China Mass Media (CMM.NYSE) is essentially a middle man, reliant on a few key relationships: with state TV provider China Central Television, from which it buys advertising slots; and the clients it sells the slots to, including Samsung, McDonald’s and China Mobile.

China Mass Media generates more than 90% of its revenue from swaps of this ad space; the remainder comes from producing programs, CCTV public service announcements, for example.

In the past few years, China Mass Media’s net income has dropped off sharply. Meanwhile, competitors SinoMedia Holding (no relation to China Economic Review’s publisher) and Charm Communications posted fairly steady growth in net income since 2007 – excluding a downturn in 2009 during the financial crisis.

The cause of China Mass Media’s dwindling profits was once the company’s greatest strength: its relationship with media behemoth CCTV. China Mass Media’s CEO, Wang Shengchang, was previously employed at CCTV, and his personal contacts generate most of the company’s business. But these connections have become less vital as CCTV has systematized some of its ad business.

From 2008, for example, CCTV started selling China Mass Media ad slots in blocks at a fixed rate, rather than based on client demand. The company began recording the purchase of these slots as a cost of revenue, causing its annual profit to plunge.

In 2009, CCTV then switched to an auction-based sales system that left its former favorite China Mass Media scrambling to compete. The next year, China Mass Media was outbid for the 2010 New Year Gala program, the country’s most-viewed program, for which it had been the exclusive ad agency from 2004 to 2009. This single contract had previously accounted for almost 10% of its annual revenue.

China Mass Media has also seen an increase in prices for ad slots – in 2009, the media fees for CCTV4 programs rose by over 40%. However, intense competition among agencies means they are unable to pass on all of these costs to clients.

SinoMedia Holdings and Charm Communications were able to keep growing their profits in this new world order. So why not China Mass Media?

One major factor has been the company’s failure to diversify its business. Charm Communications has gained footholds into satellite TV, internet and outdoor advertising, while SinoMedia Holding recently announced an agreement to sell ad space for MediaCorp, Singapore’s largest media company.

China Mass Media benefits from a healthy balance sheet – it currently holds just over US$100 million in cash and short-term investments, with little or no debt. To boost revenues, the company should reconsolidate and diversify its business.

Investors don’t appear to be looking kindly on SkyPeople Fruit Juice (SPU.NASDAQ). Given the company’s strong market position and undervalued share price, perhaps they should reconsider.

SkyPeople is a fruit juice manufacturer with exposure to a profitable niche market. While most of its competitors make apple juice concentrates – China produces 60% of the world’s supply – SkyPeople turns higher margins by producing apple, kiwi and pear juice.

The company makes roughly equivalent amounts of each juice, but generates a markedly different revenue yield on each. In 2009, kiwi juice accounted for the largest share of company revenue, 36%, followed by pear and then apple. And kiwi juice was far more profitable: In the first three quarters of 2010, it generated a gross margin of 61%, compared with 18% for apple juice concentrate.

Annual fruit beverage consumption per capita in China is only 10% of the average world level and 2.5% of the level in most developed countries. That implies upside potential, especially given high expectation of rising disposable incomes.

In addition, the company’s price-to-book ratio is the lowest of its competitors. Although it has experienced a few minor accounting irregularities, SkyPeople outperformed most of its domestic competitors in terms of revenue growth, gross margin and profit margin in 2009.

The US Securities & Exchange Commission (SEC) surprised no one on April 6 with the announcement of a formal investigation into Chinese firms listed on US exchanges. Luis Aguilar, the SEC commissioner, said special attention would be paid to “back door” listings, also known as reverse takeovers (RTO). The news was shrugged off by the markets, which had already priced in the rumors that began circulating last December, but the investigation may yet cause an uproar.

In an RTO, an operating firm injects its assets into a defunct shell company that retains a valid ticker symbol, effectively listing the private company without requiring it to pass the more stringent auditing and disclosure requirements applied to initial public offerings. Since 2007, over 300 Chinese companies have listed in America this way, with 80 or so making it onto the main boards.

While there is no reason to doubt the repute of the majority of these firms, in the last six months several have become embroiled in controversies over suspect accounting standards. This has sparked concerns that the China RTO phenomenon is little more than a variation on the Chinese product scandal theme: fake companies painted to look like the real thing.

Recent investigations by China Economic Review have thrown up evidence of inflated revenue statements by Duoyuan Printing and China Biotics; the former is now relegated to trading on the over-the-counter exchanges and the latter has seen its share price nearly halve.

The list of other companies similarly accused is long and undistinguished: China Century Dragon Media, Orient Paper, China Green Agriculture and China Natural Gas.

