Waving the White Flag on Chinese Small Caps

Am I a flip-flopper?

I had been seriously skeptical of Chinese small caps before the worst of the meltdown began. But then, as the short "hit" pieces flooded the Web and the group's stock prices got absolutely clobbered, the value investor in me started to get intrigued.

But now it's time to finally throw up my hands, pull out the ol' white flag, and simply say, "I give up!" And I can thank Longtop Financial (NYSE: LFT  ) for bringing me to this conclusion.

Longtop's shares were halted last week, and yesterday the company filed with the SEC that its accountant (Deloitte Touche Tohmatsu) is walking away and its CFO has offered his letter of resignation. That all sounds bad enough, but it gets much worse. Check out the reasons that Deloitte told Longtop to talk to the hand:

[the resignation was] as the result of, among other things (1) the recently identified falsity of the Company's financial records in relation to cash at bank and loan balances (and possibly in sales revenue); (2) the deliberate interference by certain members of Longtop management in DTT's audit process; and (3) the unlawful detention of DTT's audit files. DTT further stated that DTT was no longer able to rely on management's representations in relation to prior period financial reports, that continued reliance should no longer be placed on DTT's audit reports on the previous financial statements, and DTT declined to be associated with any of the Company's financial communications in 2010 and 2011.

And did I mention that the SEC is also investigating the company? Yeah, it's really bad.

Not your average Chinese flop
There has been a seemingly endless parade of Chinese companies battered by fraud accusations in recent months. China Agritech (OTC: CAGC.PK) and China MediaExpress (OTC: CCME.PK) were recently delisted from the Nasdaq after long trading halts and serious fraud allegations. It's hard to forget Rino International (OTC: RINO.PK), which was one of the first ships sunk in the battle. And there's a legion of other companies including China Sky One Medical (Nasdaq: CSKI  ) , China-Biotics (Nasdaq: CHBT  ) , Advanced Battery Technologies (Nasdaq: ABAT  ) , and Motley Fool Global Gains recommendation Yongye International (Nasdaq: YONG  ) that have continued trying to fend off nay-sayers.

Every one of the companies above, however, was either a reverse-merger or "blank check" company -- which essentially means that they took a back-door route to reach the public markets. Not so with Longtop, which went through a full IPO process back in 2007 -- an IPO that, I might add, was managed by Goldman Sachs.

It's also obviously notable that Longtop wasn't using some no-name auditor -- Deloitte is a major global brand. Finally, Longtop barely qualifies as being considered a small cap as its pre-trading-halt price puts its market cap at more than $1 billion, and just six months ago, its stock price was nearly double what it currently is.

Whom indeed...
Back in April, I asked "Whom can you trust?" when it comes to Chinese small caps. The picture was dim then, and it's significantly dimmer now.

Last week, a commenter on an article of mine lamented that by not declaring all-out war I was giving many suspect Chinese small caps the benefit of the doubt when there is no reason to. Perhaps there is some merit to that accusation.

Of course my goal isn't to defend one side or the other here -- I'm primarily interested in figuring out if there are investable opportunities. And there may still be. But as I said in the beginning, I'm now firmly of the belief that the juice just isn't worth the squeeze. Not convinced? Here are my top three reasons why it's better to steer clear of this group.

1) What do you know?
Major global auditors have been taken for a ride. Not once, not twice, but a handful of times. If you want to be on the long side of one of these small Chinese companies, you better have something very compelling that makes you believe the company is on the up and up. And that compelling evidence can no longer be that Deloitte or Ernst & Young signed off on the financials or even that the company had a proper IPO.

2) Even on the upside, it's been unimpressive.
One possible strategy I've mentioned a few times is buying a basket of beaten-up Chinese stocks and assuming that the ones that were cleared of fraud would deliver returns that make up for the ones that end up folding. This is now out the window. For one thing, the fraud seems frightfully pervasive, and an investor could run the risk of having a hefty chunk of their basket go belly up.

Past that, the companies that have circumvented short sellers by going private haven't offered high enough returns. I wrote about this when China Security & Surveillance went private, and China Fire & Security (Nasdaq: CFSG  ) just recently underscored this point.

China Fire is being bought out for $9 per share by Bain Capital. While that's a nice 39% premium to China Fire's 90-day average trading price, it's not nearly enough of a gain for an investor that's hoping it'll offset a company that loses 80% or more because of fraud.

