Muddy Waters initiates coverage of Focus Media with a “strong sell,” with Carson Block, Muddy Waters founder.
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Seth Klarman’s Collective Wisdom: Risk Analysis Is The Key To Investment Success
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You’ve been watching our show other the last several months, you know there are serious red flags over a few publicly traded chinese companies and their accounting practices. perhaps none more so than sino forest and focus media. nobody has been more vocal that research firm muddy waters. their strong sell report on focus media sent that stock tumbling. muddy waters claims accounting and management are suspect atfocus at best. focus media fighting back in the press. the man who runs muddy waters with carson block, joining us now exclusively. welcome to the show. good to be here. before we get to focus specifically, i want to ask you about your company.a lot of people are starting to disparage you and your firm, whoyou are, who do you work for, what are you motives? muddy waters, we work for ourselves. obviously short sellers. always kind of occupying negative place in public perception. there’s nothing we can do to change that other than to say we’re not always going to be about selling stocks short. we have conviction in our research. if we find something that we like, we’ll put our money on to the long side and we’ll — but you — i would imagine you’re not a trader. you’re a research firm primarily hired by hedge funds. correct? no. there is misperception out there that we somehow go and we sell our reports to hedge funds. there’s a lot of rumor — there’s been out there, carson. yeah. obviously people are — people have said a lot worse than that, too. doesn’t necessarily mean that it’s true.when you publish a report, who knows that that report is going to come out before it comes out other than you? well, we have — we have a group that — we don’t involve all of our partners and all of our people in every project. but we try to keep this internalstrictly. now, sometimes there have been instances where things have leaked inadvertently. that’s something we try tocontrol and we take very seriously. let’s get into the nitty-gritty of the report you put out today which says, quote, there is strong evidence that focus media does, in fact, double count its digital frames. focus media, of course, came back and said you just simply don’t understand the difference between its three types of digital ad frames. why are you so certain? how do you respond to that? okay. i think the very — the very best case for the company is that in response to our initial report, it submitted that its disclosure on the number of lcd screens was misleading because investors had perceived these lcd screens as showing full motion video ads. now it’s saying, well, we’re not selling that many full motion video ad screens. some of these we’re selling at still images which get lower price points and are a different product for advertisers. yeah. for our viewers to understand, you’re talking about getting into an elevator.there’s a video monitor. they have them in america. these are in china. you’re watching inging a video . they have three types ofscreens. a video and a couple picture frames. you were saying they were claiming they were more all video which is a higher ad rate and revenue stream. they have hired two independentcompanies to go out and check basically, i assume, every oneof the 100,000-some screens they’ve got. will you believe the results of those surveys? i think that those — that those results of those surveys in china are always questionable. because there’s — there’s a larger point to be made here about private sector corruption. and, unfortunately in china, there are a lot of businesses that fudge numbers. and if you are in the businessof evaluating or valueuating businesses, your clients are often pushing you to help them fudge the numbers. so if you weren’t willing to do that in many instances, you wouldn’t have a lot of clients. so i can’t say, especially with this board and its governance issues, that this will be a great — this is a very well connected board. this is a very well connected company in china. you actually in your report came out and you said that it’s still clear — it’s still clear that focus media did not actuallypurchase — you basically said you’re not sure they purchasedsome companies they said they purchased. they came out in a report today and said, hey, we purchased these companies.who do we believe? through these vies which, by the way, were extremely complicated. share swaps and everything. they did in a short way say they did buy these companies. you say they didn’t. if you want two points out of many we’ve made in response to this, number one, focus media has acquired vies before. variable interest entities. correct. those acquisitions look nothing like these acquisitions. they made none of the changes they’ve made in their standard vie acquisitions.number two, their disposal accounting for these is way out of balance. that, i think, is a telltale that there’s something wrong and they didn’t acquire these companies. would you change your strong sell rate if the company’s board or management changed? obviously you’ve been going after the company’s board saying they’re conflicted, not aligned with shareholders. it would be very positive to have major changes on the board and management. i don’t think we have the full picture of this company’s core business and what its results really are. so if i could — if we could be convinced that we had that picture and we saw substantive changes, then we could think about this much more positively than we do. i’ve been following this group for a while now. you’ve talked about how you don’t trust a lot of the numbers there. in the past you’ve told us you might even go long one of these things, put out a bullish report. what is next?should investors trust any, and i mean any, chinese company?u.s. investors trust any chinese company? the bigger issue is not couple of days ago on the skewed ratio in the china listedequities world of buys to sells. i think she said it’s 25 buys toevery 1 sell. i don’t remember exactly. when they did that, theybasically said, hey, their cash flow and cash balances aren’tbeing challenged by you, so all is okay? well, what we’ve said is that this is the tip of the gaged in lot of questionable acquisitionand disposal practices that are usually telltales of seriousaccounting issues. in addition, we know that we’re not saying — this is an important point. we’re not saying this company is a complete fraud. but what we’re saying is it has done fraudulent things. you got spooked by the movie business. back in ’07 they came out and gave an estimate fr their movie business which you came out and say this is your estimate for your business in the movie theater business was larger by multiples than the movie business was in china. they summarily changed thatdramatically. correct. sounds like you’ve also got a history with this company where you say they have been dishonest in the past. mm-hmm. they’re not going to change their stripes. i think that one of the — i think that a lot of people who are poll gists for this type of behavior because they see it so often with these u.s.-listed chinese companies, you have to understand.it’s the old adage. fuel me once, shame on you. fool me twice, shame on you. investors should keep that in mind. investors are down about a third since you came out negative on the stock november 13th. just ahead, herb is going to stay in china for his disaster
H/T to Value Investing World