However, perhaps pride of place should go to environmental equipment manufacturer Rino International, which was forced to delist last year after an investigation by short seller group Muddy Waters revealed the firm had fabricated sales contracts, thus overstating revenues by nearly US$178 million. In Rino’s case, investor fraud appears to have been an explicit management goal: After the company raised US$100 million from investors, a manager promptly borrowed US$3.2 million of it to build a luxury home in California.

Although the mud appears to be sticking to Brand China, the SEC must proceed carefully in its investigation. Throwing an undignified tantrum will benefit no one. While it is obvious that there were some very bad apples in the RTO barrel, there are also companies that listed through reverse mergers for the same reasons Western firms do: necessity, ignorance, and bad advice.

Exonerating the innocent is just as important as castigating the guilty, and speculators should not be absolved of their responsibility. Even given fraudulent statements by management, it could be argued that risk-averse investors had all the information they needed to stay away.

A bit of digging into the history of many Chinese RTOs throws up a network of small foreign auditors, investment banks, consultants and PR firms. These financial service providers facilitated, even encouraged, unqualified Chinese companies to list. In Rino’s case, a Western auditor appears to have helped Chinese managers defraud US retail investors. But in other cases, particularly in the over-the-counter markets, Chinese firms were more the victims of fee-based scams than the perpetrators.

Beijing too gets its share of the blame. Why are Chinese firms not listing in their home market, where investors understand them better and can value them more accurately? The queue for the Shanghai and Shenzhen bourses is long and state-owned enterprises get to jump it anyway, so entrepreneurs have little choice but to venture overseas.

For some firms, an overseas exit is the only viable option for foreign investors. But why do these companies need foreign backers in the first place? Because state-owned banks prefer lending to state-owned enterprises. It is a vicious circle.

Were the regulatory environment better in China – and the stock markets more mature – domestic firms would have no need of complex instruments like RTOs, and bad accounting would be the China Securities and Regulatory Commission’s problem, not the SEC’s.

The Chinese. There’s millions of them on the mainland. Hundreds of millions. Actually, 1.33397 billion to be precise. The results of last year’s census have been released and the figures show that the national population increased by a head count of 73.9 million from the last census back in 2000, translating into a growth figure of 0.57%. That compares to a jump of 1.07% for the period 1990-2000, suggesting that things are certainly slowing down in the ol’ baby-making department. But the survey also showed that the number of mainlanders over the age of 60 has actually increased three percentage points since the previous decade to 13.35 of the overall population. While the number of slightly-elders is growing, the amount of official bigwigs – and their Ivy League mycelia – getting privileged access to US visas and the like may be about to fall dramatically. This is in response to outgoing US ambassador Jon Huntsman having apparently gotten a bit of the Beijing cold shoulder after his recent words in support of locals exercising those pesky fundamental rights (articles 35 through 41) enshrined in the Constitution of the People’s Republic of China.

They really don’t learn, do they? Despite Beijing’s ongoing attempts to prevent illegal additives getting into the food chain, producers are still bent on continuously bending the rules. The latest health scare once more involves clenbuterol – the stuff added to pig feed to accelerate muscle growth. Nearly 300 people have been sickened by contaminated meat in Hunan’s provincial capital of Changsha – not far from where Mao lived before he moved to Beijing in an unsuccessful stab at a career in the library sciences. This kind of thing continues to go on even after the deaths of at least six infants and the hospitalization of 300,000 more back during the 2008 milk scandal. Minister of Health Chen Zhu earlier in the year said that “reducing and eliminating food-safety problems and related crimes is a long, arduous and complicated process.” Darn tootin’. Now, unfortunately it’s usually the peasants peddling the additives who take the fall – or lethal injection – rather than company bosses who know full well what they are doing. But sometimes you have to almost admire the ingenuity of some of these schemes. Some chancer discovered that you can now actually turn cheap pork into higher-priced beef with just a wok and a bit of know-how. Imagine what could be achieved if this intelligence could be turned to Serve the People.

This week in the news

 Chinese census shows rapidly aging population

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Truckers protest over rising prices

US, China to hold high-level economic talks next month

Sinopec signs huge LNG deal with Australia

China signals it may use currency to combat inflation

Uzbekistan signs $5bn deal for natural gas

China Economic Review this month

Cold War relic

Restrictions on US high-tech exports to China are costing American firms valuable business, says Tsinghua University’s Patrick Chovanec

Lessons from Japan

Investigations following the Fukushima accident in Japan may slow nuclear plant construction in China, but they shouldn’t be allowed to stop it, says Asia watcher Philip Bowring

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Upcoming conferences

2011 Wall Street China Forum

When it comes to Chinese companies listed on US stock exchanges, investors are usually intimidated by potential loss due to a lack of transparency and communication. The SEC’s recent series of investigations that target Chinese companies, on a variety of practice areas, have also aggravated this lack of confidence. However, the tremendous growth and high returns from investing in these companies and in China’s economy has become too great to ignore. Through careful evaluation and strategic diversification, investors who understand the essence of these Chinese stocks will be able to differentiate their portfolios from the others that have eyes on Chinese companies, maximizing returns yet with the minimum risk.

