A reader pointed me in the direction of China Mass Media (CMMCY.PK), another Chinese company that’s trading for less than the cash on the balance sheet. The company paid a special dividend of $22.98/share at the end of December last year (an amount almost equal to the share price the previous day) and was delisted from the NYSE two weeks ago because the market cap of the company was insufficient (below $15 million over a 30 day period). Even though the company paid a total of $57.9 million in the special dividend there is still plenty of cash on the balance sheet:
Last price: 1.80
Shares outstanding (ADS): 2,505,659
Market cap: 4.5M
Cash and Equivalents (mrq): 17.7M
P/E (ttm): 1.9x
P/B (mrq): 0.19
Is it real?
As is the unfortunate case for Chinese companies listed in the US the biggest question that needs to be answered first is “is it real?”. As discussed in my post on DSWL the only way to be sure that a company is not a fraud is to see that’s returning more money to share holders than that it has raised in the equity or debt markets. So the big dividend is a clue that the company might be real, but we do need to take a closer look at the past.
The company became public using an IPO of ADS shares (sold 7.2M shares at $6.8, raising $42 million after fees). The IPO was used to raise cash to invest in the business, and diluted the ownership of the CEO from ~100% to 70%, and that percentage has remained roughly constant to this date (it’s up a bit due to option grants and some share buybacks). So this also looks good, but it’s important to realize that the company did not pay out more in dividends than it raised in cash in the IPO. Since the CEO owns around 75% of the shares today just 14.5M was returning to outside investors in the dividend.
With the market cap of the company currently at 4.5M, and the CEO receiving ~43M in dividends it’s easy to imagine a positive scenario where the company is taken private at a nice premium to the current share price.
So I think the bull case is clear, but at the same time while just scrolling through the IPO prospectus and the annual reports there are all kinds of weird things I’m not comfortable with. Some examples:
- The company originally tried to IPO at a significantly higher price, but after failing to do so it had no problems accepting a lower price (raise money at any cost?).
- The ADS structure seems to be weird to me since the underlying shares aren’t traded anywhere
- The company used an IPO to raise cash for the business, but why do this while paying dividends?
- The company stated in the IPO prospectus that it intended to (continue) to pay regular dividends, but failed to do so after the IPO.
Or something like this:
Subsequent to the issuance of the shares, on June 24, 2008, the existing shareholders controlled by Mr. Shengcheng Wang entered into investment agreements with a group of third parties and sold the Preferred Shares at USD 60 million.
On July 23, 2008, the existing shareholders controlled by Mr. Shengcheng Wang entered into an agreement to repurchase all the Preferred Shares for USD 60 million plus one month of interest at an annual rate of 8.0%. None of the repurchase cost was borne by the Company.
How does this make sense?
China Mass Media does have some interesting things going for it, but to quote Buffet:
In this game, the market has to keep pitching, but you don’t have to swing. You can stand there with the bat on your shoulder for six months until you get a fat pitch.
No reason to swing the proverbial bat when just at first glance there are things going on I don’t like, especially not when we are talking about a company in China.