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China Media (NASDAQ: CCME) Does Its Part

China Media Express absolutely hammered the ball out of the park in Q2, and reaffirmed its guidance for the remainder of the year. The guidance is likely to be blown away by the numbers when we look back. Time will tell.

The company is doing its part, but I'm not sure the market is ready to do its part. Technically, the stock is simply not trading as well as one would hope on the back of numbers this strong. This stock is not a trader's delight, and it looks to me like it won't be in the very short term. The traders in this stock are going to be disappointed. Investors are loving the action. You can accumulate this one for the long haul at a mind boggling cheap value.

One interesting part of the picture- the short interest in this stock. The reported short interest has doubled since June from about 1 million shares to 2 million shares, and the shorts don't seem to be scrambling to cover on the earnings. It's about 7 trading days of volume to cover this short. This short interest is the rocket fuel that will someday ignite the breakout, but there's no telling exactly when. 

Short sellers are no doubt emboldened by their success with the smear campaign of Orient Paper, so one wonders if the same sort of thing is planned in this case. Their auditor is not an outsourced version of BDO in China as was the case with ONP- it is Deloitte Touche- one of the biggest and well respected names in the audit world. Taking on Deloitte would be akin to a Chihuahua going after a German Shepherd, but one never knows how emboldened these guys can get in a shaky market with a hair trigger mentality.

Nevertheless, I have a number of sources that have seen their operations, and I suspect these numbers are the real deal, and eventually investors in this stock are looking at a $30 number. I'm a shareholder of common and call options, and I'm just going to hang in there.

On to the facts- and nothing but the facts. CCME delivered $52 million in revenues in Q2- up 180% from Q2 '09. Margins were better, coming in at 70% vs 62%. 

Put on your seat belt for this one- profits were up 244% to $28.5 million- a whoppingly profitable business model. This all equates to $.80 in EPS in fully diluted shares for one quarter, suggesting this company, with no further growth, can deliver $3.20 in EPS. At just 10x EPS, you have a $30 stock. In addition, the company ended the quarter with $140 million in cash ($26 million more than end of March)- about $4 per share. 

The company delivers all these revenues and profits from flat panel display screens installed on 23,200 buses throughout China. These buses service inner city, city to country, and airport buses.

Top and bottom line growth is coming primarily from the airport buses where premium advertisers are looking to get their message out to air travelers- the most affluent in China. Over 400 companies advertise with CCME, including the likes of Coca Cola, Pepsi, Toyota, China Telecom, China Mobile, Bank of China, China Pacific Life, etc. 

The company expects to make $82 million in profits this year- that's about $2.30 in EPS- no doubt very low compared to what it will really be. If you assume the EPS remains the same as Q2 for the remainder of the year, EPS comes in at $3.47.

Technically, this chart is a classic bull/bear tug of war. The bulls have the upper hand on the fundamentals and a nearly religious fervent belief. The shorts are keeping a lid on it, and preventing it from making a really great breakout.

I suspect the traders will depart, leaving the long term investors to carry the ball. In light of its failure to break out, a prudent strategy would be to accumulate when the stock trades down to the uptrend line you see depicted in yellow on the chart, which happens to match the Dinapoli 3x3 moving average- it's some mumbo jumbo, but worth looking at.

CCME will have its day, and when it does, it will become a big momentum stock and attract all the big mo players. 
 

Honorable and Dishonorable Mention

China Education Alliance (NYSE: CEU) gets honorable mention, and Sinohub (AMEX: SIHI) gets the thumbs down from the market on earnings. 

Since the earnings release which demonstrated CEU is back on track (I covered it earlier this week), CEU has motored up the charts from about $4 to $4.60- a 15% move this week. The company only delivered 5% growth in Q1, and the market blew off the stock. In Q2 the company's performance improved admirably, and it does appear as if the Chairman might be able to deliver 30% growth as promised.

CEU - nice rebound. I still believe the stock could find $10 in the long run.

Sinohub (AMEX: SIHI), on the other hand disappointed investors, and the stock was punished as a result. This was one on my Top 10 list, and I'll probably remove it after earnings season is over.

SIHI manufactures entry level and smart phones that are sold all over South East Asia and in China. The stock had been trading around the $2.60 level, and shed about 7.5% of its value on their earnings release. The company has spent a lot of money on finishing up a new manufacturing facility. Therefore, this is the only China company on my radar to deliver results without building cash balances since the end of March.

There's upside here as the company is now geared up to manufacture 200,000 hand sets per month, and is currently at about 133,000. They are also moving towards the more complex Smart Phones, which have a higher margin.

Early next week: Earnings from NFEC early Monday morning, BSPM and BEAC after the close on Monday, and CREG on tuesday. Busy, busy, busy. Another honorable mention: BSPM is trading up nicely out in front of earnings. If they come in strong- say in the neighborhood of $.12 to $.13 in EPS, look for a little temporary pullback.

Disclosure: Long every stock mentioned: CCME, CEU, SIHI, NFEC, BSPM, and BEAC

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