Muddy Waters rates Focus Media Holding Ltd. (NASDAQ: FMCN) shares a Strong Sell because of significant overstatement of the number of screens in its LCD network and its Olympus-style acquisition overpayments. The $1.1 billion in write-downs from its acquisitions exceed one-third of FMCN’s enterprise value, making FMCN’s acquisitive behavior more destructive than Olympus’s to shareholder value. FMCN insiders have sold at least $1.7 billion worth of stock (two-thirds of FMCN’s enterprise value) since FMCN’s IPO. At the same time, the insiders and their business associates further enrich themselves by trading in FMCN assets, while costing FMCN shareholders substantial sums of money.

We maintain our Strong Sell rating on FMCN mainly because our concerns regarding the viability of FMCN’s core LCD commercial location network remain. This issue, combined with FMCN’s additional misrepresentations about the size of the network, FMCN’s opaque business model (on both the revenue and cost sides), and insiders’ penchant for self-dealing, render FMCN shares un-investable.

Muddy Waters, LLC asks and answers the question: Is “independent” verification in China better than toilet paper? FMCN announced that it’s independently verifying the size of its LCD commercial display network. MW has direct experience with another company that engaged a top research firm to confirm its LCD display network. The company turned out to be a fraud, and the research was grossly inaccurate. Today’s report details these problems, but also discusses the general state of conflicts of interest – and private sector corruption – that permeate independent research that Chinese issuers frequently cite in support of their business models. Although we specifically discuss issuer stalwarts CTR Market Research, iResearch, and Sinomonitor International, we think these research integrity issues apply to most to all foreign owned independent research firms’ China operations as well.

FMCN’s bizarre acquisition of a ginseng plantation at the Russian and North Korean border illustrates that FMCN’s acquisitions are not kosher. The most troubling aspect of this acquisition is that the selling shareholders, who had purchased the plantation only five months earlier from the founders, included at least one FMCN employee. Strangely, this company seems to have no operations; yet, most recently reported a net profit margin of 48.9% on $1.5 million in revenue.1 We therefore wonder what purpose the ginseng plantation entity serves, and whether there are ongoing improprieties associated with it. We encourage FMCN’s auditor, Deloitte Touche Tohmatsu, to look at this acquisition for improprieties – along with examining the numerous other issues we have identified.

FMCN: MW was Right that FMCN Lied re LCD Network; “Verification” Counted 30,500 Cardboard Posters