Short-seller Muddy Waters has renewed its attack on Chinese digital out-of-home media owner Focus Media, despite independent research commissioned by Focus which appeared to clear it of last year’s allegations that it had grossly overstated the size of its network. Screenmediamag.com editor Barnaby Page reports.

Following Muddy Waters’ charge in November that Focus was misrepresenting the extent of its LCD network in office buildings, residential blocks and public venues by as much as 50 percent, Focus called on Ipsos Marketing Consulting Company to validate its claims. That firm found only a minute error of about 0.04 percent, or 80 screens.

But now Muddy Waters has changed its tack and is alleging that around 30,000 “displays” in the LCD network are in fact cardboard posters.

Says the research firm, which acknowledges that it may stand to benefit from a fall in the company’s share price by taking a short position in Focus stock: “We believe that the conflation of cardboard with LCD amounts to securities fraud and a violation of GAAP segment reporting principles. In any event, those points are for Deloitte [Focus’s auditor Deloitte Touche Tohmatsu], the SEC [the U.S. Securities and Exchange Commission], and courts hearing investor class actions to ultimately decide.”

Focus is not denying that the so-called LCD 1.0 units are in fact conventional printed posters, but argues that “this is not new information. Such traditional picture frame devices are included within the LCD network because these devices were installed in Tianjin, Kunming and Shijiazhuang, cities that were developed by the company’s LCD display network division. The word ‘LCD’ in the name of each type of device clarifies that the company classifies it and includes it for device count purposes within its Focus Media LCD display network, and not in its Framedia poster frame network.”

Many, however, will feel that even if Focus has not quite lied about the substantial presence of non-digital technology in its LCD network – which comprises about 185,000 displays, including the LCD 1.0 units – it has historically been happy for the differences to go unexplored.

Playing with numbers

Muddy Waters makes additional charges in its latest report, not only repeating some of its earlier allegations but also saying that in the past Focus claimed to have signed up more cinemas to its movie theatre network than existed in the whole of China.

The media owner’s response to this is that before 2009 it “calculated the size of its movie theatre network by calculating the number of screens on which each of its advertisers had purchased advertising and then summing the screen count for each advertiser to produce an aggregate number of screens”. From 2009, it says, it switched to a more conventional method of reporting simply the number of cinemas for which it held advertising rights.

Muddy Waters calls this explanation “almost as ridiculous as its conflation of cardboard with LCDs”. And, indeed, both the surface irrationality of Focus’s claimed pre-2009 policy on movie screens, as well as the appearance of being forced to admit an inconvenient truth concerning the LCD network, might be expected to deter some investors. Focus’s stock is traded on the U.S. NASDAQ exchange with the ticker symbol FMCN.

But that doesn’t seem to have happened. The company’s share price, which was 25.5 immediately before the original Muddy Waters report was released and plummeted as low as 8.79 on its publication, closed Monday at 23.52.

Nearly all the lost value has been regained, and the influential investment Website Seeking Alpha even included Focus in a list of fund managers’ “top undervalued China buys” this week, observing that “the allegations at a minimum have...kept a lid on the stock price”. To mix metaphors, has Muddy Waters cried wolf once too often?

www.focusmedia.cn/en
www.muddywatersresearch.com

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