3) What exactly are you buying anyway?
What shouldn't be lost in all of this is what the companies involved actually do (or supposedly do at least). Most of my personal investing focuses on finding companies with great businesses that have some sort of competitive advantage that will allow them to produce outsized returns well into the future.

It's seems tough to say that the businesses of many of the under-fire Chinese companies have much in the way of a sustainable moat. In many cases, the products appear to be commodities, while in others, the companies are simply first movers in low-barrier-to-entry businesses. There's nothing inherently wrong with businesses like these, but it's difficult to expect them to continue to deliver outsized returns on capital over an extended period of time.

"Too hard pile"
Warren Buffett supposedly has a "too hard pile" where he metaphorically tosses stocks that are just too tough to figure out. For me, Chinese small caps are getting the heave-ho to this pile. Forecasting the future -- which is what we have to do to analyze any investment -- is hard enough. Trying to figure out whether facts about the present and past hold water makes the process a dangerous quagmire.

Besides, with attractive risk-adjusted returns available from world-class companies like Apple and Chevron, why get mired in this muck?

To tell me why I'm crazy for passing up Chinese small caps, just scroll on down to the comments section.

The Motley Fool owns shares of Yongye International and Apple. Motley Fool newsletter services have recommended buying shares of Chevron, Apple, and Yongye International, as well as creating a bull call spread position in Apple. 

Fool contributor Matt Koppenheffer owns shares of Chevron, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (40) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 24, 2011, at 6:58 PM, sdhir wrote:

    CHBT, Another $2.3mil worth open market purchase by Value Holdings Capital, reported today. Total in past couple weeks goes upto almost $14mil.

    http://www.prontosec.com/secdata/companyReportsSearchPage.ht...

  • Report this Comment On May 24, 2011, at 7:07 PM, TMFKopp wrote:

    @sdhir

    I already wrote about this:

    http://www.fool.com/investing/international/2011/05/20/long-...

    Now if you know *who* Azar is or *why* he's buying, that would be pretty darn interesting.

    Matt

  • Report this Comment On May 24, 2011, at 7:21 PM, cattywampus wrote:

    <i>Sometimes Nothing Can Be A Pretty Cool Hand<i> ---Cool Hand Luke Good personal quote

  • Report this Comment On May 24, 2011, at 7:26 PM, Medicalrecordman wrote:

    Who says Bain Capital is buying CFSG ? I call total B.S. on the deal, as there's another one of those delayed timelines in place .... Nov. 15th. Give me a break. This company's way overvalued to begin with at a P/E near 20 at the current stock price of $8.50 and no doubt this deal won't happen, no different than CSR, HRBN FSIN and others won't ever actually materialize.

  • Report this Comment On May 24, 2011, at 7:35 PM, tom3257 wrote:

    They Suck.....You cant trust em...

  • Report this Comment On May 24, 2011, at 8:29 PM, mullinkay wrote:

    Many odd things to observe here, (as Yogi Berra says), just by watching...

    Odd that a boots on the ground investigation included no numbers. (How much was this coal mine worth, was it a going operation, or just two old men with a wheel barrow hauling a little coal out of a hole in a hill side, no estimate of how much this so-called customer list that YONG purchased would add, if anything, to the bottom line.)

    Odd that a little hedge fund in Wyoming took a big enough interest in this small company to conduct an investigation...what was the motive...it seems they could have done something easier than this....and less expensive, too.

    Odd that another small cap company located in China already has a law suit pending against this hedge fund.

    Odd that two large universities have people wanting to show the farmers in China how to use this product.

    Odd that the government there would give YONG awards for excellence if they did not deserve them. They would not want egg on their face.

    Something stinks here, and it is not Lutefisk cooking. Trouble is it is hard to tell if the stench comes from China or Wyoming.

    Old Farm Boy

  • Report this Comment On May 24, 2011, at 9:53 PM, cattywampus wrote:

    Sometimes stinky old dead fish make good fertilizer.

  • Report this Comment On May 24, 2011, at 9:57 PM, burr0081 wrote:

    I am in Matt's camp exactly. I am not staying away from these stocks because I have any particular insight into whether these companies are fraudulent or completely on the up and up. Rather, I am staying away precisely because it's too hard to understand whether there's any fraud. Also, with several of the legitimate companies now being taken private at only a small premium, there does not seem to be enough upside to justify owning in the face of the known risks.

