A Critical Failure in the Focus Media Story

Re: Focus Media Holding Limited (FMCN)

Matt Berry January 12, 2012

Disclosure: I am short FMCN.
I am not infallible. Every investor must do their own due diligence. Every investor must make an individual decision based on his/her judgment of the company and the market. This is not a recommendation to buy or sell a security. I may not (and usually do not) post changes I make to my positions.

How many Chinese urban theaters in 2008?

30,000

Chinese Urban Theaters in 2008

25,000 20,000

15,000

10,000

5,000

FMCN's claimed network of urban theaters

Total urban theaters in China

In 2008, FMCN claimed business relationships with 27,164 theaters in urban China. Data sources, web pages, and government websites report that the total number of urban theaters in China at that time was only 1,545.

FMCN: How many was that?

SEC 20-F, 2008
27,164 theater screens in 2008?
The increase is primarily attributable to increased leasing costs associated with time we rent on movie theater screens as a result of an increase in the number of theaters we lease in our network from 10,930 in 2007 to 27,164 in 2008. SEC 20-F, 2008 See also, As of December 31, 2008, we had rights to lease advertising time on screens in 27,164 movie theaters in cities across China. SEC 20-F, 2008

Muddy Waters Source

Muddy Waters Research provides evidence that there were only 1,545 theaters in 2008.

source

Here is the source document provided through Muddy Waters Research.

In the next slide, lets verify two of the column headings.

The Chinese characters for Movie Screen and Cinema are

The Chinese characters on the document are not as crisp as wed like. Fortunately, there are many references to the same data on the internet, one of which we will examine on the next slide.

Source, as found in Muddy Waters Research report.

Another mention
and a different set of years, found at news.china.com.cn.

Well look into this passage and table in more depth later, for now lets zoom in on the Chinese characters relevant to the FMCN SEC filing and Muddy Waters source document.

You can find the original webpage at news.china.com.cn

Google translation
I copied the Chinese characters found just above the table and put them into the Google translator. (news.china.com.cn)

On the next slide, well put the table and Google translated text together along with a professional translation.

Professional Translation:

Here is the translated text again and another point.

Here we have the same data supporting the source document provided by Muddy Waters. According to these documents there were only 1,545 theaters in urban China in 2008, making FMCNs claim of 27,164 impossible. Interestingly, this article mentions 19,287 digital cinema screens built in rural areas. Two points: 1. FMCN claimed the theater network was in urban cities. 2. The 19,287 refers to screens and not theaters. Lets look at the next few slides and youll see what I mean.

Cinema chains currently have 1545 movie theaters opened in cities in the Chinese mainland, with a total of 4097 screens. In 2008, urban cinemas added 118 theaters and 570 screens. The proliferation of multiplex-type movie theatres in urban areas is a trend that continues to develop, with an average of 2.65 screens per theatre nationwide (see figure 4). In addition to these figures, 147 digital cinemas have been built in rural areas outside the cities, boasting 19287 digital screens, nearly 5 times the number of screens offered by urban cinemas. These rural digital cinema screens present excellent conditions for the further expansion of the film market. ~ news.china.com.cn
Google Translation:

FMCN clearly refers to an urban network.

In July 2006, Focus Media acquired the majority equity interest of ACL to start building up our movie theater network, which leases screen time prior to the screening of each movie shown from movie theaters in urban cities in China, and then sells those time slots to advertisers.
http://www.focusmedia.cn/en/aboutus/companyoverview.htm

(Try Google Cache, if this page is altered: here.)

[Note the severe reduction in theaters from over 27,000 in 2008 to only 280 in 2011 but thats another story (which I hope to tell in another presentation). For now, we are interested in the location of these theaters.]

We believe that the value of our advertising network derives from its effectiveness in reaching a large number of consumers with higher-thanaverage disposable incomes in urban areas. ~ SEC 2008 20-F

Destination Digital: Opportunities in Chinas Media and Advertising Market http://www.trpc.com.hk/bank/presfiles/digital_payments_in_china.pdf

Continuing Operations Overview. Our continuing operations consist of the following reporting units: (i) our Internet advertising agency business, (ii) our movie theatre and traditional outdoor billboards advertising network and (iii) others (which consists primarily of the CGEN portion of our in-store network, which has substantially ceased operations and is not expected to provide significant revenues in the future). For our continuing operations, we expect our business and operations to be driven by a number of factors and trends including: Overall economic growth in China, which affects overall advertising spending in major urban areas in China where consumer spending is concentrated; ~ SEC 2008 20-F

But even if FMCN referred to theaters screens in both urban and rural China, the numbers would still not add up.
If we stretched the interpretation on FMCNs behalf and included the rural digital cinema screens (19,287) and added in the urban cinema screens (4,097) it would equal 23,384 total screens that is to say, according to the data reported, there were only 23,384 screens in question (never mind for now that FMCN referred to theaters, not screens). So even if FMCN claimed a total monopoly on both rural digital movie screens and urban cinema screens in 2008, they still would have exaggerated their numbers. Of course, as weve already seen, FMCNs theater network was in urban cities, not in rural areas, but it is difficult to imagine exactly what management was thinking when they came up with their number.

2008: Even using urban screens and rural digital screens FMCN still comes up short.
28,000 27,000 26,000 25,000 24,000 23,000 22,000 21,000 FMCN claimed urban theaters Total urban screends and rural digital screens in China

A little more WEB sleuthing brought me to this government site.

The specific webpage shown on the right can be found here.

Well scroll down ...

Well select this text and plug it into the Google translator

Google translation

Professional Translation: According to Tong Gang, in 2008, domestic cinema chain companies built 118 new theatres, bringing the total number of theatres to 1545, an 8.27% increase over the previous year. 570 new screens were added, at an average rate of 1.56 new screens per day, bringing the domestic total to 4097, an increase of 16.16%.

Screen shot of professional translations: Project 2360026

According to Muddy Waters source, the total number of Chinese theater screens in 2010 exceeded 6,200.

6,200 screens in China in 2010, English references

2010 data in the Muddy Waters source matches the data found in English media.
(Also, if we accept that Chinas theater business has been growing from year to year and not shrinking and that both Chinese and English sources show a national total of 6,200 Chinese movie screens in 2010, then even if we took that larger number and compared it to FMCNs claimed relationship with 27,164 theaters in 2008 FMCN still comes up short. )

Forbes

(2/09/2011)

Chinas box office grew 64% in 2010 to $1.5 billion, on top

of more than 40% growth the year before that, and the nation now has more than 6,200 movie screens

LA Times (3/6/2011) Over the last four years, the number of screens in China
has doubled to more than 6,200

Muddy Waters Research source

Summary

2008 SEC 20-f filing

More than all of the urban movie theaters in China.

Matches data on Chinese government webpage

Muddy Waters Research source

Matches 2010 data published in Forbes and LA Times

FMCN claimed a relationship with over 27,000 urban theaters in 2008.

Data sources show that there were less than 1,600 urban theaters in China at that time.

Questions for FMCN:

1. 2. 3. In 2008, how many urban movie theaters in China did you have a business relationship with? Can you provide a list? Are your filings with the SEC reliable?

Matt Berry Disclosure: I am short FMCN.

I am not infallible. Every investor must do their own due diligence. Every investor must make an individual decision based on his/her judgment of the company and the market. This is not a recommendation to buy or sell a security. I may not (and usually do not) post changes I make to my positions.