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China MediaExpress: Past Lessons

The following commentary comes from an independent investor as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

BEIJING ( TheStreet ) -- Investors are said to have short memories and this seems to be the case with CCME. I have put many hours of work into China MediaExpress Holdings (CCME) CCME and I am now very concerned that we will see a restatement.

We have seen this many times in the past, and each time there was some excuse why investors never saw it coming, including cash verifications, audits of 10Qs by Big 4 auditors as well as too much faith in research analysts and the supposed due diligence done by institutional investors.

I have given concrete examples from the past on why these things should not be overly relied upon.

Back in November, China Education Alliance (CEU) was the subject of a short report claiming that the company was an empty shell.

This report took the share price down to $2 from over $5 in preceding weeks. I noted a number of flaws in the short report. In particular, I noted that the short sellers never spoke with management, never visited the company and never even went to China. Instead they made use of paid "investigators" whose credentials were never stated.

As a result, I hopped a plane to Harbin. During four days of viewing every possible classroom and student that were presented to me in the best light by management, I saw fewer students in total than attended my high school.

After some technical difficulty we were able to download the company's online product, which cost only 1 RMB (about 15 cents). In contrast to the short report, there were in fact classrooms, students and a functioning Website. However there was clearly no conceivable way that the business that I was seeing was generating over $30 million in revenues as stated in its SEC filings and very recent investor presentations.

Prior to my visit, CEU's auditors announced that they had performed "enhanced procedures" to verify the company's cash balance and the stock jumped by 60% to $3.50 under the theory the company must be real if the cash is real. However, after a disappointing conference call, the stock dropped straight back to $2 where it still sits today. This represents a 20% discount to reported cash per share. Those who bought on the bounce due to the verification of the cash lost around 45%.
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