Focus Media Defense Against Muddy Waters Report Reverses Losses

Focus Media Holding Ltd. (FMCN), a digital advertising company in China, rose to a two-month high in New York as it defended itself against a report by Muddy Waters LLC questioning company disclosures.

American depositary receipts of the Shanghai-based company climbed 3.3 percent to close at $24.23 yesterday, the highest closing level since Nov. 18. The ADRs had dropped as much as 5.4 percent earlier after the Muddy Waters report.

Focus Media overstated the size of its liquid-crystal- display television network by reporting some cardboard posters as LCD displays, Muddy Waters said in the report, reiterating a “strong sell” recommendation. The short-selling company run by Carson Block first said in a November report that Focus was inflating the size of its advertising network and overpaid for acquisitions.

“Investors perhaps are getting tired of Muddy Waters,” said C. Ming Zhao, an equity analyst at Susquehanna International Group LLP in Boston. He rates the shares “positive” and has a 12-month price target of $45.

Focus Media disclosed on Nov. 29 that some traditional picture frames, containing static poster ads, are included in the counting of its LCD network because the frames were installed by the LCD display network division rather than by its Framedia poster frame network, the company said in a statement yesterday.

“LCD is not representing the type of device,” Jing Lu, an investor-relations officer at Focus Media in Shanghai, said in a phone interview today. “This is a classification of business divisions.”

Muddy Waters estimated that proper LCD screens generate seven times more monthly revenue than the static poster ads. Lu declined to comment on that estimate.

ADRs of Focus Media have fallen 5 percent since the last trading day before Muddy Waters’s first report on Nov. 21.

To contact Bloomberg News staff for this story: Belinda Cao in New York at lcao4@bloomberg.net; Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editors responsible for this story: Emma O’Brien at eobrien6@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net

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