Long Strange Trip: Chinese Small Caps

I've been fascinated with the brouhaha that's been going on with Chinese small-cap stocks. Of course, when I say "fascinated," I mean fascinated like when everyone on the highway slows down to stare at a multi-car wreck.

Unless you've got money invested, it's tough to figure out who to root for in the whole mess. On one side, you've got these apparently fast-growing Chinese companies that came into the public markets through reverse mergers -- which is sort of like visiting a friend's house by sneaking in through an open window. Most of these companies appear to be showing gangbuster growth, but at the very least their management teams have had a heck of a time clearly communicating with investors.

On the other side of the tussle, we've got self-styled crusaders out to crush the supposedly fraudulent companies. Many (most?) among this guerilla band short the stocks that they attack, hoping to profit as the stocks' prices fall. While there has been some really good work done by some of the sleuths, as more and more blood enters the water it seems that anyone who can come up with a noble-looking logo is ready to take potshots at Chinese small caps that they're shorting.

Like I said, it's tough to wave a flag for either side.

Getting down with diligence
I was struck again by how nutty it's gotten after covering three separate Chinese stocks yesterday that were reeling after bearish reports. Yongye International (Nasdaq: YONG  ) , Gulf Resources (Nasdaq: GFRE  ) , and China-Biotics (Nasdaq: CHBT  ) all lost more than 10% of their value after online reports surfaced questioning the veracity of the respective companies' businesses and financials.

Of the three, it was China-Biotics' tumble that stood out the most to me. It appeared that the stock's decline was driven by a blog post on Seeking Alpha from an amateur investor named Gisli Eyland, who posts under the name "Sportgamma" and sums his approach as "Sports business meets value investing."

There was really nothing wrong with Eyland's post on China-Biotics. He notes that he's had some concerns about the company and then details some simple diligence he tried to do to allay those concerns. Eyland apparently scoured publicly available documents for China-Biotics and then sent out a series of emails to the company and third parties to try and verify or question what he'd read. All but one of his emails -- which included attempting to contact large companies like Wal-Mart and Unilever -- went unanswered.

As a result, Eyland was left with the same questions he started with and a queasy feeling in his gut. He said, "I'm inconclusive whether China Biotics is indeed a fraud or a rose bud among cabbages, but what I do know is that I have a huge information disadvantage." So he shared his decision to sell his China-Biotics shares.

Somebody's getting greedy
Interestingly, in the midst of the sell-off there didn't seem to be much notice that investor Richard Azar continues building a large stake in the company. Yesterday, the company filed a "Form 4" showing that Azar increased his stake by 178,500 shares on May 17. That follows a filing the day prior reporting a holding increase of nearly 400,000 shares. Based on his holding as of Tuesday, Azar's stake at yesterday's price is worth nearly $32 million.

Now who exactly is Richard Azar? Good question and one that I didn't initially have an answer for. Interestingly, there is little information readily available about him. Based on a Facebook profile, he's a snappy dresser and a fan of Boccelli, Shakespeare, and Charlie Rose. More importantly, it appears that he is a big-time Trinidadian investor who is a big fan of Warren Buffett. His name is even mentioned a couple of times in Roger Lowenstein's Buffett: The Making of an American Capitalist.

Myopia?
Even smart investors do stupid things, and perhaps Azar is throwing good money at a bad company. However, it boggles my mind that investors in the China small-cap space are so scared out of their minds that they'd allow a stock to be knocked down more than 10% based on the musings of an amateur investor while a big fish is throwing real money at the shares.

Not that I'm all that surprised by this -- to some extent it echoes the crazy sell-off in China Shen Zhou Mining (NYSE: SHZ  ) last month. In that case, it appeared that investors completely misunderstood the meaning of a statement by the company's accountants.

If ever there were an environment of "shoot many times in the face first and maybe, possibly ask questions later," it exists right now with Chinese small caps.

Boy, the sidelines are comfortable
I started out by saying that I'm fascinated by what's unfolding here, and I'd bet my left arm that I'll continue to be wowed by new developments. While I've considered the possibility of entering the fracas by investing in a basket of these shunned stocks -- and thereby hoping that some big gainers would offset any proven-out frauds -- I'm still currently enjoying the view from the sidelines, particularly since I've been finding good opportunities in stocks that are much easier to get my arms around.

Now I know you have something to say about the Chinese small-cap showdown, so head down to the comments section and sound off!

The Motley Fool owns shares of Wal-Mart Stores and Yongye International. Motley Fool newsletter services have recommended Wal-Mart Stores, Unilever, and Yongye International, as well as creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Wal-Mart 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.


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  • Report this Comment On May 20, 2011, at 10:34 AM, buffalonate wrote:

    Here is a video about Chinese reverse mergers you should check out. http://finance.yahoo.com/blogs/daily-ticker/invasion-chinese...

  • Report this Comment On May 20, 2011, at 1:16 PM, safetyprof wrote:

    Totally agree! I belive the shorts are taking advantage of the lack of transperancy and suspicioun of these stocks. However, after doing my due dillegence on one of them GFRE, I concluded this is the real deal. A top teir auding company is signing off on their reports and the company has responded to hit pieces logically. The growth of GFRE is phenominal. But, due to the shorts hit pieces the stock has, and continues to be hammared. I'm long GFRE, but somethings got to give in this space. Either the China folk need to work much more dillegently in fending off the shorts, and boosting thier stock price to fair values, or the shorts will continue to get rich. Big upside on good China companies, but the game is brutal and you never know. I recommend highly that all investors due thier own due dilligence on GFRE. And, be leery of short hit pieces.

