China Mediaexpress Holdin (NASDAQ:CCME)

Given the current market environment, The GeoTeam would like to put CCME expectations into perspective.

Normally, we would remove CCME from the GeoBargain list

Based on 2010 guidance, the 2nd Q should be a strong quarter, however dilution will likely impact 2010 3Q and 4Q resulting in EPS growth of less than 30%:

If we take the high end of CCME's guidance of $75.0 million and subtract the first quarter reported net income of $18.1 million, it will report net income of $56.9 million for the remaining 2010 nine months.  This works out to about $19.0 million per quarter or EPS of $0.57.

In 2009 we calculated that CCME reported EPS of:

• $0.40 for its June second quarter. (2010 implied EPS growth= 42.5%)
• $0.56 for its September third quarter. (2010 EPS implied growth= 1.8%)
• $0.49 for its December Fourth quarter. (2010 EPS implied growth= 16.3%)

We are not sure how investors will react to such events.  Short-term investors may choose to revisit CCME as it enters 2011 when, according to the 2011 net income target of $130 million, consistent EPS growth should resume. (2011 EPS could reach $3.88 based on current shares. This compares to about $2.25 for 2010 if objectives are met).

**Please be aware that the the 2010 net income guidance is below the incentive allocation target of $83.5 million. Investors should take this discrepancy into account if they choose to reference the 2011 net income target when formulating an investment decision. Also, if allocation targets are met, the fully diluted share count will rise.

**CCME also was adamant about not providing a 2010 EPS target during its 2010 earnings call.

The good news for dedicated long-term investors is that:

• CCME guidance does not include acquisitions or additional advertising agreements with buses. As it currently stands, CCME has increased its "bus exposure" by 8.3 % (1751 additional busses) since it issued its guidance.
  
• Per the 2010 first quarter conference call, CCME is evaluating potential acquisition opportunities. (We got the impression that such an event could be imminent).
  
• Per the 2010 first quarter conference call, CCME confirmed that its guidance is very conservative.
  
• It appears that management is portraying a strong message that it will not have to dilute its shares anytime soon:

"CME believes that its existing cash resources, the anticipated cash flows from operating activities, will be sufficient to meet both its short-term and long-term liquidity needs, including capital expenditure requirements to achieve its expansion plans and the potential increase in costs as a result of becoming a public reporting company."

We will make an exception and keep CCME coded as a GeoBargain for long-term investors who are aware of some of the possible short-term "perception" hurdles. 

GeoBargain, China MediaExpress Holdings reported stellar third quarter results. Investors may want to take particular note in the following comments that may indicate no immediate needs to raise capital via the issuance of stock.

"As of September 30, 2009 and December 31, 2008, CME’s accounts payable, one of the principal components of its current liabilities, were $2.0 million and $1.6 million, respectively. CME’s accounts payable relate to concession fees payable to the inter-city express bus operators participating in CME’s networks. CME expects its accounts payable to increase as the number of inter-city express buses carrying its network increases.  Moreover, as of September 30, 2009 and December 31, 2008, CME’s accrued liabilities for the purchase of property, plant and equipment were $1.5 million and $1.1 million, respectively.  CME believes the cash it generates from its customers, will be sufficient to fund its expansions and payment obligations to the inter-city express bus operators and CME’s equipment supplier.

CME believes that its existing cash resources, the anticipated cash flows from operating activities, will be sufficient to meet both its short-term and long-term liquidity needs, including capital expenditure requirements to achieve its expansion plans and the potential increase in costs as a result of becoming a public reporting company."

Source: SEC Form 8K (November 16, 2009)

On November 2, 2009 we published "Hidden Clues Yield Opportunities", an article in which we mentioned Amcon Distributing (NYSE AMEX:DIT) and Hong Kong Highpower Technology (NYSE AMEX:HPJ) as companies giving us clues into their future growth prospects.

Some bullish clues we search for are insider buying at 52-week highs (ex. Amcon), substantial increases in dividends, acquisitions made with existing cash balances, lenders amending loan arrangements by accepting equity, news indicating that guidance could surpass estimates (ex. Hong Kong Highpower) and reverse splits during a period of growth. 

This morning, China MediaExpress Holdings (TMI)  repurchased and retired 1.9 million warrants in a private transaction.

We have been following the China MediaExpress / Tm Entertainment & Media story since June 25, 2009.

Today's actions by China Media may be a clue indicating that cash flow is stronger than anticipated since the Company is willing to retire warrants from which it would have otherwise received cash upon exercise.

We still can’t rule out any future capital raise events, but investors may view today's move as management's confidence in its business prospects and a willingness to enhance shareholder value.

We will continue to keep our eyes wide open and ears pressed to the pavement in search of company clues that ultimately lead to certainty in these uncertain times.

On October 15, 2009 Tmi Entertainment & Media approved its business combination with CME media. This is exciting news on two fronts:

1. On June 25 2009 we coded TMI a GeoBargain. We were a little weary of doing so because the consummation of a merger was not yet a done deal. However, based on the Company's aggressive financial performance targets and clean balance sheet, we felt  that TMI offered a nice opportunity to participate in a hot China industry sector. The GeoTeam® thinks that the stock may offer some significant upside from current levels.  [[See valuation scenarios]]

2. The approval of the business combination justified the warrant arbitrage strategy we highlighted on September 1, 2009, thanks to GeoContributor "Drexion".  The warrants saw an increase in price from $0.16 to $1.81 in roughly 6 weeks from our first mention. Ironically, with TMI currently trading at $7.88, the warrants are still mispriced with an intrinsic value of $2.38 (warrant strike price is $5.50). That doesn't even include a premium for time value as the warrants have a two year expiration.

