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

February 9, 2012

In our November 21, 2011 report on FMCN, we accused management of fraudulently overstating the size of its LCD Network. FMCN had previously defined the LCD Network as a “network of flat-panel television displays.” FMCN first vehemently denied our charges that it overstated the LCD Network size, and then independently “verified” that its previously reported number of 185,174 LCD Network displays was correct.

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However, over 30,500 of those “verified” displays are not LCD televisions at all – rather, they are mere cardboard posters. Not only does this mean that FMCN management was brazenly lying to investors in the wake of our report, but the lies sharply call into question the veracity of FMCN’s reported financials. We estimate that each LCD television generates monthly revenue seven times that of a cardboard poster.

Separately, on November 29, 2011 we pointed out that FMCN had previously grossly lied about the size of its movie theater advertising network. FMCN’s recent attempt to explain away that lie is almost as ridiculous as its conflation of cardboard with LCDs.

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Initiating Coverage on EDU – Strong Sell

July 18, 2012

EDU - Magna Cum FraudeMuddy Waters rates New Oriental Education & Technology Group (NYSE: EDU) shares a Strong Sell because it is probable that EDU will have a significant restatement and possible that its auditor will resign because:

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EDU has reported 392% revenue growth since going public. The revenue growth has been built on store growth of 338% during this time. EDU tells investors that its entire store network is company-owned, but this is a lie. As recently as last month, EDU president and CFO Louis Hsieh adamantly denied that EDU has any franchisees. This report shows Hsieh’s statements are patently false – EDU has numerous franchisees. However, these franchisees are not a hidden bonus for investors. Rather, they are part of a substantial fraud in EDU’s accounts.

It is virtually certain that EDU uses the upfront franchise and other fees to inflate its cash balances in order to receive unqualified audit opinions from its auditor.

EDU’s Beijing operation (which is approximately 35% of EDU’s reported revenue) has prepared financial statements for 2009 – 2011 are fraudulent. EDU has submitted these financial statements to its domestic regulator, the Civil Affairs Bureau (“CAB”). It is probable that EDU used these same financials in the preparation of its U.S. filings.

EDU’s corporate structure is far more problematic than just a weak VIE. The schools that conduct its operations are ultimately state property. We question how EDU can consolidate them.

We believe that as a result of our exposure of these problems with EDU’s reporting, EDU will restate historical results – likely significantly; and, that its auditor will resign.

[1] Calculation based on RMB revenue, and excludes currency fluctuations.

[2] Store count number includes schools and learning centers; it excludes book stores.

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Initiating Coverage on Olam International – Strong Sell

November 26, 2012

Muddy Waters rates Olam International (SGX:O32; OTC:OLMIY/OLMIF) shares a Strong Sell. In this latest report Muddy Waters highlights how:

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Olam runs a high risk of failure. Its “asset heavy” strategy appears to be an off-the-rails CapEx and acquisition binge. Management talks about the “gestation” of these projects, but our research makes clear that they are marred by incompetence and perhaps significant misconduct. The vast majority of the acquisitions we have researched are of low quality assets that appear to bring little more than cosmetic benefits to Olam. In short, these projects are “pie in the sky” that we strongly believe are destroying substantial amounts of capital.

Bond holders in particular should be asking where their money goes (and how they will get it back). Olam has spent S$571.0 million less on acquisitions than announced. However, it has spent S$996.2 million on unattributed non-acquisition CapEx – most of it since FY2011. One possible interpretation is that Olam is doing far more greenfield projects than realized, which greatly increases its risk profile. Another possible interpretation is that Olam has problems with internal controls and significant cash leakage.

Over the years, Olam has committed a shocking number of accounting gaffes. We can conceive of two possible interpretations of its accounting track record – either its accounting functions are blithely incompetent; or, there could be malfeasance. (Both could be true as well.) The former interpretation has ominous implications for Olam’s oft self-promoted ability to manage risk. The latter interpretation obviously has even more dire implications.

We believe it is instructive to view Olam through the lens of failed US trader Enron Corp. There are a number of material similarities in the way their businesses developed, and their actions.

We value Olam on a liquidation basis because our opinion is that it is likely to fail. In the event of a liquidation, we estimate the present value of the debt to be 14 to 33 cents. In a liquidation, the equity would likely be wiped out, or given “nuisance value” at best.

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Muddy Waters Offers to Pay for Olam Debt Rating

November 29, 2012

Olam’s response to our November 27th report is remarkable in that, despite being 45 pages long, it fastidiously avoids addressing the vast majority of our points. The response is essentially a waste of toner, as much of it consists of canned presentation slides and consultant drivel. Where Olam’s response attempts to be substantive, it contains numerous instances of irrelevant information, factual inaccuracies, misleading statements, and mischaracterizations of our report. However, the response does demonstrate Olam’s continuing deluded denial of its fiscal problems. It seems the Titanic is still heading full steam toward the iceberg.

Stop-Gap Bailout of Olam Validates MW’s Thesis

December 3, 2012

Olam’s surprise announcement of an unusually structured US$750 million debt issuance validates our thesis that Olam is in danger of failing. Only in the case of our November 2010 report on Rino International have we had a faster confirmation of an investment thesis.

MW Learned from John Hempton how to Catch FMCN in Another Lie

January 24, 2013

This past September, research that John Hempton of Bronte Capital did on FMCN inspired us to do some more work ourselves. This is the first time we have publicly discussed these findings, which provide additional evidence that FMCN is a long-standing fraud.

Muddy Waters’s Reaction to Olam Q2 2013 Report

February 7, 2013

Muddy Waters retains our original investment thesis and Strong Sell rating on Olam’s shares. Our analysis of Olam’s Q2 2013 results is detailed in our latest report.