Focus Media Holding FMCN
FMCN's 'independent' verification of its 185,174 LCD network counted 30,500 cardboard posters as LCDs, confirming Muddy Waters' fraud thesis and impugning all reported financials.
Thesis
Muddy Waters reiterates its Strong Sell on Focus Media (FMCN) after the company's January 2012 'independent' Ipsos verification of 185,174 LCD displays was exposed as including roughly 30,542 cardboard posters relabeled 'LCD 1.0 picture frame devices' — over 15% of the supposed flat-panel network. Management's excuse that those locations lacked adequate power is implausible: a 17-inch LCD draws 20 watts versus the 50,000 watts a typical elevator pulls. Combined with FMCN's earlier disclosure of 27,164 movie theaters in a market of only 1,545, the pattern shows management fabricating network inputs that drive revenue. Because LCDs generate roughly seven times the monthly revenue of a poster, and ASPs and lease costs are independently unverifiable, Muddy Waters argues investors cannot trust reported financials and that the conduct amounts to securities fraud and a violation of GAAP segment reporting.
SCQA
Focus Media (FMCN) is a Chinese out-of-home advertising company whose reported revenues depend on the disclosed size of its LCD display network and movie theater network.
After Muddy Waters' November 2011 short report, FMCN's 'independent' verification confirmed 185,174 LCD displays — but 30,542 of them are cardboard posters and the prior theater count exceeded the entire Chinese cinema market by 17.6x.
Investors should treat FMCN's financials as unreliable, maintain a Strong Sell, and expect SEC, auditor, and class-action scrutiny over fraudulent network disclosures and GAAP segment-reporting violations.
Confirmation that the inputs to revenue are fabricated supports the original short thesis: an LCD generates roughly seven times the monthly revenue of a cardboard poster, implying material overstatement of reported sales and profits.
The three reasons
- 1
30,542 of FMCN's 'verified' 185,174 LCD network displays are cardboard posters, not LCDs
- 2
FMCN previously claimed 27,164 movie theaters when only 1,545 existed in China (1,758% share)
- 3
If network-size inputs are lies, reported revenues and profits are likely lies too
Primary demands
- Reiterate Strong Sell rating on FMCN
- SEC investigation into network size misstatements and securities fraud
- Auditor (Deloitte) and courts to address GAAP segment-reporting violations
KPIs cited
Pattern membership
Where this document fits across the library's 12 rhetorical / structural patterns.
Precedents cited
- Olympus accounting scandal (acquisition write-downs)
Notable slides (4)
Notes
Short follow-up note (9 pages, prose memo not a deck) reiterating Muddy Waters' Nov 2011 thesis after FMCN's Ipsos 'verification' attempt. Distinctive sarcastic register: 'Jedi mind trick', Humpty Dumpty illustration, 'Light Cardboard Display' pun, footnote jokes ('both contain carbon atoms', GPS coordinates for Narnia). Inline photo of cardboard posters in an elevator (p.2) and Tenniel Humpty Dumpty illustration (p.4) are the only graphics. No valuation work or price target — purely a credibility/fraud reiteration. Credits Seeking Alpha contributor Matt Berry for spotting the cardboard admission buried in the 2nd amended 2010 20-F. Closing flourish: 'WARNING: A printout of this Report is not a CRT Display.'