  • Report this Comment On May 20, 2011, at 1:48 PM, thestockseer wrote:

    The answer to this problem is the quality of the auditors. After Enron's debacle with A E Anderson the worst of the public auditors left the field. If the Chinese Corporation has a known auditor who values its name an reputation ihe auditor will investigate and confirm the claims of the Corporation and if they do not check out will resign as auditor. Only invest in Corporations with well known auditors to avoid the worst of the scamers both U S and Chinese

  • Report this Comment On May 20, 2011, at 2:01 PM, dougs4 wrote:

    I have become inceasing annoyed by the web site Seeking Alpha that not only gives voice but seems to encourage hit pieces on small cap Chinese stocks. When one looks at these hit pieces, they are designed to cast doubt and the short seller gains. Every hit piece published by Seeking Alpha diminishes their creditability.

  • Report this Comment On May 20, 2011, at 2:23 PM, MKArch wrote:

    Matt,

    I'm a long time TMF sub and have a lot of respect for the service but I can't understand why on the whole the service continues to give the benefit of the doubt to these RTO's when they are 100% verified guilty of fraud.

    CHBT SAIC filings show a company about 1% of what their SEC filings indicate. CHBT is absolutely lying to someone. Is it investors half way around the world with no recourse if they ever do figure it out or their own government known to execute citizens that screw with them?

    Judging by the recent blow ups of companies with mismatched SAIC and SEC filings it's pretty clear who they are lying to. Why TMF on the whole continues to give them some benefit of the doubt is beyond me. The fact that these phenomenally profitable high growth stories all had resort to going public via the back door half way around the world instead of on a Chinese exchange should be hint enough that something is wrong here.

  • Report this Comment On May 20, 2011, at 2:42 PM, anopenmind wrote:

    I use to depend on Seeking Alpha for valued source, but no longer. Yes, they do allow some weird sources, some unknown to the public, to trash Chinese small-caps; typically, a day after quarterly financials are releases, such as with YONG. Every 3 months great reports; then, right on schedule, the trash hits. Auditor is KPMG with 130,000+ worldwide employees and Beijing office not far from YONG hdqts. Since 2003 and the Rite Aid $125 million settlement, don't we know KPMG is extra careful with audits?

    Companies like YONG & GFRE (I own both stocks.) continue to provide value-added products for a high-demand market. IF reputable sources post negative facts, I'll act accordingly. EX: The Motley Fool, who if I am correct, has people who visited YONG operations in 2008 & 2010. Doubtful YONG fooled both Motley fellas and KPMG.

  • Report this Comment On May 20, 2011, at 2:55 PM, adandeleon0915 wrote:

    I am a beginning Investor and still am new to the market. I have invested in this company for a week now and it seems really difficult to decide whether I should just leave my shares or just sell from all the choas that is happening right now.

  • Report this Comment On May 20, 2011, at 3:13 PM, TMFKopp wrote:

    @thestockseeker

    Re: auditors

    Not as much of a compelling point as one might think. As the Absaroka report details, there have been quite a few companies that were audited by the overseas arms of big U.S. accounting firms that are now in the dumpster (including CAGC and CCME).

    You can check out the report here (page 14): http://absaroka.com/uploads/YONG.ResearchReport.051811-vFINA...

    Matt

  • Report this Comment On May 20, 2011, at 3:22 PM, TMFKopp wrote:

    @MKArch

    "I can't understand why on the whole the service continues to give the benefit of the doubt to these RTO's when they are 100% verified guilty of fraud."

    Wow, don't know where to start with that one...

    First, we're a motley group (as the name implies) and don't all hold the same opinions. As far as CHBT in particular, it is *not* a recommendation of any Fool service. And aside from Global Gains I don't think that any of the other newsletters pay much mind to this group (correct me if I'm wrong?).

    Second, can you please provide me some back-up to your claim that all Chinese RTOs have been "100% verified guilty of fraud." I don't recall seeing that myself...

    "CHBT SAIC filings show a company about 1% of what their SEC filings indicate."

    Do a little more research on this. It's a tricky topic, but as far as I've seen, the SAIC filings do not necessarily reflect the full financial information of a consolidated company when it has a bunch of subsidiaries.

    Right now, my position is as an interested party on the sidelines. If I could find some way to separate the wheat from the chaff among these companies I'd be ecstatic because I don't believe that every last one is a fraud and they have all been beaten down to a bloody pulp. To date though, I haven't figured out how.

    Matt

  • Report this Comment On May 20, 2011, at 3:26 PM, TMFKopp wrote:

    @adandeleon0915

    "I am a beginning Investor and still am new to the market. I have invested in this company for a week now and it seems really difficult to decide whether I should just leave my shares or just sell from all the choas that is happening right now."

    Hmm... how can I put this... This *isn't* personalized investing advice (I can't give that since I'm just a individual investor just like you). However, in my opinion, these Chinese small caps are a bad place to be for a new investor. The issues that an investor has to wade through here are many and complex and the risk of permanent capital loss is very real.

    Of course, if you speak Mandarin and live in China and can visit these companies, talk with management, etc, maybe it's a different story. But if it were me, I'd start my investing efforts with something a bit easier.

    If I can use a skiing analogy, this would be like strapping on skis for the first time and deciding to hop on a double black diamond.

    Again... just my two cents.

    Matt

  • Report this Comment On May 20, 2011, at 4:21 PM, adandeleon0915 wrote:

    @Matt

    Great advice and I greatly appreciate your input on this. I figured, market points might be dreading a bit but I am sure this could only be a period of such until it hits a good peak, like 2 days ago... either that or stay at a poor valued security for a long while.

