The China Market Has Gone Mad

What does it say about investors when a sloppily researched, negative article by one Ian Bezek, amateur investor, recent Colorado State University graduate, and lover of cats, chess, and Mexican food, was able to shave 10% -- or $40 million -- off the value of Nasdaq-listed Yongye International (Nasdaq: YONG  ) on Monday morning? It says that when it comes to small Chinese companies, investors are scared as heck. It also says that many have not done the level of due diligence necessary nor diversified their portfolios sufficiently to be able to take the risks associated with investing in this volatile and murky sector.

As a result, whenever some small research shop, hedge fund, blogger (anonymous or not), or short-seller raises questions, the stock drops dramatically before the claims can be examined in any depth by any rational person. That's why small Chinese fertilizer maker Yongye dropped 10% after Bezek called its story "too good to be true" and presented flimsy evidence to insinuate that the company was stealing cash from investors and lying about its recent rapid growth. This is stupid, but blind selling in situations like this is passing for investment advice in some circles. Columnist Rick Pearson advised readers recently that, "When a serious and detailed allegation of fraud surfaces, sell. Sell immediately."

Pearson's advice should not have applied in this case since it's a stretch to call Bezek's effort either serious or detailed (see Yongye's related press release for an easy rebuttal), but the net effect was the same. Investors are struggling to separate fact from fiction in the world of small Chinese stocks, and they're making bad decisions as a result.

Opportunity knocking 
This has not gone unnoticed across the investing universe, and a cottage industry has sprouted up around shorting a small Chinese stock, releasing a negative report, pushing it out through various unregulated channels, and then profiting as the stock drops and covering. Yet just as there is truth in every jest, small-cap Chinese companies are not meritless targets for short-sellers. Many struggle with corporate governance, transparency, and internal controls, are poor capital allocators, and often pursue rapid revenue growth at the expense of efficiency and profitability.

Even some others are frauds. RINO International was delisted after it admitted, as firm Muddy Waters alleged, that it had not entered into contracts it told investors it had signed. And be forewarned: There are other fraudulent Chinese companies out there (and I remain convinced that I've toured a few of their factories while visiting China in search of investment ideas).

All of this is in the headlines thanks to a Barron's story this past summer, Bloomberg's story on Texas short-seller John Bird and his discovery of discrepancies between the numbers Chinese companies are filing with China's State Administration for Industry & Commerce (SAIC) and with our own Securities and Exchange Commission, the recent RINO blow-up, high-profile mentions in The Wall Street Journal and New Yorker, and the announcement of an SEC investigation into the sector. But it is not new news. In fact, the origins go back to March 2008 when Mark Cuban's Sharesleuth website wrote about a company called China Fire & Security (Nasdaq: CFSG  ) .

Begin at the beginning
When Sharesleuth published its negative report on China Fire, Cuban was already short the stock. The stock dropped from $7 to less than $4 in a matter of hours as China Fire struggled to respond. Sometime after, Cuban covered his short, profiting handsomely even though China Fire went on to rise to more than $18 per share by the fall of 2009.The stock has since declined again for myriad reasons, including real problems in the business such as rising accounts receivable, but China Fire's long-term performance doesn't matter as much as the fact Sharesleuth revealed a powerful profit model that has since been franchised.

There are two perspectives why this activity continues today with such frequency. The first is that fraudulent Chinese companies continue to list in the U.S. and make themselves targets by doing so. The second more cynical take is that sophisticated investors have discovered they can make some money forcing Chinese stock prices down, regardless of whether their allegations turn out to be true (and the jury remains out in a number of cases). Either way, "reports" on small Chinese companies are not going to stop being published around the Internet anytime soon.

What to do with this information
Knowing this, one can either decide that the sector is too hairy and too volatile for capital (a fair decision) or endeavor to learn more about China, its business practices, and its companies and market opportunities and prepare yourself to intelligently buy when others are blindly selling. Bezek's errors, for example, were easy to spot for anyone who follows Yongye. He wrote that it was implausible that Yongye could have opened some 20,000 stores since 2007 with only 399 employees. Heck, how could the company even staff those stores? But what Bezek failed to note about Yongye's business model is that it doesn't open, own, or operate those stores. Rather, it sponsors existing stores in small villages across China and works with them to promote its product. So the people opening and staffing Yongye's stores aren't Yongye employees at all.

Similarly, another tried and true data point for short-sellers is to point out the aforementioned discrepancies between SEC and SAIC filings. Although this is a more substantive debate, there's reason to be skeptical of these repeated claims. Consider, for example, the case of Sahm Adrangi of Kerrisdale Capital, who recently posted a negative report about China Education Alliance (NYSE: CEU  ) on his firm's website. Among his pieces of evidence was the observation that "the company's local filings to the Chinese government show that the online business generated less than $1 million in revenue in 2008."

But Sahm Adrangi is also the previously anonymous Chinese company analyst who, upon discovering that the local filings for short target China Marine Food (AMEX: CMFO  ) suddenly matched the SEC filings, wrote, "This by no means leads me to believe that CMFO has been accurately representing itself in its SEC filings. ... I believe that I have overestimated the veracity of SAIC filings in my previous article. Now I think they can be falsified just as SEC filings can." What this demonstrates is that Adrangi is consciously not interested in presenting reliable data to support his investment cases, but rather happy to make use of whatever tactics have been effective to persuade -- or scare -- others.

