GEO Investing

Investors, including the GeoTeam®, will closely monitor the developments surrounding the attack on CCME by Citron and Muddy Waters. Last week, we published a small update regarding our initial thoughts on this subject.

Due to events over the past year, many investors have abandoned the ChinaHybrid space. If CCME can be taken out, it is our fear that the RTO space may lose another layer of supporters that have kept their faith in believing that quality could be found. The outcome of CCME’s story could have far reaching ramifications for the near term trading prospect of rest of the companies in the RTO universe.

CCME has a top auditor, convincing third party on-the-ground due diligence, strong institutional investors, has issued a dividend and a employs a CFO who bought a large amount of stock at $15.00. If we can’t trust this scenario, what can we trust?That is why we were only moderately impressed with CCME’s response this morning. Although, they did touch on many of the issues in the “hit” pieces, one major and defining issue was not addressed:

Muddy Waters issues on pages 13 and 14 of their report regarding allegations that key media buyers who handle accounts of customers that CCME claims to do business with are unaware of CCME.

CCME needs to address this concern. Show us a contract or have some of your major customers publish a comment attesting to their relationship with you.  It would be very impactful if management could confirm its relationship with a company like Coca-Cola®.

CCME could have also done a better job handling their assertion that SAIC documents drastically differ from SEC filings.

Here is their comment:

“CCME’s SAIC reports were prepared in accordance with pertinent SAIC rules and policies. Our consolidated financial results reported in the Company’s audited financial statements are prepared in accordance with US GAAP”

CCME should take a page out of GFRE hit piece rebuttal that points to supportive references. Please see GFRE 8K exhibits.

We are not long CCME, as we await more details.   We also for see rebuttals from Muddy Waters or Citron.  One question investors will begin to ask will be how does this tier one company go public at a low multiple via an RTO transaction in lieu of an IPO, especially since it did not need to raise expansion funds?  Investors should begin to take a closer look at the SPAC transaction to follow the money trail and value the transaction.

As for investors who want to deploy significant capital to the ChinaHybrid space, investors should do one of two things.

  • Wait for the completion of 2010 audits; multiples are low enough that you may be able to still grab good value at this time.
  • Invest only after you have completed a level of on the ground due diligence on prospective companies.  Along with pulling SAIC filings on several ChinaHybrids, we have performed some level of DD on many firms. Investors need to know that there is hair on more names than we would like to admit. We will have details on this later and why we think SAIC filings may be a more useful investment tool than originally thought by many.
  • Seasoned investors may want to deploy minimal capital across names that they think will pass audits (provided audits will be completed by top auditors).

Overall, we feel that the ChinaHybrid universe will continue to be a sentiment driven market vs. a fundamental driven market, at least until mid March/April when audit results will begin to offer clarity. We also need to be mindful of the SEC investigation into Chinese RTOs. A little help from CCME management would not hurt too.

We are maintaining our portfolio weight allocation of 80 % U.S.A and no more than 20% ChinaHybrids. We have also began shorting ChinaHybrids when our on-the-ground due diligence gives us reason to. Our over-exposure to the U.S. micro-cap sector has enabled us to perform nicely over the past several months, even as China RTOs struggle to gain sustained momentum.

Last week we removed NEWN from the tier one list and CELM from the GeoBargain list until they address significant differences between SAIC and SEC filings. From this point forward we will not code ChinaHybrids as a GeoSpecials or GeoBargains if SAIC filings significantly diverge from SEC filings or until more clarity is offered on this topic. see note

Disclosure: We have purchased puts as a precaution. We feel the current attitude creates volatility and can possibly test the nerves of any fragile long investors. Furthermore, we need to see more clairification and confirming evidence regarding customers as well as disclosure of SAT documents. A trading halt in shares poses a risk to option-related strategies. We are still performing on the ground due diligence before we make any long investment decision.