009-11-30  $14,926,003  
3.
Jiahua(3)
2007-8-15  
Internet advertising
$7,659,158  2009-12-1  $7,659,158  
4.
Wangmai(4)
2007-9-1  
Internet advertising
$2,749,158  2009-12-14  $2,749,158  
5.
Jichuang(5)
2007-12-1  
Internet advertising
$366,032  2009-8-24  $366,032  
6.
1024(6)
2008-3-1  
Internet advertising
$3,397,124  2009-12-18  $3,397,124  
7.
Dongguan Yaya(7)
2007-10-1  
Mobile handset advertising services
$1,540,612  2009-2-28  $1,588,110  

(1)The original sellers which subsequently repurchased Catchstone were Only Education Holding Limited and Maxnew Holdings Limited, BVI companies owned by a single PRC individual unrelated to our company.
(2)The original seller which subsequently repurchased WonderAd was Megajoy Pacific Limited, a BVI company ultimately owned by seven PRC individuals unrelated to our company.
(3)The original sellers which subsequently repurchased Jiahua were two PRC individuals unrelated to our company.
(4)The original seller which subsequently repurchased Jichuang was Richcom International Limited, a BVI company owned by a single PRC individual unrelated to our company.
(5)The original sellers which subsequently repurchased Keylink Global Limited were four PRC individuals unrelated to our company.
(6)The original sellers which subsequently repurchased 1024 were two PRC individuals unrelated to our company.
(7)The original sellers which subsequently repurchased Dongguan Yaya were Sinoalpha Limited and Max Planet Limited, BVI companies each of which is owned by a separate single PRC individual unrelated to our company.



All these businesses were acquired and sold back to their original owners. Indeed they were mostly given back to their original owners. Those original owners were mostly BVI entities which the company has said were not related.

In my original post on this matter (which you should read first) I posed three different interpretations of the accounts.

The first interpretation was that these really were unrelated entities and huge amounts of money was lost on these transactions and then the assets were given away. That is the accounts were straight and these were just bad deals.

The second interpretation was that these were undisclosed related parties and the transactions were part of looting Focus Media.

The third interpretation was that the earnings of Focus Media were fake (probably by faking up revenue) and the losses on these transactions were fake losses designed to offset fake profits (and hence make the books balance).

The whole write-up is here. I had no way of distinguishing between these interpretations.

Since then I have done more work.

In particular I have obtained the company registration details from the British Virgin Islands for six of the counterparties. Remember these are unrelated counterparties - they are BVI companies that sold assets to Focus Media and were mostly later given those assets back. As these were unrelated purchases all of these counter-parties should be unrelated. All of them except for Only Education Holdings Limited and Maxnew Holdings Limited because above it discloses that those two companies are owned by a single PRC individual unrelated to Focus Media.

Lets go case by case:

Catchstone was purchased from Only Education Holdings and Maxnew Holdings limited on the 16th April 2007. Only Education was registered on 6 October 2006, Maxnew on 8 January 2007. Both had the same address and phone numbers:

R.G. Hodge Plaza 2nd Floor
P. O. Box 3152
Road Town
Tortola VG1110
British Virgin Islands
Tel#: 1-284-494-4693 Fax#: 1-284-494-4627

That is OK because Only Education and Maxnew were related parties - they were both owned by the  same PRC individual.

Both companies were later struck-off for non-payment of a fee.

WonderAd was purchased from and later given back to Megajoy Pacific Limited, a BVI company owned by seven PRC individuals unrelated to Focus Media. The date of purchase was 15 September 2007.

Megajoy was registered on the 2 February 2007. The registered address and phone number were:
R.G. Hodge Plaza 2nd Floor
P. O. Box 3152
Road Town
Tortola VG1110
British Virgin Islands
Tel#: 1-284-494-4693 Fax#: 1-284-494-4627

The company was later struck off for non-payment of a fee.

By now I am puzzled. In a town full of lawyers these seemingly unrelated parties have managed to choose the same lawyer.

Wangmai was purchased from and later given back to Richcom International Limited, a BVI company owned by a single PRC individuals unrelated to Focus Media. The date of acquisition was 15 August 2007.

Richcom was registered on 25 October 2007. Strangely this company was only came into existence a few months after it had sold a multi-million dollar business to Focus Media.

The registered address and phone number are:


R.G. Hodge Plaza 2nd Floor
P. O. Box 3152
Road Town
Tortola VG1110
British Virgin Islands
Tel#: 1-284-494-4693 Fax#: 1-284-494-4627


Yes - it is the same address. And the same outcome. The company was struck off for non-payment of a fee.

Dongguan Yaya was purchased from and later given back to Sinoalpha Limited and Max Planet Limited. The acquisition date was 1 October 2007. Each of these companies was owned by a separate single PRC individual unrelated to Focus Media.

Sinoalpha was registered on the 12 July 2007. Max Planet was registered on 10 August 2007. They both had the same address and phone number:


R.G. Hodge Plaza 2nd Floor
P. O. Box 3152
Road Town
Tortola VG1110
British Virgin Islands
Tel#: 1-284-494-4693 Fax#: 1-284-494-4627
Yes - that same address.

Sinoalpha has since been struck-off for non-payment of a fee but (believe it or not) Max Planet is a company in good standing.

Pictures of the official search records for all of these companies are appended to the end of this post.

Interpretations

I originally had three interpretations of the disclosure about the 2009 transactions. The idea that all these transactions are straight though becomes harder to sustain.

In a town full of lawyers all these seemingly unrelated parties chose the same lawyer. And they are sloppy about it - they don't pay their registration fees and get struck off. More notably (in the case of Richcom) companies that do not yet exist sell assets to Focus Media and are later given those assets back.

The last example leans hard towards my third interpretation - that fake cash was paid for fake assets (hence indicating that Focus Media has fake earnings). Why?

Because millions of dollars were - on this data - paid to a company that does not yet exist. I am not sure how a company that does not exist opens a bank account and receives real cash. [Not having a bank account to receive the cash received precludes the first two interpretations above...]

But a company without a bank account can receive fake cash [as per the third interpretation].

That final line is of course just a guess [maybe the company that did not exist did actually have a bank account]. But on the data here it looks to be a guess with pretty good supporting evidence.




John


Appendix: Company details

Only Education Holdings Limited:


Maxnew Holdings



Megajoy Pacific Limited




Richcom International Limited



Sinoalpha Limited


Maxplanet Limited








General disclaimer

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.