  • Report this Comment On May 20, 2011, at 4:31 PM, MKArch wrote:

    I was referring to the RTO's where the SAIC filings are substantially different than their SEC filings as being verified frauds Matt. I've followed the SAIC vs. SEC debate for a while now and arguments that shorts are missing subsidiaries don't turn out to be accurate. The only defense I've seen of the mismatched SAIC & SEC filings is that it's supposedly common practice for Chinese companies to lie to their government in order to avoid paying taxes or it doesn't matter that the SAIC filings don't match because the information is only derived from their tax filings and not the actual tax filings themselves so they don't need to be accurate. No rationale is given why companies would file inaccurate information if it didn't matter anyway. You can add to no rational expanation for why the SAIC filings are wrong the fact that RTO's with mismatched SAIC SEC filings are blowing up all the time now as scrutiny of them intensifies and I don't understand anyone giving a Chinese RTO with mismatched SAIC-SEC filings the benefit of the doubt.

    I know how your free articles work and realize each author speaks for themselves I just find it odd with all of the blow ups lately I still see regular TMF pieces giving these companies the benefit of the doubt and none calling them out for the frauds that they have proven to be (Blow ups and mismatched filings). I don't think it's a conspiracy just odd for a service that is usually pretty critical of publicly traded companies. I remember during the financial crisis regular TMF pieces suggesting banks and regulators were colluding to hide losses and keep insolvent banks alive and what a shame it was that investors down 75% already weren't completely wiped out as they deserved to be. I might be wrong but I think you were one of the bank critics. Now were looking at real fraud and the only TMF pieces I've seen addressing the issue have been anti short to middle of the road at best.

    Again I don't think this is a conspiracy just my personal musings over TMF authors willingness to believe all the short allegations against U.S. banks and advocate investors of banks they deemed insolvent but propped up by the government be wiped out but don't seem to be very critical of what appears to be widespread blatant fraud with Chinese RTO's.

  • Report this Comment On May 20, 2011, at 4:51 PM, MKArch wrote:

    Just to be clear Matt I'm suggesting *maybe* the lack of criticsm of the Chinese RTO's among TMF authors is due to group think instead of just coincidence.

  • Report this Comment On May 20, 2011, at 5:24 PM, TMFKopp wrote:

    @MKArch

    Group think? Nah.

    Last summer I highlighted CSR, YONG, and RINO as potential short candidates due to the massive discrepancies between net income and cash flow (http://www.fool.com/investing/general/2010/08/23/i-dont-shor.... That was largely before the whole Chinese small-cap market blew up.

    Back then I was skeptical of them and today I'm still skeptical of them. In fact, I'm skeptical of pretty much any company that comes public through an RTO, Chinese or not. (though, admittedly, I did well in the past by investing in True Religion)

    But here's the thing: The one thing that I know for sure about investing is that when everybody seems sure of something, there's reason to be cautious. A year ago, most people seemed pretty sure that the blistering growth of these Chinese upstarts was real -- that made me nervous. Today, sentiment has drastically flipped and there seems to be a majority consensus that every last one of these companies is fraudulent. Nerves now kick in on the other end.

    I don't claim certainty in either direction right now because I don't have it. In many cases, I don't think the short sellers have it, but it would hurt their case to present anything less than absolute conviction.

    Do me a favor if you don't mind... can you post some links for what you've read about the SAIC filings? I'm very interested to read as much as possible on the topic.

    Matt

  • Report this Comment On May 20, 2011, at 5:43 PM, MKArch wrote:

    http://waldomushman.com/

    John Bird aka Waldo Mushman posts on the Yahoo CSKI m.b. as well as many other RTO mb's. There are vocal critics that regularly take him on and not seeing any of them explain away the SAIC issue despite repeated attempts to make it go away has me convinced if the SAIC doesn't substantially match SEC there is fraud and it's the U.S. investors that are being defrauded. I believe Waldo was the first to discover the SAIC documents and since then it's become a staple among RTO shorts. He responds to posts on the m.b.'s and my guess is he would respond off the m.b. if you asked him.

  • Report this Comment On May 20, 2011, at 5:48 PM, MKArch wrote:

    BTW my gut feeling is just about all of the Chinese RTO's are frauds but my gripe is with analyst that give the benefit of the doubt to the ones where the short has dug up the SAIC filing and shown that the numbers the company reports to their own government are not even in the same universe as what they are reporting to U.S. investors half way around the world with no recourse if the company is committing fraud.

  • Report this Comment On May 20, 2011, at 5:59 PM, Professio wrote:

    There seem to be some concerns about SAIC filings in the comments, I could share what the Chinese told about these filings in news articles.

    The SAIC or Sate Administrator for Industry & Commerce of the Peoples republic of China. You can find their mission statement here:

    http://www.saic.gov.cn/english/aboutus/

    It's basically where companies get their license that allows them to operate as a business. It's also where you'll let the government know what your business exactly does. The SAIC doesn't review any financials and the filing doesn't require a formal audit. Its just to obtain (or renew) a business license.

    This is by no means where companies file their tax returns or anything similar. In SAIC financials are not reviewed.

    What usually happened was that a particular public Company trading here in the US would hire a company to make the filings with the SAIC. So they paid some company a amount of money who would make some filings to the SAIC and you'd get the license. Now, hiring a fancy auditor is expensive, so usually it was just a filing with some specifics about what the company does and yes, some financials. However, these financials are hardly looked at by the SAIC and since they are public Competitors can get their hands on them.