Good luck to the SEC
Ultimately, resolution, to the extent that investors will get any, looks like it lies in the hands of the SEC. That's another scary thought, but at least that agency is investigating China-based companies listed in the U.S. as well as the auditors, law firms, and investment banks that helped them come public. This part of the market is the Wild West right now and would benefit from additional oversight.

Yet the biggest winners who emerge from this investigation may actually end up being the Chinese companies themselves. Legitimate operations that improve corporate governance, upgrade their auditors, and continue to trade after lesser operations have been purged from the market will benefit from higher valuations. The key, of course, is identifying those legitimate operations and having the emotional wherewithal to hold on during this period of volatility.

The global view
We continue to invest in China at Motley Fool Global Gains, but we do so carefully, only after meeting companies on the ground in China, and via a diversified approach that combines small Chinese companies such as Yongye with larger Chinese companies such as Guangshen Railway (NYSE: GSH  ) and multinationals such as Coca-Cola (NYSE: KO  ) within a broader basket of China exposure. As a result, although we hope that our diligence will prevent us from suffering a blow-up, we're confident that one disaster won't torpedo our overall returns.

Furthermore, we look to build long-term relationships with our investments in China, endeavoring to get to know management over time and judge their decision-making over a multiyear period. That enables us to rationally examine any negative reports on our investments and add to our positions, as I did personally on Monday with Yongye, when it merits.

Tim Hanson is the advisor of Motley Fool Global Gains. He owns shares of Yongye International and assures you that both of the peppers pictured in this article are jalapenos (though concedes that it should not be mistaken for a scientific study). Coca-Cola is a Motley Fool Inside Value recommendation. Guangshen Railway and Yongye International are Motley Fool Global Gains picks. Coca-Cola is a Motley Fool Income Investor recommendation. The Fool owns shares of Coca-Cola and Yongye International. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (46) | Recommend This Article (100)

Comments from our Foolish Readers

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  • Report this Comment On February 10, 2011, at 12:30 PM, sadrangi wrote:

    Tim,

    I disagree with you.

    I am quite interested in presenting reliable data to support my investment cases.

    When CMFO provided SAIC financial statements in 2009 that matched its 2009 SEC financial statements, when all prior historical SAIC financial statements did not match SEC financial statements, I was 100% convinced that the company had found a way to either bribe local government officials to provide falsified documents to inquiring agents, or had otherwise found a way to file falsified SAIC documents. CMFO is not the only one to have successfully done this - ONP did it, and, while we're on the topic, so has YONG. It appears to be possible with smaller, rural AIC offices, whereas companies like CSKI and CHBT, which report to AIC branches in large cities like Harbin and Shanghai, have been unable to get their AIC branches to provide falsified SAIC documents.

    In the US, SEC filings are filed at a federal level. In China, SAIC filings are filed at a local level. And the standards amongst disparate AIC branch offices are not uniform.

    Again, I am very consciously interested in presenting reliable data to support my investment cases.

    Sincerely,

    Sahm Adrangi

  • Report this Comment On February 10, 2011, at 12:31 PM, goldminingXpert wrote:

    Attack me and not my report. Well done! The one specific thing you complained about "opened" vs. "branded" I specifically commented on at the SA story. I made a poor choice of verb. I still find it difficult to think they can come up with specific marketing for each of their 24,000 stores with 399 employees -- as their 10-K states.

    I stand by my analysis, though I spoke with the CFO and I will be publishing a second piece offering the company's view of my concerns.

    I'm not sure why you brought up SAIC filings, China Fire, etc. I didn't mention any of that in my article. You did a fine job of rebutting an article I didn't write though!

  • Report this Comment On February 10, 2011, at 1:22 PM, kidchicago2 wrote:

    Ian, amateur grilling expertise aside, I have no idea what your qualifications are to attack a Chinese company you have never visited and never spoken to any representative of. Do you have any clue how many YONG employees it takes to brand a store? Any experience at all that would be relevant to that analysis? Or do you just have a hunch? And what would the basis for your speculation be? Something you learned in a real estate class at the university you recently graduated from? Or something else in your long years of investing (you must have started with the E*Trade baby, because you can't be over 25 now).

    Regardless, this article wasn't meant to be merely an analysis of your own blog post. It was meant to address the wave of short attacks that have roots going back to China Fire in 2008. In other words, you're not the first hack to go down this road and you won't be the last.

    I'm sure you feel important at the moment -- the Company has issued a press release just about you and you've cost individual investors like myself a lot of money. And it really didn't even take much time or effort to put together your amateur-hour analysis, did it? Congratulations, you won for a day. Maybe you should consider *what* you won though, and the price thousands of investors paid. I'm guessing you could care less, as long as you get to stay in the spotlight. It beats hanging out alone in your parent's basement, I'm sure.

  • Report this Comment On February 10, 2011, at 1:55 PM, Swede46 wrote:

    Ian,

    Maybe you shouldn't be surprised at the rebuttal to your article. You didn't bring up any new information that hasn't been previously discussed and explained to the satisfaction of anyone following the company. Your article was singled out because it was the worst example of research we've seen on a Seeking Alpha blog and still managed to drive the price down. Before you decide to post a follow up article, I suggest you do a lot more due diligence.