  • Report this Comment On May 25, 2011, at 2:39 AM, cattywampus wrote:

    I looked at the afer-market and saw that YONG was down 0.17 to 3.82 ,but it was just a hundred share block traded last. 500 other shares traded for around $4.00, not a high volume, 600 shares traded after hours. Hope the investor/analyst event put on by Yongye in a week or two will clear up this debate. Great series of articles on the Chinese small caps

  • Report this Comment On May 25, 2011, at 11:08 AM, cattywampus wrote:

    Maybe after the Yongye analyst/investor event they can wave the checkered flag on the recent turmoil in the share price fluctuations.

  • Report this Comment On May 25, 2011, at 12:58 PM, goldminingXpert wrote:

    Wise decision Matt. Nice to see that you have an open mind about these Chinese stocks.

  • Report this Comment On May 25, 2011, at 1:37 PM, TMFKopp wrote:

    @truth

    Haha!

    Obviously you know that this isn't my usual fare, but I'm willing to look for value where value might hide out. Unfortunately, this mess is just too sticky for me to safely pick through.

    I can do headline risk and uncertainty (see BP, villifaction of... http://www.fool.com/investing/general/2010/06/02/is-bp-a-buy..., but this is just too far out there.

    Matt

  • Report this Comment On May 25, 2011, at 1:44 PM, TMFKopp wrote:

    @goldmining

    I try to keep an open mind about everything. Unfortunately, most people tend not to appreciate that in an investor / commentator -- dead-set conviction is typically preferred. But for myself (and my own investing) and my readers, I'd much rather get to the best answer (at least in my view) than stick doggedly to a position just because I had previously said something.

    (Not that I've ever been a China RTO bull... just a skeptic of both sides)

    Broadly speaking, cognitive biases that would cause someone to blindly stick to a stance are our worst enemies as investors (http://www.fool.com/investing/general/2011/04/14/10-ways-to-...

    Matt

  • Report this Comment On May 25, 2011, at 2:28 PM, krobert2 wrote:

    Very inappropriate to suggest a blanket approach to all Chinese small caps. Maybe some of them are fraudulent and therefore aren't good investments. But many are very good companies beaten down by dishonest short-sellers. Articles effect share prices, helping short sellers, hurting honest investors.

  • Report this Comment On May 25, 2011, at 2:41 PM, anuvaka wrote:

    Thanks Matt

    I have been reluctant to buy wholly foreign investments for a long time, due to currency exchanges, foreign taxes and civil unrest.

    Now I have a new reason, the possibility of fraud or an uncontrolled government regulation.

    I have 3 China investments, small percentages of the portfolio, but it appears to be well worth selling at a loss. Or I can wait for the government to take it over.

    jC

  • Report this Comment On May 25, 2011, at 4:22 PM, TMFKopp wrote:

    @krobert2

    "Articles effect share prices, helping short sellers, hurting honest investors."

    "Honest investors" have been fleeced in a number of cases already by these companies.

    Are there non-fraudulent companies among the bunch? Yeah, I'm pretty sure there are, but that percentage looks like it may not be as high as I would have said a few months ago.

    My view above is that most individual investors do not have the time or resources to do the diligence that needs to be done to ensure that they're investing in a non-fraudulent company. I haven't "sided with the short sellers" I've simply said that this is a segment of the market that's complex and risky enough that I'm fine with avoiding it altogether.

    @anuvaka

    To be clear, I'm not necessarily suggesting that any particular one of these stocks is fraudulent or should be sold. (see my above response)

    However, like I said in the article, I'd want a pretty compelling reason to believe that the company that I own is telling the truth. If it's simply a matter of crossing fingers and *hoping* that it'll all turn out all right though, that's another matter.

    On a similar note, I'm not advocating shorting these stocks any more than buying them. The same deal holds true -- you'd need a compelling reason to short.

    Some of the short sellers have done some good research, but since they have their own financial incentives, I'd want to do at least some of that research myself (for instance getting SAIC filings and having them translated or visiting operations in China). Problem is, unless you're planning to place a really big bet, the time and costs associated with doing that kind of research is prohibitive.

    As I noted in another article today (http://www.fool.com/investing/general/2011/05/25/is-your-por... risk for buyers falls when prices fall -- which puts at least one thing in the bulls' corner here. The converse would be true for short sellers -- as the price falls the risks rise. From that perspective, shorting many of these companies today isn't nearly as attractive as it was before this became a bloodied battleground.