    The CEO of CHBT confirmed they hired a company to do the SAIC filings and didn't worry about it. Until Shorts started using it as evidence, after being targeted the CEO of CHBT said they would make sure the next SAIC filing would match the SEC filing.

    Unfortunately I can't seem to find the news article, but here is a great article explaining it in depth:

    http://china.fixyou.co.uk/2010/07/on-saic-and-sec-filings.ht...

    Disclosure: I have a long position in CHBT, I have no position in any of the other shares mentioned and no intend to buy or short any of them in the near future.

    I hope this clarifies it for some people, happy trading everyone.

    Jelle

  • Report this Comment On May 20, 2011, at 6:08 PM, MKArch wrote:

    It's not their tax filing but the financial information included in the filing is derived from their tax filings and there is no logical reason for them to not report accurate financial information to the SAIC. In fact the apologist primary argument that the SAIC doesn't matter so who cares would suggest there's no benefit to not reporting accurate financial information to the SAIC. Do you think it's just a coincidence that all the RTO's blowing up lately have mismatched SAIC-SEC filings?

  • Report this Comment On May 20, 2011, at 6:29 PM, TMFKopp wrote:

    @MKArch

    Look, I don't want this to come off as if I'm defending these companies. I'm simply arguing against over-certainty.

    "Do you think it's just a coincidence that all the RTO's blowing up lately have mismatched SAIC-SEC filings?"

    Hmmm... maybe? If it's typical that SAIC and SEC filings wouldn't match then this wouldn't be surprising. It would be like saying, "Imagine that, all of the convicted murders this year had a liver!"

    Considering that we're dealing with fraud masterminds here, why is it that they would overlook something seeming so simple? Most of what I've read suggests that SAIC filings aren't audited and are primarily used for business registration. So why not just match the numbers to what's being filed with the SEC and cover their tracks? Did they skip Fraud 101? Or is there another explanation as to why they didn't think the mismatch would be important?

    Being fraudulent isn't something you just fall into. It's typically planned, thought through, and well managed. Bernie Madoff kept old letterhead around so that backdated documents would look completely legit. The name of the company is slipping my mind right now, but one of the fraudulent Chinese companies was caught staging activity at its factories when Americans came to visit. Now that's dedication to the swindle!

    And yet they *all* somehow overlooked this issue of matching up SEC and SAIC filings?

    That's not to mention that it seems like an obvious thing for an auditor to notice. Obviously some supposedly good auditors have made some big mistakes on these companies. But they would have had access to the government-and-company's-eyes-only SAT filings and certainly the SAIC filings. And yet in every case the SAIC and SEC discrepancy was missed?

    The American accounting and tax systems are hopelessly complex and smart people in this country make mistakes trying to understand it all the time. And now we're trying to understand and match up the rules of a very different system. I'm not saying it can't be done, I'm just saying that it may be tougher than some are giving it credit.

    Again, I'm not saying that these companies aren't fraudulent, but I'm just arguing to temper certainty. Overconfidence is the enemy of investors.

    Matt

  • Report this Comment On May 20, 2011, at 6:31 PM, Professio wrote:

    First off, you are correct there is no real reason for the SEC and SAIC filings not to match. It was just the companies management being lazy and not willing to spend money on auditing SAIC filings. I guess you could ask Investor Relations for the specifics about it.

    Also: " the filing is derived from their tax filings" can you point out to some evidence about that ? I did not know about that. It was my understanding SAIC filings and SAT filings had nothing to do with each other.

    I think I can explain in a simpler way though:

    Consider you want to rent a house, the land owner will want some confirmation of your income before renting it to you. This doesn't need to be spot on accurate, just an estimation will do.

    Or when opening up a account with a broker, some estimation of what you own and earn will do. They will also not review it, so you can basically enter whatever you want.

    Well, I guess you can think of other situations in which you had to give some information regarding your income or assets but it didn't have to be correct simply because it wasn't going to be reviewed.

  • Report this Comment On May 20, 2011, at 6:36 PM, TMFKopp wrote:

    @Professio

    I'm sure MKArch would have something to say about this too, but:

    "Consider you want to rent a house, the land owner will want some confirmation of your income before renting it to you. This doesn't need to be spot on accurate, just an estimation will do."

    Many of the companies in question here have filings that are *way* off. Building on your analogy, it would be like telling your prospective landlord that you make $500 / year when you actually make $50,000 (or vice versa). It's not even close.

    "Or when opening up a account with a broker, some estimation of what you own and earn will do. They will also not review it, so you can basically enter whatever you want."

    If the companies are thinking about their SAIC filings this way, then it's really just as bad -- at least in my eyes. Why wouldn't you just file the correct amount? These companies are running audits, they're submitting filings to the SEC and the SAT in China. Why submit stupid "whatever" numbers for SAIC filings?

    If this is the attitude they take towards the SAIC filings then it's a bad sign for the rest of the business.

    Matt

  • Report this Comment On May 20, 2011, at 6:49 PM, MKArch wrote:

    Matt,

    My understanding is that it's just the RTO's that have mismatched SAIC-SEC filings not the YOKU's and BIDU's and the SAIC information is taken from the audited SAT filings. There is also no logical reason why the SAIC information shouldn't be accurate. If you are truly interested in learning more I'd suggest contacting John Bird as he's done the real work and believes enough in the case against the RTO's that he is suing CSKI's auditor. Yes he has a clear financial agenda but that doesn't make him wrong and like I've said I've seen plenty of people try to take him down and none of the arguments to date have been convincing to me.