    Tim Hanson has visited with company management 3 times over 3 years at their HQ in China, read all their 10Q's and 10K's, participated in all their CC's and contacted the company numerous times if information released by the company required clarification. As a suscriber to his Global Gains service, I've seen more DD from him than any analyst covering the company.

  • Report this Comment On February 10, 2011, at 2:30 PM, earlyages wrote:

    We all know investing in China is risky and we all feel the fear of fraud. Nonetheless, we forget that we also shall fear the short sellers who profit greatly from internet rumors.

    One most do the due diligence and read about the authors. Who is this investor Ian Bezek who wrote this article in Seeking Alpha? He cites his expertise : distress real estate. Is he a frustrated Donald Trump and also an analyst?

    10 years managing his own stocks means nothing; he could have lost money all those years for all we know.

    Beware of wannabe analyst they can kill your gains.

  • Report this Comment On February 10, 2011, at 3:34 PM, xds68 wrote:

    I've been following this space for a long time, and did fine trading in and out of names in the past. That said, these holdings are closer to baseball cards than stocks, and I'm not sure end of day the actual financial performance matters as much as some seem to think. Even for the strong performers, there is no way to return capital to US holders, as it's impractical to repatriate yuan back to dollars. So you depend on a greater fool being willing to take it off your hands at some point. Add the fact that US holders have no ability to influence management or to seek redress in the Chinese courts, and what you have is an option on some long term improvement in corp governance, currency exchange, and shareholder protections. Wouldn't hold my breath.

    The most obvious example of the currency conundrum is even when these stocks trade to 2x or 3x earnings, not feasible (or of interest) to managements to repurchase shares.

  • Report this Comment On February 10, 2011, at 3:46 PM, Itrustbutverify wrote:

    Mr. Adrangi, you claim to have evidence that Yongye has falsified SAIC documents.

    Presenting the information that substantiates your claim would certainly add credibility to your comments, not to mention the company you work for. Will you?

    Mr. Bezek (a.k.a. goldminingXpert), the first thing you need to do is calm down, and re-read the article. It is commenting on a number of articles and authors that have been posted. Nowhere does it link you to either SAIC filings or China Fire. Claiming it does is not the way to inspire confidence in your assessment of the article or Yongye for that matter. I will be looking forward to reading your subsequent article on Yongye. I trust it will have verifiable information that will support your position.

  • Report this Comment On February 10, 2011, at 3:59 PM, genb3 wrote:

    This writer seems to have a lot of conflict of interest, not to mention attacking Yong's critic instead of the allegations that was presented. This makes Mr. Hanson appear quite petty, defensive & amateurish himself. Thus, Mr. Hanson's credibility & actual diligence is highly suspect as well. Fact of the matter, companies always deny their fraudulent claims until they can no longer do so- and all the more so when they have government backing.

  • Report this Comment On February 10, 2011, at 4:13 PM, goldminingXpert wrote:

    "This makes Mr. Hanson appear quite petty, defensive & amateurish himself. Thus, Mr. Hanson's credibility & actual diligence is highly suspect as well."

    I wouldn't go so far as to suggest that his due diligence is highly suspect, but I do feel this article is a personal attack brought on by the fact that I questioned his magical jalapenos. (Let me just say that if the larger "jalapeno" is in fact a jalapeno, I wouldn't eat it, as it is a seriously disturbing freak of nature.)

    I never directly accused the company of fraud, lying, etc. I suggested that for a variety of reasons, most of which Mr. Hanson did not address, and some of which the PR did not address, the company's numbers and story seemed off. I did not title the SeekingAlpha article, it was re-titled to the more combative title their editors picked.

    The company, unlike my critics including Mr. Hanson, reached out to me and had the CFO speak with me to address my concerns. After this discussion, many of my concerns have been diminished, though I won't be racing out to buy the stock anytime soon.

    I was never short the stock, am not short the stock now, and am not in collusion with anyone else short. I had no financial incentive to write about YONG, other than a small compensation from SeekingAlpha. My track record, both as goldminingXpert here, and my extensive editorial experience can be seen here and through Google searches. As Global Gains is behind a pay wall, I cannot judge Mr. Hanson's credibility, though from this exchange, and past picks I know that have leaked out to the general public, I am not terribly impressed. I'll leave it at that, as I have no interest in getting into a spitting match with anyone at the Fool.

  • Report this Comment On February 10, 2011, at 4:40 PM, poeticJ wrote:

    Tim,

    This was one of the more reasonable articles on the subject, and investors appreciate it. My only issue with it was the line:

    "Many struggle with corporate governance, transparency, and internal controls, are poor capital allocators, and often pursue rapid revenue growth at the expense of efficiency and profitability."

    That's a very strong statement to make, and I would encourage you to provide evidence to support it because I don't think it's entirely true.

    I agree w/ you on internal controls (not many are 404 SOX-compliant like CHBT just became), but I've found many of CHN-cos to be as transparent and open as US companies. How are US companies significantly more transparent than CHN cos (& not anecdotal evidence)?

    Also, could you provide more detail on your corp gov claim? Again, a lot have adopted the audit/ethics/etc. committee system and similar corp gov legal agreements that you see in the US (one weakness is mgmt can't fully be prosecuted for fraud).

    Re: the rapid revenue, a lot of these companies are in hyper-growth spaces (CHN infrastructure, CHN consumer) and are following the same strategy that AMZN and the tech cos did a decade ago. Get the mkt share first, then become focus on margins down the road. Many investors are ok w/ this... (although there seem to be a few too many acqs.)