    Matt

  • Report this Comment On May 25, 2011, at 5:08 PM, krobert2 wrote:

    Bottom line is your article negatively affected the share price of the Chinese company I'm holding. I am an honest indivdulal investor who has done his due diligence on this one particular company. So in this case you have helped the dishonest short sellers and hurt other shareholders like me.

  • Report this Comment On May 25, 2011, at 5:10 PM, kkawohl100 wrote:

    China Stock Tracker ranks companies by their auditors and track records.

    http://www.fixyou.co.uk/tracker_details.php?s=GFRE

  • Report this Comment On May 25, 2011, at 5:32 PM, TMFKopp wrote:

    @krobert2

    Sorry, but that's not a compelling reason for me to not express my views on the issue. Since you say that you've done your diligence, you should be focused on the fact that as this all shakes out (and it will) the wheat will be separated from the chaff and the stock will eventually go to its intrinsic value. Trying to silence views that differ from yours or that have a short-term impact on the stock price is, at best, a waste of time.

    Of course, since you say you've done your diligence and are convinced that the short sellers are dishonest, I'd be very interested to hear what stock your talking about and what your diligence process was -- I'm sure it'd be helpful to other readers.

    As I noted above, I try to maintain an open mind (just not about stifling reasonable discussion on the topic).

    Matt

  • Report this Comment On May 25, 2011, at 5:37 PM, TMFKopp wrote:

    @kkawohl100

    Thanks for the resource!

    Matt

  • Report this Comment On May 25, 2011, at 5:42 PM, krobert2 wrote:

    You are personally attacking me, nobody is trying to silence you. You should research each stock

    that you include in your articles.

  • Report this Comment On May 25, 2011, at 5:52 PM, TMFKopp wrote:

    @krobert2

    "You are personally attacking me"

    That's an interesting interpretation of my response above.

    In case you read any of that as sarcastic, let me be clear that it wasn't. I'm truly interested i which stock you're referring to and what your diligence has uncovered that makes you so convinced that it's on the up and up and the short sellers are wrong.

    In the grand tradition of The Motley Fool, we're all about becoming better investors and learning from each other -- I assume that I could learn something from what you've found.

    Matt

  • Report this Comment On May 25, 2011, at 6:08 PM, krobert2 wrote:

    So you can criticize the stock without researching it? No thank you, signing off now, won't be back.

  • Report this Comment On May 25, 2011, at 6:10 PM, Shawnerz wrote:

    I got burned too. I bought China Green Agriculture (CGA) at 13.25 after MF Global Gains recommended it a couple years ago. It's now down to 4.80. Accounting fraud and alleged payoffs of officials are bringing the stock down.

  • Report this Comment On May 25, 2011, at 7:01 PM, TMFKopp wrote:

    @krobert2

    "So you can criticize the stock without researching it?"

    Um... just in case you get curious and come back... you haven't yet specified what stock you've been referring too. I'm fairly able at a variety of things, but mind reading isn't one of them.

    Matt

  • Report this Comment On May 25, 2011, at 8:31 PM, lannyslee wrote:

    First of all, I AM CHINESE. Having established that, let's make this clear - when it comes to Chinese companies, NEVER trust what you hear. China for the most part still does NOT respect the rule of law. People have no scruples, and will literally sell their grandmothers. My people back home are laughing at how gullible, naive and /or greedy Western people are. There is absolutely no way anyone in China can get rich without lying, stealing, bribing, and/or cheating. The rich simply stay out of jail by buying/bribing their way out of prosecution and imprisonment. Everything is about "guan xi" - relationship, as in "who do you know". Mark my words, the Chinese are sneaky, crafty and sly. There's a Chinese saying, "xiao li zhang dao" - the dagger concealed within a smile. All that bowing and scraping to the white man only lasts as long as there is something to be gained. Once the opportunity is exhausted, they will cut you off. The only way to beat the Chinese is to become Chinese - live in China, learn the language, work in a Chinese company shoulder to shoulder with the local people as an equal, NOT as an insulated privileged expat, then maybe, just maybe, you won't get taken for a ride.