    CSKI trades at a multiple of less than 2 most of the other RTO's trade at low single digit P/E's I would love to hear someone make a convincing argument that the SEC filings are accurate and the SAIC filings are innacurate because I'd make a killing on these stocks. I don't do shorts but I've loaded my CAPS port with RTO red thumbs because no explanation about why these companies SAIC numbers don't substantially match their SEC numbers makes any sense. I know John Bird keeps track of who's SAIC filings match and who's don't if you want hard evidence I'd suggest contacting him. I think I've seen TMF have outsiders do articles in the past maybe you could get him to write about the RTO space and SEC vs SAIC.

  • Report this Comment On May 20, 2011, at 7:02 PM, TMFKopp wrote:

    @MKArch

    I'm familiar with Bird (http://www.fool.com/investing/international/2011/01/18/chasi...

    He's done an incredible amount of work on China Sky that's included much more than the comparison between SEC and SAIC filings. (http://www.bloomberg.com/news/2011-01-13/texas-short-seller-...

    I appreciate the suggestion to contact him and I might, but to be fair, this all started with you saying that you were 100% convinced that companies with mismatching filings were fraudsters. If that's the case, I would expect that you'd have plenty of your own reasons for believing this so fervently.

    My view is that it's certainly odd, but I also don't claim intimate knowledge with Chinese accounting and regulations. The questions that I raised above give me at least some pause in labeling this issue *the* red flag to end all red flags.

    Matt

  • Report this Comment On May 20, 2011, at 7:03 PM, MKArch wrote:

    Matt,

    John Bird is the source again but the numbers reported on the SAIC filings are more than just an off the cuff estimation there is some sort of verification process between the SAIC and the SAT.

  • Report this Comment On May 20, 2011, at 7:10 PM, MKArch wrote:

    Sure there are no guarantees in life except death and taxes but for purposes of deciding how to divi up credibility between a short that has evidence that a company is reporting two completely different sets of numbers with no logical explantion why they differ and the company that reported the numbers I don't see any reason why the company should get any benefit of the doubt. It's a 100% fact that lied about something.

  • Report this Comment On May 20, 2011, at 7:24 PM, MKArch wrote:

    Matt,

    Just to clear up a point about my claim that substantially mismatched SAIC and SEC filings is 100% fraud. The numbers we are talking about can't be explained away by accounting differences or simple mistakes they are not remotely close. That means the company is absolutely lying to someone. I suppose there is a remote possibility that they are lying to the SAIC for some unknown reason but occam's razor suggests they are lying to U.S. investors. In any case they are lying to someone. Hence my claim that they are definitely guilty of fraud.

  • Report this Comment On May 20, 2011, at 7:38 PM, TMFKopp wrote:

    @MKArch

    "It's a 100% fact that lied about something."

    If you have a firm grasp on Chinese accounting, rules, and regulations. Do you?

    If you can't claim that, then there may, in fact, be a reasonable explanation for the discrepancies.

    Matt

  • Report this Comment On May 20, 2011, at 7:40 PM, TMFKopp wrote:

    @MKArch

    "That means the company is absolutely lying to someone."

    Not to sound like a broken record, but given that the SAIC filings are relatively lightly regulated, why not just match them up and cover tracks?

    Also, I've read that in many cases these filings are done on an unconsolidated basis, which means you could have a holding company with relatively little income filing the reports.

    Matt

  • Report this Comment On May 20, 2011, at 7:46 PM, ETFsRule wrote:

    The rules are different depending on their corporate structure (VIE or FIE). Explained here: http://seekingalpha.com/article/227536-review-of-u-s-listed-...

  • Report this Comment On May 20, 2011, at 7:59 PM, MKArch wrote:

    Matt,

    The latest numbers on CHBT are a good example. ~$0.5M in revenues reported to SAIC and ~$70M reported to SEC. I've seen the claims that shorts are missing subsidiaries and they always come back and explain that they didn't miss any subsidiaries. Then the argument becomes who cares about the SAIC.

    You are right I don't understand Chinese accounting but I don't think I have to in order to be confident that the company is lying about one of these two sets of numbers. And again RTO's with mismatched SAIC and SEC numbers are blowing up all the time now and my understanding is the well known Chinese companies that went public via IPO don't have mismatched numbers and aren't blowing up.

  • Report this Comment On May 20, 2011, at 8:29 PM, MKArch wrote:

    http://messages.finance.yahoo.com/Business_%26_Finance/Inves...

    Since you have mentioned you know of John Bird and take him seriously you might find this interesting. As I mentioned earlier I think if you contacted him he would be willing to provide the details. He's also discussed looking into the non RTO Chinese companies and finding identical numbers in the SAIC as reported to the SEC.

  • Report this Comment On May 20, 2011, at 9:04 PM, buffalonate wrote:

    These companies won't buy back their own shares at firesale prices which tells me all I need to know. They could easily put the short attackers out of business by buying back shares. That would give confidence in the company and send the stock skyward. The fact that they haven't used this obvious remedy is very alarming. I won't invest in any of them.

  • Report this Comment On May 20, 2011, at 10:31 PM, TMFKopp wrote:

    @MKArch

    The post that you reference is not terribly enlightening. As I said, it doesn't tell me a whole lot that all of the companies had mismatching SEC and SAIC statements. They all also had CEOs. And headquarters. And a lot of other things.

    You see what I'm saying? You need more than that to *prove* that that's what's going on.

    Has it been proven that the actual results are, in fact, the same as the SAIC filings? Let's say a company reports $50 million in revs in its SEC filings, $0.5 mil in its SAIC filings. It turns out to be fraudulent. Revenue was actually $20 million. We'd still be left scratching our heads on these SAIC filings.