    It would be helpful if you spoke w/ the inv bks/companies about the benchmarks they need to achieve to address these risks- and talk about how investors can evaluate them in these areas.

    Remember,

    # of Chinese companies listed in US that have been fraudulent but passed a Big 4 audit: 0

    # of Chinese proven or under investigation (excluding OTC or pink sheets): 1 (RINO, still under investigation)

    # of Chinese companies listing in the US: In the hundreds

    Companies accused of fraud but unproven: ONP, CSKI, CGA, CAGC, YONG, CCME, CVVT, WATG, SCOK, BORN, CMFO, CHBT, AUTC, and another 10 or so. Yet nothing has been proven. Not a very good batting average, right?

  • Report this Comment On February 10, 2011, at 8:57 PM, kidchicago2 wrote:

    Ian, what part of your investing experience, or experience with running a business (involving branded stores in Chinese villages or anything, anywhere) leads you to believe that it would take more employees than Yongye has to brand (not "open") 20,000 small rural stores?

    I'll stop the ad hominem attacks, even though I think they're well deserved, but I'd like to hear why you think you're qualified to make most of the allegations you have. The answer, I'm certain, is that you simply are not. The "jalapeno" debate is a great example; you say, based on your experience with a grill, that the two peppers from the Motley Fool test are not both jalapenos. How exactly do you know that? Did you contact Tim? Did you ask someone who would know a Jalapeno from an Anaheim (someone, say, who studies such things)? No. You just threw out a wild guess and let the chips fall where they will. That's not just unprofessional--to the extent you believe a few articles on SA make you a professional writer--it's also totally irresponsible.

    What's your response, "goldminingXpert"?

  • Report this Comment On February 10, 2011, at 9:17 PM, goldminingXpert wrote:

    I've bought dozens of jalapenos from various grocery stores, including natural food stores, over the past years and I've never seen a single one look anything like the one they claimed and they'll all looked like the normal "unfertilized" jalapeno. The whole point of my article was that none of this story adds up. Just because I buy 100 jalapenos and 0 of them look remotely like the one they claim doesn't make it impossible that it was a jalapeno, but it makes it quite unlikely. As I said 95% probability that it wasn't a jalapeno. If the last 100 jalapenos you see look nothing like the pepper in front of you, but the pepper in front of you looks like the majority of the Anaheim peppers you buy, the simplest explanation is that it is probably an Anaheim.

    About branding, as I have repeated now numerous times, the 10-K specifically states that they make promotional materials unique for each store. I'm not sure if you've ever worked in the media industry. I have, and let me tell you, making ads takes a lot of work.

    And about qualifications. I'm 22. I don't yet have a long resume to point to because I'm 22, and I was unable to work for several years because I was caretaking for my terminally ill father. Until my reputation is proven, I can only stand on what I've written. Take my articles or leave them. In your case, leave 'em, doesn't matter to me. Apparently the market thought differently than you, and that's great. That's why we have free markets. If I'm wrong, go buy the stock and make a killing -- you're welcome for the discount.

  • Report this Comment On February 10, 2011, at 9:20 PM, john795806 wrote:

    Investors in Yongye should not panic. Losing 10% may seem like a lot, but it's money lost only if you sell. One of many reasons to have a balanced portfolio is so that such temporary losses are bearable. If you've done your due diligence and are convinced about Yongye's long-term prospects, take this a buy opportunity.

    As for Ian, I'm glad you were treated respectfully by Yongye, which is more than you deserve. You didn't even contact them before writing your article, which is hardly due diligence, and now they've reached out and contacted you. Your sins were many--ignoring a great deal of research on the positive effects of fulvic acid-based nutrient mixtures (Yongye's product), while citing a single study on humic acid application to soils, which does not characterize Yongye's product. As hard as it may be for you to believe that Yongye managed to brand 20,000+ stores (and hiding behind "bad choice of verb", which is right up there with Nixons' "mis-spoke the truth")--why didn't you check it out with Yongye how they managed to do that? THAT'S due diligence. Won't eat that big pepper? Maybe if you tasted it, you'd find it just fine. It wasn't like they sprayed it with growth hormones--just plant nutrients, for crying out loud!! You cost some panicky small investors a butt-load of money. Stop defending yourself--what you did is not defendable. Eat some humble pie, and take some lessons from your monumental public screw-up so you can become a better writer.

    I can see now what comes out of the "Seeking Alpha" site. I won't be going there for any investment advice.

  • Report this Comment On February 10, 2011, at 9:29 PM, john795806 wrote:

    And to add, Ian, who said that Yongye actually made their own promotional materials? Our small organization (less than 100 employees) contracted last year the production of training materials for 60,000 farmers. We paid another firm to work with us on the design, and then they and another firm did the actual production. By the way, neither of those firms had more than 20 employees. Twenty thousand? Very doable.

  • Report this Comment On February 10, 2011, at 10:16 PM, goldminingXpert wrote:

    John: here's the specific line in their 10-K:

    We create posters with village-specific case studies that demonstrate a farmer’s incremental revenue, original investment and harvesting time saved from using our products.

    It says "we create." If we doesn't actually mean we, but instead means a third-party, they could simply state that and that'd be the end of it, no? The press release in response to my article did not specifically state this, though it did state that they rely on their distributors to do "store recruiting work." Whether this includes the "we create posters" or not is unclear -- if their distributors make the posters, they should phrase the 10-K differently. This is really a minor quibble, but I don't appreciate you slandering my character when I've done nothing wrong and I did throughly research my article and can defend my points.