To register please go to: http://www.wallstreetchinaforum.com/signup
May 6 2011, New York, US

2011 China Overseas Investment Conference
As China becomes more integrated into the global economy, a growing number of companies are looking for new ways to expand their business out of China.
China Economic Review has invited leading investment experts and domestic Investment players to discuss issues and solutions in overseas investment for companies on the mainland. This two day interactive and case study-oriented seminar will provide valuable information and practical advice on outbound investment.
18-19 May 2011, Shanghai, ChinaThe IRS – More Invasive Than Ever for US Expats

CER China Offshore Investment Conference
China’s economy continues to grow and so does its role in international finance and offshore investment around the world. The China Economic Review China Offshore Investment Conference 2011, scheduled for May 24-25 in Shanghai, is being custom designed to help financial organizations around the world understand the trends and outlook on the fast moving China market and the implications of China rise for their jurisdictions. This conference will provide the answers and also introductions to the people in China who matter on international investment.
24-25 May 2011, Shanghai, ChinaChina Economy & Market Outlook: 2011 Emerging Trends
Li-Gang Liu, Head of Greater China Economics, ANZ Now a third of the way through 2011, this breakfast event will observe the trends so far as well as analyze what we can expect to come.
31 May 2011, Shanghai, ChinaWorld Travel Fair 2011
The 8th World Travel Fair (WTF) 2011 will be held again at Shanghai Exhibition Center on May 12-15, 2011. Within 4-day opening, the World Travel Fair 2011 is estimated to attract over 500 exhibitors from 45 countries to share their opinion on global travel trend and the latest travel industry information. After 2010 Shanghai Expo, more & more organizations realized the great potential of Chinese outbound tourism market which especially within Yangtze River Delta. The World Travel Fair performs as a great bridge for Chinese travel agencies & tour operators to build up contacts with overseas tourism organizations. As a trade visitor, please pre-register online at http://www.worldtravelfair.com.cn/ to get the entrance barcode (worth 30RMB) for free.
12-15 May 2011, Shanghai, ChinaGlobal Derivatives China 2011
Global Derivatives China 2011 on 11th May 2011 on the Financial Street of Beijing, China will bringing together 250+ decision makers from banks, securities, asset management, futures and IT solution providers to discuss the future of China’s derivatives market and such derivatives based products as CSI300 Index Futures.
Keynote Speech:

• China’s coming derivatives market
• The development of CSI300 Index Futures
• The use of derivatives based products
• Outlook for RMB products and OTC markets in China

For sponsor & delegate
Tel: +86 21 5258 0206
E-mail: bd@indexingetf.com
11 May 2011, Beijing China

The 5th Annual Payment China Summit 2011
The 5th Annual Payment China Summit 2011 is the definitive CEO level strategic summit where new breakdowns, business intelligence, cutting-edge ideas, pioneering strategies really make a difference. Bringing together 350+ executive officials, payments decision-makers and experts from 20+commercial banks, central banks, financial institutions, telecom operators, 20 Airlines, 35 public city smart card companies, a plenty of online merchants and payment industry’s regulatory bodies and associations, payments service providers and corporate treasuries worldwide to address the most pressing issues facing the China’s payment industry with highlights on Payment Systems & Regulatory; RMB internationalization and cross border settlement; Bankcard; Prepaid Industry; Electronic & Mobile Payment; Retailer and Online Merchants Solution; Cash Management & Trade Finance etc.
Venue: RENAISSANCE BEIJING CHAOYANG HOTEL
Contact Michael DU at 86 21 5236 0030*6012, or email to Michael.du@globaleaders.com
Online Register at www.paymentchina.com
25-27 May 2011, Beijing, China7th Asia OFFICE SPACE Congress
Following on from its roaring success in Hong Kong and Singapore the region’s leading event for corporate real estate, facilities and workplace projects is ready to hit another of Asia’s key markets.

The Corporate Real Estate Roadshow Comes to China – As China strides ahead, leading Asia as the new engine of world growth, the impact on commercial real estate will be profound. How will the new rules of the corporate workplace be translated in the world’s most populous nation in 2011?

To register & download the programme please go to: http://www.asiaofficecongress.com/
9 June 2011, Shanghai, China