    Matt

  • Report this Comment On May 20, 2011, at 10:35 PM, TMFKopp wrote:

    @buffalonate

    CSR's Chairman bought out the entire company. Of course, I actually thought that was bad news for China small-cap investors b/c he was able to do it so cheaply:

    http://www.fool.com/investing/international/2011/04/25/terri...

    Of course you say:

    "The fact that they haven't used this obvious remedy is very alarming. I won't invest in any of them."

    The conclusion is more or less where I am -- I'm not investing in any of them. And I do agree that based on the cash piles that most of these companies claim, a significant share buyback would seem a good move at this point.

    Matt

  • Report this Comment On May 20, 2011, at 10:39 PM, TMFKopp wrote:

    @MKArch

    One last thought... I promise I'm not trying to be argumentative solely for the purpose of being argumentative (though, alas, I have been known to do that).

    If you're 100% certain that these companies are frauds and that the SEC/SAIC discrepancy is such a slam dunk, then why aren't you shorting? I know you said that you don't short, but certainty and slam dunks are few and far between in the investing world. If I was as convinced about something as you seem to be about this, I'm pretty sure I'd be putting money to work.

    Matt

  • Report this Comment On May 21, 2011, at 3:11 AM, veryst wrote:

    Matt,

    It would be interesting to you or others, to explore who is buying yong shares during this down trend. tx

  • Report this Comment On May 21, 2011, at 3:38 AM, cattywampus wrote:

    MKArch

    I,m glad to see that you don,t give (YONG) a red thumbs down in your caps picks. I looked over your info, very impressive, fool since 2003, 99.32 rating, 505 out of 73787. Coming from a long time fool like yourself that carries some wait. Many other posters in this response section don,t have your accuracy and attention to detail. Trucking got my chips cashed in.

  • Report this Comment On May 21, 2011, at 9:57 AM, MKArch wrote:

    Matt,

    In regard to being argumentative, it takes two to tango. This thread wouldn't be as long as it is if I weren't just as guilty. I take your points in the spirit of debate, hopefully my own come across the same way.

    If you look at my CAPS portfolio I started a few months ago with just CSKI which I was actually thinking of going long as it was ~50% loser in one of my favorite CAPS players portfolio and looked interesting enough to investigate a little more. I came across a lengthy article about John Bird and his CSKI short rationale and it was convincing enough to me to red thumb CSKI instead. I also started following him on the CSKI m.b. and other boards and started following short "hit pieces" on other RTO's as well and suspected this was more than just a couple of bad apples but even in CAPS I didn't make a big move to red thumb these companies for fear there might be a decent number of legit companies and what happens if no one cares that the books are cooked. It's only been recently that I've made a big move to red thumb them as it looks like the jig is up. TSTC was actually a H.G tiny gem mention that I had a green thumb on originally and flipped to a red thumb after reading the "hit piece" on the company.

    I guess that was a long way of explaining that I did go through a process of reading about a number of companies and the arguments both ways before I came to the conclusion that there is no logical explanation for why these companies SAIC numbers are not reflective of the true business. I don't know if I can find the post but John has addressed the issue of SAIC not being the tax agency and has pointed out that there is some sort of check off from the SAT on the financials reported to the SAIC. Non RTO's are reporting SAIC numbers that match SEC numbers. If the SAIC is just a licensing agency there is no reason to not provide them with accurate financial information or financials that materially differ from what they report to their tax agencies. John and other shorts have not only made sure to account for all of the companies subsidiaries but they also check major customers and suppliers SAIC filings and consistently find they are on par with what you would expect for what the RTO in question reports to the SAIC and do not match what's being reported to the SEC.

    IMO the evidence is overwhelming that the SAIC numbers do reflect the actual business. In your example that maybe the truth lies somewhere between SAIC and SEC and maybe CHBT revenues are $20M instead of the $70M they reported to the SEC or the $0.5M they reported to the SAIC they still committed fraud even though it's a little less massive. Does it make a difference if they might be a little less of a fraud? In your example they are lying to two agencies.

    I can't stay solvent as long as the markets can stay irrational so I've never shorted a stock and I'm not set up to do so now even though if I was ever to short stocks the RTO's would be the ones. I also believe in the KISS method of investing and never bothered with options although again if did have the ambition to try to figure out how to play options I'd probably do some puts on RTO's with mismatched SAIC-SEC filings. If you look into my CAPS port it's a bullish play on the U.S. and it's recovery from this recession. I think I can get the same or better results from long positions in stocks right now.

    Mike

  • Report this Comment On May 21, 2011, at 9:59 AM, nanoguy wrote:

    I would like to see the comments on Chinese RTOs expanded a little more to other RTOs and micro-caps in general. e.g.- I still remember the Hungarian winery "opportunities".

    With developing economies becoming so attractive (e.g.- China, India, Brazil), it would seem that a few general principles could be shared.

  • Report this Comment On May 21, 2011, at 10:22 AM, pogicraft wrote:

    companies that don't list in their local exchanges before going overseas scare me

  • Report this Comment On May 21, 2011, at 12:04 PM, Professio wrote:

    First off, when I tried explaining why SEC and SAIC could mismatch I didn't mean that they should. The companies made mistakes, they were lazy, they recognized their own mistake too late, definitely. Management should never have allowed it to happen.

    @Matt,

    Going back to the rent and landlord example:

    "Many of the companies in question here have filings that are *way* off. Building on your analogy, it would be like telling your prospective landlord that you make $500 / year when you actually make $50,000 (or vice versa). It's not even close."