    Read more: http://www.faqs.org/sec-filings/100315/Yongye-International-...

  • Report this Comment On February 10, 2011, at 10:36 PM, Momentum21 wrote:

    Tim: Are you really crediting Ian with a $40MM beatdown?

    Most Chinese Small Caps you look at are getting ravaged daily. No one wants to participate in this game anymore...it's pretty simple.

    Every time you turn around another company is issuing a billion shares or fudging numbers using some random accounting method or trying to make the security industry in China magical.

    The shorties have been posting links to bogus message board sources forever. Why is Ian special?

    Believe me, I love crummy, downtrodden stocks and would love to buy Yong or CCME but China has gotten me down lately.

    CSR can't even rise over $5.00 when the CEO says he wants to buy the company for $6.50!

  • Report this Comment On February 10, 2011, at 10:50 PM, goldminingXpert wrote:

    Momentum: Odd that he credits me with a $40M beatdown when A) the stock was down 10% for about 5 minutes before bouncing hard and closed down less than 5% and B) the company was also hit with a downgrade by an analyst firm the same morning.

    It's also hard to be too bullish on the Chinese ag space when it appears that China Agritech may be a complete fraud (thanks Bronte Capital). I'll take it as a back-handed compliment that Mr. Hanson overstates my influence, however.

  • Report this Comment On February 10, 2011, at 11:49 PM, Needtherapy wrote:

    I infer that Ian views this as more of a game than anything else. In any event, Tim's rebuttal was good enough for me to up my shares. Only time will tell, but I think Ian just helped me get more shares at a lower price - so I guess I should say thanks?

  • Report this Comment On February 11, 2011, at 3:39 AM, kurtshrout wrote:

    Tim,

    I very much respect and appreciate your work, especially since there are so many people now who will present any lie, exaggeration, and/or misrepresentation to manipulate the price of a U.S.-listed Chinese stock downward. (Ian Bezek has proven himself to be one of these people.) What poeticJ wrote above, though, is correct in that even you, and many of the other well-intended people like you, have judged the stocks in this space too harshly. There are additional risks involved in investing in this space, but this can be said of investing in small stocks in general and investing in stocks from India, Brasil, Russia (which is genuinely significantly riskier), and other developing nations. No one has shown any real numerical proof that the U.S.-listed Chinese stocks are far riskier. This is because there is none.

    To further illustrate: “…the SEC suspends trading only when it believes the public may be making investment decisions based on false or misleading information. Suspensions give notice to current and potential investors that we have serious concerns about a company. A suspension may prevent potential investors from being victimized by a fraud.” (Source: http://www.sec.gov/answers/tradingsuspension.htm) It appears that there were about 236 SEC trading suspensions in 2010, and it appears that very few of these suspensions involved Chinese companies. (Source: http://www.sec.gov/litigation/suspensions/suspensionsarchive... (I was able to find three Chinese companies on this list.)

    Like you, there are some companies in the space regarding which I have some special concern. (I keep some of these stocks on a watch list to see if/when these special concerns will be eradicated.) I keep in mind, though, that same issue exists with stocks in multiple other segments.

    Thank you for the relatively very-high-quality work that you do, and please do continue on with it.

  • Report this Comment On February 11, 2011, at 3:42 AM, kurtshrout wrote:

    Note: The first link provided above will work if/when you delete the ")" at the end.

  • Report this Comment On February 11, 2011, at 7:33 AM, john795806 wrote:

    Wow, Ian, you just won't give up your defensive posturing. "We create" should not be interpreted that they actually do the printing--they aren't a print shop! Do you expect them to be making the paper and pulping the trees, too? "We create" means that they make it happen, presumably in the most economic way, which would mean out-sourcing the printing, doh! To create 20,000 sets of materials for branding and to get them put up isn't a big deal.

    If you think it is, then come up with some evidence, not just a bunch of doubts.

  • Report this Comment On February 11, 2011, at 8:43 AM, fxfxfx wrote:

    Ian, the picture about you gets clearer, now that your latest article on SA has been published where you praise citron research. Now your YONG hit-piece makes more sense (and looks even worse and gets a very bad taste to it). And it goes to show, how little research you are doing. just google for citron and deepcapture as a start - but then again, you DO perhaps know who citron research really is...

  • Report this Comment On February 11, 2011, at 9:40 AM, Starrob wrote:

    Anyone that knows me, knows that I am all for real on the ground due diligence on Chinese stocks. When all is said and done in the end, I think many of the people that are pro-investing Chinese stocks will find there are a bit more fraudulent companies than they originally believe.

    I would not go strictly by how many companies the SEC has shut down as evidence of how much fraud is going on and that applies to the market as a whole.

    For a variety of reasons, I believe the SEC misses a lot of frauds. Tim alludes to his confidence in the SEC finding fraud with the following comment:

    "Ultimately, resolution, to the extent that investors will get any, looks like it lies in the hands of the SEC. That's another scary thought, but at least that agency is investigating China-based companies listed in the U.S. as well as the auditors, law firms, and investment banks that helped them come public."