  • Report this Comment On May 25, 2011, at 9:25 PM, AaronRogers wrote:

    Matt= Your frustartion makes sense as does the thread of your article but it I feel this is an irresponsible article with regards to the companies listed that you are not sure of wrong doing or impropriety. Just as you have stated in other articles do not buy without due diligence shouldn't it be the same to say do not sell without either.

    More over, the cornerstone of value investing is these types of situations so I strongly urge you to reconsider your position. Value happens cause no one knows or cares yet or usually due to an over reaction or correction. They only go back up when the issues are adressed and resolved either internally or externally.

    Take CSKI. What if they come out and say yes we screwed up our earnings are actually 1 buck not more here is our proof. BAM the stock triples. Or what if there is no problem and its baby with the bath water.

    *******I guess what I am really getting at is it is okay for you to broad blanket lump stocks as a personal decision but to publicly do it and encourage is a little beneath you as a journalist and financial advisor. I have and will always respect your opinions and I thank you for the knowledge and wealth of info you provide. This time I agree to disagree.

    By the way I have 0 positions in any of these companies as I am awaiting on the sidelines for the smoke to clear and because I agree with you on better right now (can't fight the market by yourself) but I do feel very fondly of CSKI

  • Report this Comment On May 26, 2011, at 12:14 AM, TMFKopp wrote:

    @AaronRogers

    Thanks for taking the time to weigh in and I appreciate your thoughts. However:

    "it is okay for you to broad blanket lump stocks as a personal decision but to publicly do it and encourage is a little beneath you as a journalist and financial advisor."

    First, I can't stress this enough: I'm *not* a financial advisor. I'm an individual investor like (most) reading this.

    Second, I completely disagree. I think good investment results stem from having open and free exchanges of views -- all views. Investors that are getting severely shaken by an article like this are likely investors that haven't done the diligence that needs to be done in order to own these particular stocks.

    Other than Longtop, I haven't even presented the specifics of any of the cases against these companies. I've presented a broad-brush reasoning for not trying to navigate these dangerous waters. Investors that have done significant diligence on one or more of the stocks above should have the ammo to respond to my three bullets:

    1) I *do* have compelling proof that the company I'm invested in is legit. I've examined the various sets of filings to ensure that they match, I've talked with customers to make sure they're actually doing business with the company, and I've traveled to China to see the thriving enterprise with my own eyes.

    2) I don't need to worry about a basket approach because I've done a lot of work on a particular company or few companies and know them to be solid.

    3) I believe that the business underlying the companies that I own is a compelling one that has a sustainable competitive advantage. Or, I don't really care because I was able to buy at such a low price.

    However, if the investment thesis has its foundation on "I hope" or "I think" that the company is legit or "Those short sellers are bad people so them must be wrong," then... well, that's not the kind of foundation I like for my investments.

    "Take CSKI. What if they come out and say yes we screwed up our earnings are actually 1 buck not more here is our proof. BAM the stock triples."

    This is fraud. Are you really happy to own an investment where you're hoping that management is just committing *a little* fraud? And how is it that you're suddenly trusting this company about everything else once they disclose that?

    And sure, there are optimistic possibilities, but the thing is that you can't just take possibilities like that and view them in a vacuum. You need to look at the variety of potential outcomes -- including the stock basically going to zero if there is serious fraud -- and handicap them to get to an expected return.

    "More over, the cornerstone of value investing is these types of situations so I strongly urge you to reconsider your position."

    See, this is an interesting thought and it's what had me sniffing around these stocks as potential buys in the first place. For one thing though, widespread fraud is not typically something that many value investors are going to jump at.

    But there is truth to what you're saying. The problem is that this isn't simple headline risk, or concerns about future growth, or something like that. We're talking fraud. And given the companies that have already folded, this isn't just idle talk.

    Plus, there's a huge geographic gulf for U.S. investors which means that they can't easily see the company or its products. Plus, there's a language barrier. Plus, there are cultural differences. Plus, there are a variety of cross-country accounting issues.

    The bottom line, is that if you want this to be some sort of classic value play, then you would have to be willing to tackle all of those obstacles to get to the bottom of which companies are telling the truth. And for most individual investors, the time and money that would be required for that effort isn't justified by the amount of money that is going to be invested.

    And if the case is, "Hey, I think CSKI is telling the truth" and that's the entirety of it, then you're not investing, you're making a bet. That's fine, you can certainly do that, but it ends up being no different than plunking down money on an NBA playoff game.