This was a great example of the internet creating a social medium for investors to get together and formulate an incredible opportunity that we all could profit from.  Keep up the good work everyone!

Disclosure: The GeoTeam owns TMI warrants. Our plan is to slowly sell the warrants as they approach intrinsic value.

The GeoTeam® is updating TMI valuation scenarios due to information brought to our attention by a GeoInvesting user (Drexion). We originally computed future earnings per share figures using a share base of 32.7 million (as indicated by the company) before the addition of potential make good shares. However, this share count does not take into account the existence of warrants with an exercise price of $5.50. The proper fully diluted share count should be approximately 45 million.

Drexion also highlighted the following potential arbitrage opportunity

• Current Price of Common Stock: $7.83
• Current Price of Warrants: $0.16
• Strike price of Warrants: $5.50
• Implied intrinsic value of warrants: $7.83 - $5.50= $2.33

• Buy the warrants at current price of $0.15.
• If the business combination is completed and the warrants become exercisable then the warrants should approach the implied value.
• Profit = (New Value of Warrant, Properly Priced) minus $0.15.

There is caveat that is likely contributing to current warrant price.

Excerpts from TMI 2008 10K

• An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless.
• An investor will only be able to exercise a public offering warrant if the issuance of common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants.
• The Company will not be obligated to deliver securities, and there are no contractual penalties for failure to deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration is not effective at the time of exercise, the holder of such Warrant will not be entitled to exercise such Warrant and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle the warrant exercise. Consequently, the Warrants may expire unexercised, unredeemed and worthless.

Furthermore, several acquisition deals have fallen through over the past nine months.  If this happens to TMI, the warrants would be worthless upon liquidation.

Drexion's opinion on the likelihood that this deal will not be consummated.

On March 31, 2009, TM announced that it reached an agreement with Opportunity Partners L.P., a fund in the Bulldog Investors (“Bulldog”) group of private investment funds in connection with Bulldog’s then ongoing consent solicitation and proposed proxy solicitation. In connection with the settlement, Bulldog agreed (i) to cease its efforts to effectuate an early windup of TM, (ii) not to oppose the board of directors at the next meeting of stockholders or otherwise seek to exercise control over the management of TM, (iii) to withdraw its demand to force TM to hold an annual meeting of stockholders, and (iv) to enter into a forward contract with TM or a third party whereby Bulldog would not vote its shares against a proposed business combination. As part of the settlement, TM agreed to name Gerald Hellerman to its Board of Directors, who is independent of both Bulldog and TM. In addition, TM reimbursed Bulldog for certain expenses it incurred in connection with its consent solicitation and proposed proxy solicitation. As of the date of this proxy, Bulldog owns 2,340,550 shares of TM Common Stock, representing an 18.7% ownership interest. We believe the fact that Bulldog agreed to enter into a forward contract with TM enhances the likelihood that TM will receive stockholder approval for each of the proposals being voted upon at the Special Meeting.

Thus we already have 18.7% of the vote guaranteed. Another 33% of the public-vote is required and then management's 18% goes along with the majority.

The 18.7% holder agreed to not vote against the acquisition. I am not sure this means a 'Yes' vote or a 'Abstain'. The critical component here is that without voting 'No', that holder cannot choose to be one of the parties liquidating their positions if the measure passes (Must vote 'No' to get that liquidate-option). This is very good due to the 'If more than 30% choose to liquidate, acquisition does not happen' rule that is in place....That was a very high shareholder bar they had to pass, and the bar is now much lower. The Director that the 18.7% holder got to place on the board DID vote for the acquisition, so it is very possible they will vote 'Yes' and have it count towards the majority (Management's 2.1M shares votes along with majority).

I think it is important to note that a number of the major institutional holders of the TMI common also have very large TMI Warrant positions, as of 6/30/09. If they were planning to vote 'No', that warrant position would make no sense. Let me list some of them real quick:

QVT Financial LP 1.0M shares common, 600.0K warrants
HBK INVESTMENTS, L.P. 942.5K shares common, 515.9K warrants
DEUTSCHE BANK AKTIENGESELLSCHAFT 234.1K shares common, 202.7K warrants
BASSO CAPITAL MANAGEMENT, L.P.114.8K shares common, 577.1K warrants

Drexion's opinion on the "warrant caveat".

Fairly common verbiage... It will definitely be exercisable as soon as the acquisition is approved...If it is approved... That's why CME made sure to put in the clause where they get the first 20M raised from warrants.

The GeoTeam® will offer updates when more details become available.

While this strategy does appear attractive, investors must still consider the potential risks associated with the story.

Disclosure: The GeoTeam® has established a position in the warrants due to the favorable risk/reward opportunity.

TMI currently meets eight out of ten GeoBargain® requirements.  Please note that The GeoTeam® is awaiting future filings in order to further assess the company's balance sheet.