    I read a lot of material from people that actually visit some of these Chinese companies on the ground and after awhile I have noticed a common theme. Virtually all run across more than a few companies that they put into the high probability of fraud category as Tim alludes to here:

    "Even some others are frauds. RINO International was delisted after it admitted, as firm Muddy Waters alleged, that it had not entered into contracts it told investors it had signed. And be forewarned: There are other fraudulent Chinese companies out there (and I remain convinced that I've toured a few of their factories while visiting China in search of investment ideas)."

    All that being said....I believe some of the reports that Short Sellers are writing are frauds too. For me to take any report seriously, the person writing the report must have actually visited the company on the ground in China.

    Due diligence sitting in a housecoat looking things up on a computer thousands of miles away from the company. Well, these type of reports I throw in the trash can.

    I can at least read the Muddy Waters reports because they appear to at least actually go to China in some cases.....but most of the seekingalpha analysis whether positive or negative Chinese stocks is JUNK!!!

    The relative track record of someone on seekingalpha or TMF does not matter much to me if they have no experience in the topics they speak of.

    For me to take someone seriously on subjects of China, they must have at least made visits there over a number of years.

    People that have not done so.....well, you can usually find that they mis-speak very often. China does not operate like the USA and people that have never set foot in China and see how Chinese business actually operate most of the time make wrong assumptions.

    Starrob

  • Report this Comment On February 11, 2011, at 10:24 AM, Swede46 wrote:

    Ian,

    You mentioned that Global Gains was behing a pay wall. Why don't you check them out for free. The Motley Fool has a very liberal policy. You join any of their services and they will charge your credit card. Then, if you are not satisfied, you recieve a full refund if you cancel within 30 days and a pro rated refund after 30 days. No questions asked. I've done this with some of their other services and always recieved a prompt refund.

    Global Gains has very active discussion boards on their stock picks and you can take a YONG test drive. You may even decide you want to continue your subscription.

  • Report this Comment On February 11, 2011, at 10:59 AM, EricTheRon13 wrote:

    Excuse me, but isn't this an illegal activity? i.e. isn't "Dump and Dis" equally actionable with "Pump and Dump"? So we're talking about criminal activity here, right? So aren't these bloggers in the least concerned that the SEC might find out they made some big short-sales right before their blogs were published? Seems to me this would be as easy to document as the pump-and-dump scammers that get caught fairly easily.

    I guess they just assume the SEC people are too busy downloading porn to do any effective police work. Maybe it depends on someone complaining first. If I lost a bundle because of one of these bloggers, and I thought they had shorted first, then I would certainly file a complaint with the SEC.

  • Report this Comment On February 11, 2011, at 1:28 PM, rfaramir wrote:

    "there are so many people now who will present any lie, exaggeration, and/or misrepresentation to manipulate the price of a U.S.-listed Chinese stock downward. (Ian Bezek has proven himself to be one of these people.)"

    and

    "Excuse me, but isn't this an illegal activity? i.e. isn't "Dump and Dis" equally actionable with "Pump and Dump"?"

    No, on both accounts, unless proven otherwise. Ian has said he had no position in YONG, nor was in a relationship with anyone who did.

    Near as I can tell, he's just writing his own opinion. He makes mistakes and people get upset (reasonable, as they have skin in the game). He is contacted by YONG and is upfront about it, and is forthright in his comments on his article on SA. He seems a bit defensive, but emotionally, that's warranted based on the vitriol hurled his way (on SA--TMF has a much better, though not perfect, community). I think he should be a bit humbler and less defensive, since the work was a bit weak. He can learn from this episode to do more due diligence beforehand, and to have his articles edited before posting, but I hope he doesn't give up on writing altogether.

  • Report this Comment On February 11, 2011, at 6:37 PM, MAURIZIO400 wrote:

    The China Market Has Gone Mad

    is it the china market that has gone mad?

    i don't know that i'd care to differentiate between a bastard that shoot me cause he hates my guts or the idiot that does it because he's under the influence of whatever. a bullet is just a bullet all the same to me.

    irresponsably dumping xxxx on companies or people isn't less criminal cause one doesn't have a short position on it. in fact i can work up more understanding for the short whom after all is driven by an entirely human impulse, greed, but just do it for the hell of it...

    that beats me, I do not see anything human that I can sympathise with. I say that is the kind of people that are making it harder for us all. and we should try to do a better job of ignoring theyr rantings...they are just wasting our time and attention

  • Report this Comment On February 12, 2011, at 12:41 PM, jwarne01 wrote:

    I'm sorry -- but an inexperienced 22 yr. old who graduated from the equivalent of a Community College (that being Colorado State) isn't going to set forth any detailed analysis which I would be credence in. Regardless of the accuracy and/or inaccuracies .... I play the odds and with that experience base, regardless of the author's intentions, there a 10% chance he'll get the story straight in such a manner for which profitable investment actions could be taken. This young fellow will need many more years of experience on the ground in SE Asia before I'd read his views. I've hired 100s of Grads (MBA & JDs) and Undergrads (namely from schools like Wharton/UPenn, Princeton, Standford, UofChic., Dartmouth, Harvard, etc.) ... and when it comes to young Analyst (Ian's level at best) no matter how intelligent, without the requisite experience in the matters being assessed you rarely find a professional who can accurately tear-apart a Company and/or Industry. Sorry Ian ... good luck to you in your career -- but at this point your assessment is merely a shot in the dark. (Princeton ' 83, Wharton '87)

  • Report this Comment On February 12, 2011, at 1:10 PM, ETFsRule wrote:

    "Believe me, I love crummy, downtrodden stocks and would love to buy Yong or CCME but China has gotten me down lately. "

    This is exactly the kind of mentality that the shorts are depending on.