    (and that's a generic "you" I'm not saying that's what you'd do)

    Matt

  • Report this Comment On May 26, 2011, at 12:19 AM, TMFKopp wrote:

    Not that I didn't already write too much in the last post... but to try and simplify it a bit. Take CSKI again. There have been serious evidence-backed allegations against that company.

    My point in all of this is that if you are invested in or are thinking about investing in CSKI (you can plug in other tickers here as well), you need to sit down and seriously ask yourself why. That's not a rhetorical question, it's a real one. What information do you have that either proves the allegations are spurious or verifies the numbers that the company has presented?

    Matt

  • Report this Comment On May 26, 2011, at 11:10 AM, JeremieP1 wrote:

    Hit pieces from random parties move the stock price away from a proper valuation just as do analyst errors in forecasting unrealistic growth. Investing in stocks is an exercise in identifiying valuation mistakes and capitalizing on them. At some point internet stocks became ridiculously overvalued before the dot-com bubble burst. It is likely that at some point China small caps will do the same on the other side. Good luck to all ya'll in figuring out when that is...

  • Report this Comment On May 27, 2011, at 7:53 AM, refugee07 wrote:

    I'm still struggling with a decision about CGA and YONG. As a member of the Motley Fool community, part of my issue is not only trust of the reports on CGA and YONG. It is also trust in the reports of MF, which invested time and energy in research and evaluation tours. Matt, I think for most people on this board the answer to your final question ("What information do you have that either proves or disproves the allegations...) will be either directly from MF or buttressed from MF recommendations. I don't disagree with your analysis, but this appears to be one half of the internal debate I'm assuming the MF teams that made the recommendations were having before they issued the "Buy" alert. None of the issues raised here is really new, although I appreciate that some issues may seem bigger due to their durability. If you read back to the China study tour report, for example, issues of reliability in reports and board capacity were directly assessed. In light of this, my suggestion is to request a counter-point piece from one of the Buy teams at MF. I accept full individual responsibility for my decisions, and I enjoy hearing opposing views. In a nut-shell, however, Motley Fool is an integral part of my due diligence leading to a decision. In this case there are confusing signals coming from trusted advisors, and Matt's article is in fact calling into doubt information that I received from another MF section. I respect that, and appreciate it. But I would like both sides of the argument presented together so that I can avoid swinging back and forth as successive opinions are published months apart.

  • Report this Comment On May 27, 2011, at 12:37 PM, bretcomar wrote:

    @refugee07

    You stated my thoughts exactly.

  • Report this Comment On May 27, 2011, at 12:51 PM, TMFKopp wrote:

    @refugee07

    Sorry I'm traveling so I'm writing from my iPhone and will have to keep this short. But there is ongoing diligence being done by Global Gains and a very robust discussion on the newsletter's discussion boards.

    Not that that prevents a Fool.com article countering my thoughts, but if you're looking for something right now that's where to find it.

    Matt

  • Report this Comment On May 27, 2011, at 4:27 PM, zgriner wrote:

    I don't trust China the government and the China the business community.

    It seems that the Chinese master plan has been to glorify wealth so as to draw in the West and make suckers out of us. Not only have we surrendered our manufacturing capacity to them, at the expense of the well-being of the Chinese people, but we have enabled them to advance their entire manufacturing base, especially necessary for their long-term military plans.

    At the same time, it seems, that while it's glorious to make a buck, it seems that ethics and honesty is not something instilled by Communist Party in its people. Those same skills needed to circumvent the Party are used to circumvent all oversight.

    Consequently, we have crooked, adulterated food, crooked, adulterated products, and crooked, adulterated companies.

  • Report this Comment On May 27, 2011, at 4:57 PM, whyaduck1128 wrote:

    It doesn't matter whether one cow was drinking upstream from my current position, or the whole herd. I'm not drinking there. I'll move upstream from them; in this case, closer to home and more reliable companies.

  • Report this Comment On May 27, 2011, at 7:27 PM, AaronRogers wrote:

    I just checked in and saw that you took the time to respond. While there is a lot more to write on the individual ticker CSKI I can tell you that within your rebuttal there are valid points and this isn't the forum on this ticker. I can tell you that I have contacts in China for other endeavors and will personally look into this. I will post on CSKI in a few months as this is not pressing in my life right now. I will say CSKI has filed timely. CSKI has been forthright. CSKI is audited. Management has addressed. CSKI even posted negatives which adds validity.