    Consider the landlord charges $100 rent a year, and you tell him you earn $500 it seams fair right ? Now what if you told your landlord you made $50,000 I'm sure he would try to charge you higher rent, simply because you can easily afford it. One has to take in account anyone can access SAIC filings including customers and suppliers. If they know the profit margins you have on them, or the amount of cash you have sitting around many things can happen. When seeing you have high profit margins on them, customers might want to demand lower prices. When seeing the large amounts of cash the supplier might want to charge more since you can easily afford it.

    Which leads to the next argument I will try to address: "There is no reason for the SEC and SAIC filings not to match."

    There actually might be a few:

    (Please note that I'm not trying to justify the difference between them.)

    * Outsourcing the SAIC filings might lead to the out-sourced party not knowing the true financials. Understating is better than overstating since the SAT can view these.

    * Customers and potential customers can access them. If they know how much you earn on them, they might want to demand lower prices.

    * Suppliers and potential suppliers can access them. If they know how much cash you have they might want to demand higher prices.

    I hope this provides some counter-balance to that argument.

    Also, there was a argument that the SAIC filings are derived from SAT filings. Though I agree companies Should post the same financials to both, but as I posted above there might be some potential downsides. Mostly I would like to point out that although they probably should match for the sake of clarity the bottom line is the SAIC doesn't mind if they don't.

    The argument that all Companies with non-matching SAIC and SEC filings are fraud blows the situation way out of proportion. If it were that simple, Auditors would not risk their reputation over something as simple to check as that.

    In many ways I agree this was plain stupid by the companies and should never have happened. Management should never have allowed it to happen, but it happened and thats where we are. When it comes to stuff like this, China has some wild-west investing about it.

    I hope this clarifies that the SAIC-SEC story isn't all that simple, though I agree, it probably should be that simple in the future :)

    I would be more than happy to look at different arguments or views, happy trading everyone!

    Jelle

  • Report this Comment On May 21, 2011, at 1:10 PM, MKArch wrote:

    Jelle,

    The argument that they are hiding something from competitors doesn't wash. First of all competitors all know what the costs of material and labor and overhead are and even if they didn't these companies are supposedly disclosing their true financials in their SEC filings anyway. Reporting revenues 1% of what they supposedly really are isn't just a silly goof that they made because they don't understand U.S. GAAP accounting.

    Your argument that the SAIC doesn't care if they report incorrect numbers is not true as well. The SAIC requires some sort of check off from the SAT that the financials the companies are reporting to them match the financials they are reporting to the SAT which is the tax authority that does require audited financials. Non RTO's are reporting numbers in their SAIC filings that match numbers reported to the SEC. My understanding is it's just the RTO's that are reporting inconsistent numbers and they are off by orders of magnitude.

  • Report this Comment On May 21, 2011, at 4:50 PM, TMFKopp wrote:

    @all

    I've got an email in to John Bird and I'll let you know if I hear anything.

    Lots to respond to here... hopefully I don't miss anything...

    The primary issue we're discussing is SAIC versus SEC. I emailed Tim @ Global Gains -- he's obviously studied this stuff pretty closely and has good reason to at least try to be on the bullish side (active recommendations). His view was similar (in a way) to MKArch's -- ie that the companies with mismatched filings *are* lying to somebody.

    So the question is, who are they lying to? Well, in some cases it's become quite obvious that they were lying to the SEC / U.S. investors. In other cases, it looks like they may be dodging full taxation in China. The *best case scenario* seems to be that they were simply lazy and outsourced SAIC filings to folks that badly fudged the numbers.

    For bulls, the preference obviously seems to be the hope that the mismatched companies were lying / under-reporting on the SAIC filings. But even that's not a great case -- what does it say about a management team that is either willing to fudge numbers themselves or hire somebody else that will fudge numbers?

    Still not sure I'd rush to bet against a company with mismatching filings *unless* there is more to the case. In John Bird's case, he's built quite an extensive case against CSKI. Looking at YONG (which has become a hot-button stock) I just haven't been that convinced by the cases presented and, correct me if I'm wrong, but I don't think there was an SAIC filing mismatch issue there.

    Matt

  • Report this Comment On May 21, 2011, at 4:56 PM, TMFKopp wrote:

    @Jelle

    "Consider the landlord charges $100 rent a year, and you tell him you earn $500 it seams fair right ? Now what if you told your landlord you made $50,000 I'm sure he would try to charge you higher rent, simply because you can easily afford it. "

    No offense, but when's the last time you rented a place? Someone can correct me if I'm wrong, but I've never heard of this happening. A place is advertised for a specific rental rate and the income of the potential renter is to make sure they can cover that rate.

    Now if for some reason a rental was advertised as carrying a rent that was a percentage of income, that'd be a different story...

    And that would actually be more similar to the case here -- higher SAIC income filings might tip off the tax authorities that the company should pay more taxes. So the argument is that the low SAIC filings are potentially a way for a company to fly under the radar and pay lower taxes.

    And even if it is that latter scenario -- which is the optimistic case -- we're still talking about a lying management team. Not ideal.

    Matt

  • Report this Comment On May 21, 2011, at 4:59 PM, TMFKopp wrote:

    @pogicraft

    "companies that don't list in their local exchanges before going overseas scare me"

    Good comment. This was actually one of my original concerns about these companies.

    Why would a small company skip over the Hong Kong or Chinese exchanges and head straight for the U.S.? There are a lot of Chinese-based large- and mid-cap companies that don't have a U.S. listing at all. Why are the overseas exchanges good for these larger companies, but not the smaller ones?