    You may never see these kinds of bargains again in your lifetime. CCME trades at a PE under four and an EPS growth rate over 100%. As Buffet would say, "be greedy when others are fearful".

    Instead, people get discouraged when a stock goes down, and as a result they do the exact opposite of what they should be doing (buying low and selling high).

    If you think a company is a fraud that's one thing. But if you don't, then you could be making a huge mistake by passing up on them.

  • Report this Comment On February 13, 2011, at 12:10 PM, Momentum21 wrote:

    ETFsRule - I am not the easily discouraged type (see my real life holdings) and I have no idea if CCME is legit or not.

    The fact of the matter is that when you combine an out of favor sector, fraud speculation and serial dilution you better have multi bag potential on the other end of the rainbow.

    I just don't like what some of these companies do. It is easier to hold on for the long term if you feel good about the potential beyond achieving a more normal valuation.

    I just prefer to speculate in other areas at the moment. I think there is still time for more fear to set in...I will be back... : )

  • Report this Comment On February 14, 2011, at 1:25 AM, NEVERFADE wrote:

    Any reading on "Generation Y" (of which at 29 I am a member) lists negative attributes such as a sense of entitlement, deluisions of granduer, and a struggle to see things through the lens of reality.

    Bezek's and Andragi, from their rebuttals, cleary aren't intelligent enough to participate in a logical discussion. I found Mr Hanson's article to be logical and well written, while the two hack "investing analysts mentioned may be better served in a career where they don't need to think logically or write well.

    Acceptable careers may include ditch digging, sign holding, or being a Senator from a state in the deep south.

  • Report this Comment On February 14, 2011, at 1:30 AM, NEVERFADE wrote:

    Ian,

    You're an embarrasment to the investing world just as your university is an embrassment to the academic world.

    Please crawl in a whole somewhere and unplug your internet.

  • Report this Comment On February 14, 2011, at 1:09 PM, MAURIZIO400 wrote:

    neverfade

    are you sure that gen y fits you well?

    m considering an honorary spot with us baby boomers.

    man you are a mean mother! :)

  • Report this Comment On February 15, 2011, at 11:23 AM, kidchicago2 wrote:

    Ian says:

    "I've bought dozens of jalapenos from various grocery stores..."

    I really can't make my point any more clearly than he did. If his basis for claiming expertise in any other aspect of YONGE's operation follows the same logic as his jalapeno knowledge, I feel safe in ignoring him.

    And Ian, why didn't you just ask Tim, or the Motley Fool, if they rigged their test? Probably for the same reason you didn't contact Yongye before writing your hit piece on them: it's more fun to wildly speculate and make up conspiracies and frauds than actually doing the hard work of investigative journalism.

  • Report this Comment On February 15, 2011, at 12:35 PM, Itrustbutverify wrote:

    Well after reading Ian’s second article posted on the Seeking Alpha Comedy website I can only say I am glad he reversed his financial opinion of the company after engaging in some research. Unfortunately, not ever having talked to someone who tried the product, or trying it himself, he chose to stick to maintain that the product doesn’t work. To his credit, he did correctly identify both peppers as peppers and did cite one research report that supported his position, but ignored thousands of others. He did reference an Analyst’s down grade to “Hold”, but neglected to cite the other two analysts recommendations, which are both “Strong Buys” according to NASDAQ.

    Given Ian’s analysis, one also has to wonder why there wasn’t a mass exodus of the big money by institutions. Yes volume spiked for a day, but returned to “normal” levels the next. Institutions and funds hold somewhere around 17-18 million shares or 35% of the stock. Given that small investors hold roughly 65% of the stock one could reasonably extrapolate that institutions sold somewhere in the vicinity of 900k-1m shares or roughly 5-6% of their shares. Not exactly what I would expect to see from the “smart money” when they discover a company is a fraud, or that a product doesn’t work. Oh wait, maybe they did discover fraud after all, just not the same one Ian did.

  • Report this Comment On February 17, 2011, at 12:17 PM, NajdorfSicilian wrote:

    Tim, this is one of the worst written 'articles' I have ever seen by you on TMF.

    Shorting stocks that are frauds, or *suspected* of being frauds is not a new 'cottage industry,' it's been around as long A.W. Jones.

    Shorts have as much right to publish their research, obviously, as the 'sloppily researched, positive' articles that are published by both Bulls and Pump and Dumpers. [I am not putting you in the latter category]

    Secondly, it's not just Chinese stocks that may drop in such situations, but any illiquid, small-cap company where people are suspicious of fraud is going to move, list of US stocks too numerous to mention.

    Thirdly, your 'attack the messenger' attitude is reprehensible, and TMF should be ashamed to host such flailings. Attacking Sam Adarangi for postulating that SAIC filings can be fraudulent, rather than disproving him is more of the same nonsense by you. For shame. SEC filings can be fraudulent - list too numerous to mention again - so Sam's point is a valid one, one you refuse to address on its merits.

    Finally, this elicited a bark of laughter:

    'As a result, although we hope that our diligence will prevent us from suffering a blow-up, '

    You hope?

    Hope is not a strategy.