    To your comment "This is fraud. Are you really happy to own an investment where you're hoping that management is just committing *a little* fraud?" I would answer a resounding YES. Risk/Reward. The whole point of these Chineese stocks is that full on fraud is priced in. So at these levels and pricing if only a little fraud is discovered and rectified CSKI booms. If no fraud (which so far seems to be the case) a huge boom. This is a value play solely due to fraud issue. At what level is fraud priced in is a very important valuation tool. If you disagree then let me remind you of GS headwinds 2 years ago. BAC and the whole stock option backdating scandals and the pricing of those companies there after. It was how much fraud and at what levels of penalties. Immediately after these major issues were resolved what happened. SO A RESOUNDING YES how much fraud is a critical factor and what penalties for it. If the fraud is huge then 0 you will go. So upside vs. downside is a gigantic factor at The Motley Fool both conservatively or agressively. 2.8 downside vs. 20 upside and its all hinged on this factor so degrees of fraud is very relevant.

    ***I do want to take the time to say THANK YOU*** For those who get offended by an article or offended by the response to your comments posted of an article (as I read earlier in a thread) I ask what are you thinking? Be greatful for a forum and a writer who takes the time to acknowledge your posts. Be grateful for a writer who actually intelligently responds to your posts. I offer it is far more offensive to be ignored after I took the time to post. So once again even in disagreement please take this sincerely "THANK YOU" 1) Thank you for your educated postings 2)Thank you for your time 3) Thank you for responding and helping me with my thesis. 4) Please let all other Motley Fool writers know AaronRogers does not post much but when he does he is very appreciative of responses. Also thank you for overlooking the many typos and poor english contained within.

  • Report this Comment On May 28, 2011, at 1:48 PM, nanoguy wrote:

    Why buy? Not just YONG, but any company share. This is a very individual decision, and so cannot be answered for a community in general.

    Some personalities have a tendency toward excitement and rapid action. Perhaps this drives an inclination to day trade or "chart". Some folks may have a hard time sleeping at night if the market price of a share drops 5%. Perhaps this would lead toward investment in mutual funds that concentrate on megacaps and bonds.

    Without knowing, I would think that most, if not all, at least want a fair return on their investment!

    So we study the proxy reports and 10-Ks. We read articles and listen to opinions. We know the information is imperfect and that no one can forsee circumstances of the future, so some subjectivity may enter our filtering. In the end, we try our best to invest in companies that pass our criteria.

    One factor in my own criteria is whether management actions seem to reinforce a relationship of trust with shareholders. A lot of microcaps and small caps do not score very well on that ... especially in emerging markets.

    Some of that may be simple lack of knowledge about what it really means to seek and retain shareholders in a public company, and some of that may be simple greed (Let me print money, get mine, and get out).

    Time usually helps to sort that out.

    But there is another factor included in my own personal selection criteria. Does the company's product, vision, and actions seem to support Deming's concepts of added value?

    In other words, I would like my investments to do "more" than just make money! Small as they may be, I want them to be a vote to encourage entrepreneurs and leaders to include in their decision making the question "Am I trying to balance responsibility to all my stakeholders (investors, customers, employees, community) while both making a reasonable profit and making the world a better place?"

    This is not a recommendation to buy or sell.

    I am long YONG.

  • Report this Comment On May 31, 2011, at 6:23 PM, ayaghsizian wrote:

    With the exception of 2 solar companies, NEP being halted on the AMEX was the last straw for me. There is no way to know what numbers are true. Real estate transactions, business deals, etc...we have no way of knowing who's benefitting more than they legally should.

    A. Yaghsizian

  • Report this Comment On May 31, 2011, at 8:59 PM, jff1001 wrote:

    I too have had it with Chinese stocks run by Chinese and directed at the Chinese domestic market. But I do think that the various American investment newsletters need to improve their vigilance. You must point out where the possibility for fraud exists or say how these numbers could be cooked. At this stage of the crisis, American newsletters should in effect boycott local Chinese companies and give no positive recommendations until assurances exist that they have become honest and transparent.

  • Report this Comment On June 24, 2011, at 11:32 AM, gmdaniels wrote:

    We talk about their China Agritech, China Media Express, China Electric Motor et al, while they talk about our Enron, Madoff, Goldman Sachs and even recent funny business at Berkshire Hathaway

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