  • Report this Comment On February 17, 2011, at 12:27 PM, NajdorfSicilian wrote:

    Also - Tim, there are some well-known Asian-focused HF managers that have said they suspect *upwards* of 60% of Chinese reverse-shell merger firms are fraudulent, including some of the alltime best managers in the space. [You can find their comments if you look or talk to people.]

    Do you think they are sloppily ignorant 22-yr olds also? What is your response to such allegations?

    These guys with superior track records over 10 years with Billions under mgmt, many of whom are native Chinese speakers, are you going to attack them and their research also? Some of them have been saying this at investment conf on the West Coast, and elsewhere, for a year+ now.

    Do you think, overall, these managers are:

    a) they are breaking the law,

    b) ignorant,

    c) have had hundreds of people on the ground for years, collectively, and do proper due diligence [proven by years of results running billions, and are significantly more likely to get the story right than a retail investor?

    It's not just MW, Citron, and randoms on SA making these claims, perhaps you were unaware.

    Yong notwithstanding, if there is a significant risk that 60-70% of the stocks in this space are frauds - like RINO and others - isn't it wiser for the vast majority of investors to avoid the sector entirely?

  • Report this Comment On February 17, 2011, at 4:11 PM, WakeUpInvestor wrote:

    Sahm Adrangi,

    Oberweis Asset Management bought recently a lot of shares of China Marine Food Group. You think they didn't do their due diligence before they would pull the trigger.

    It makes me sick those so called experts who think they know everything about SEC/SAIC filings, Chinese business culture, etc.

    A lot of them have never put a foot on Chinese ground, but think that all Chinese companies are fraud.

  • Report this Comment On February 18, 2011, at 3:37 PM, RegLeCrisp wrote:

    Hey Pynchon, I'll take a stab at this. When you call a SPECIFIC company a fraud, the burden of proof is on you (or Adrangi, as the case may be). This differs greatly from a blanket statement. Obviously the vast majority should avoid the sector because the vast majority is, unfortunately, highly ignorant, thus explaining the existence of an industry that pays exceptionally well for exceptionally mediocre performance.

  • Report this Comment On February 18, 2011, at 11:26 PM, rwk2008 wrote:

    Sadly, in our society which is terrified of almost everything, perception passes for reality. If someone hears a negative rumor early, he probably should immediately act on it, since many others will as soon as they hear it. Doesn't matter whether or not there is any substance - Americans aren't interested in substance.

  • Report this Comment On March 06, 2011, at 5:34 PM, curt00 wrote:

    Tim,

    User Swede46 says that you have visited company management 3 times over 3 years at their HQ in China and have done extensive research.

    What other Chinese companies have you physically checked out? What are your thoughts of NIV (NIVS IntelliMedia), SIHI (SinoHub), LIWA (Lihua) and the Chinese solar stocks, such as JASO (JA Solar)?

  • Report this Comment On April 08, 2011, at 1:49 PM, MonsterFluff wrote:

    Might need an update on YONG as it continues to drop even in the absence of negative articles.

    Now at $5.20 down from $6.50 in February--any insights into why the market continues to push this lower?

    Most discussion about Chinese small caps fails to be backed by any kind of research or thinking about the stock itself in a fundamental way. It is also highly useful to compare filings across a sector as they are available to form an idea of normal business and how the stock under discussion fits into its sector. YONG has some very odd revenue and utilization numbers compared to competitors CGA and CAGC. And CGA has some very odd margins compared to YONG and CAGC. Might be of more interest to write an article taking a detailed look at these companies as a sector and look for the inconsistencies. You will be amazed at the discrepancies that are everywhere.

    I would also like to see TMF acquire the SAIC filings for comparison. If you are going to China and meeting management this should be easy to do. I would be in favor of your research taking that extra step not available to the rest of us and go beyond meetings and on-site tours.

    Company comments like that of Ren[CGA CEO] that everyone lies on the SAIC filings because that is how business is done in China do not ring of truthfulness. We need to see it for ourselves and decide it validity.

    CGA recently said the SAIC filings were purposely obfuscated to keep competition from having information that would provide a business advantage. I guess the Chinese competitors can't get and translate the SEC docs? Or maybe the SEC documents suffer from the same shortcomings as the SAIC filings. In a nutshell----hard to know what to believe and easier to find better understood companies. Why bother with these?

  • Report this Comment On April 11, 2011, at 10:32 AM, Shouclack wrote:

    For deworsesification, of course... What a question!?!?! :)

    Steeve

    Learning a lot about investor psychology through all these stories

  • Report this Comment On May 19, 2011, at 4:55 PM, goldminingXpert wrote:

    -50% since I wrote about it. How much longer will you wait before admitting your faith in YONG was misplaced?

    If a 22 year-old recent college grad with his not "serious" effort can find fraud, why can't you?

  • Report this Comment On May 31, 2011, at 2:48 PM, McTwidget wrote:

    Okay, Ian...what do you have to say now? Is Morgan Stanley dumber than a 22 year-old recent college grad?

  • Report this Comment On August 14, 2011, at 1:59 PM, goldminingXpert wrote:

    YONG is still down, CMFO has totally collapsed. China bears, two points. Tim Hanson, zero points.

    Regarding CMFO: So what if CMFO replaced the real AIC filings with fake ones? What does that prove. You would be wise to listen to Adrangi, since all his Chinese fraud calls have played out, and your China bullish picks have all been tanking.

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