    Matt

  • Report this Comment On May 21, 2011, at 5:52 PM, ETFsRule wrote:

    No one is "lying" to the SEC or to the SAIC. Let me try to explain this.

    In the first example at the link I posted earlier, the "US holding company" will file the SEC forms. These need to match Company A's SAIC filings, because company A is a FIE (and, in this example they are the one and only FIE associated with that US holding company).

    In the 2nd example, again, Company A's SAIC filings will be audited, and will match the US holding company's SEC filings.

    Now, the trick that the shorts do in their articles, is they post the SAIC filings from the operating entity- which is called "Company B" in examples 2 and 3. Company B is a DES or VIE - not a FIE.

    These filings will not match up with the SEC filings made by the holding company, or with the SAIC filings made by Company A. In fact, Company B's SAIC filings aren't audited because they don't really matter. Company B is owned by Company A, and as a result, Chinese authorites are only concerned with Company A's financials. That's why Company A's SAIC filings are audited, and will match up with their SAT tax filings. But instead the shorts only show the filings from Company B.

    Another trick is that the shorts will post the SAIC filing of just one of the FIE's, but they will ignore the others. If there is more than one FIE owned by a US holding company, you need to add up the numbers from all of them. The sum will correspond to the SEC filing made by the US holding company.

    In the case of CHBT, they have two FIE's, and their structure is shown here:

    http://static.seekingalpha.com/uploads/2010/8/31/saupload_ch...

    When someone posts an SAIC filing, you don't really know which filing they are showing you unless you can read Chinese. But, the key point is that the SEC filings for CHBT should be equal to the the SAIC filings of both of their FIE's added together. These are "Growing Bioengineering (Shainghai) Co., Ltd." and "Shanghai Shining Biotechnology Co., Ltd.". The shorts are only showing you the SAIC filings from one of these two companies, and they are ignoring the other one.

  • Report this Comment On May 21, 2011, at 7:12 PM, 9tiger wrote:

    A small cap Chinese company that exactly emphazes the gist of this article is SCEI. Check out the message board on Yahoo Financial for the details and inside scoop.

  • Report this Comment On May 22, 2011, at 9:59 AM, MKArch wrote:

    ETF's,

    One of the tricks of the RTO pumpers is to keep claiming that the shorts are missing subsidiaries of the holding company when it's not true. They know the company structure, they get SAIC filings for all of the subsidiaries and then they go a step further and get them for major customers and suppliers.

    Getting back to the original point in the article about how much influence short sellers have on these RTO's. Anyone who posts on stock message boards knows that every stock has shorts saying mean things about it and many arguments sound convincing at a blush. We all know not ever stock gets crushed because shorts say mean things about them. I know this is different because these are Chinese companies and U.S. investors are biased against Chinese. BIDU, YOKU, SINA etc... would prove the opposite if anything.

    O.K. so it's just Chinese RTO's that investors will believe anything bad about. Well a month or so before CCME blew up Muddy Waters put out a YouTube piece of a supposed CCME sales rep contacting them and admitting to the company committing fraud. I don't remember the exact circumstances of the call but it sounded legit to me but supporters claimed M.W. faked the call. The stock went up after the video was released as evidently the street agreed it was a fake. Take a look at the P/E's of the RTO's most sport a P/E in the low single digits despite phenomenally profitable high growth businesses. That should tell you something.

  • Report this Comment On May 22, 2011, at 10:09 AM, MKArch wrote:

    Matt,

    I'm sure you have your own agenda for discussion with John Bird but some things that I think would be interesting to get into would be SAIC filings of RTO's vs non RTO's, relationship between SAIC and SAT and the degree to which RTO's SAIC numbers differ from their SEC numbers. I think a TMF interview or just let him do an article on the subject would be great for everyone.

  • Report this Comment On May 22, 2011, at 2:33 PM, ETFsRule wrote:

    "One of the tricks of the RTO pumpers is to keep claiming that the shorts are missing subsidiaries of the holding company when it's not true. They know the company structure, they get SAIC filings for all of the subsidiaries and then they go a step further and get them for major customers and suppliers."

    This is incorrect.

    For instance, if you look at the short article about CHBT, they only posted one SAIC filing and said, "this is the SAIC filing for CHBT".

    Then, they went on to claim that some type of fraud was going on because it didn't match the company's SEC filing.

    Obviously that makes no sense, because CHBT has more than one FIE. So looking at just one of their SAIC filings is meaningless.

  • Report this Comment On May 22, 2011, at 2:35 PM, MKArch wrote:

    Matt,

    Regarding the RTO's cheating on their taxes, they are supposedly making their true financials public via SEC filings so I don't see how that argument holds water. The tax authorities could find the tax fraud by checking with EDGAR online. They've got plenty of recourse if they find these companies are lying. U.S. investors basically have none.

  • Report this Comment On May 22, 2011, at 2:57 PM, MKArch wrote:

    http://seekingalpha.com/article/269961-china-biotics-2009-re...

    China-Biotics' revenue generating subsidiary in China during that time was 上海双金生物科技有限公司, filed in SEC documents as "Shanghai Shining Biotechnology Co.,Ltd." ("Shanghai Shining"). The other relevant subsidiary in China during this time period was Growing Bioengineering (Shanghai) Co. Ltd., located in Qingpu. Operations did not begin for its facility until February 2010.

    ***********************************************************

    What is he missing?

  • Report this Comment On May 22, 2011, at 9:36 PM, ETFsRule wrote:

    "What is he missing?"

    Again, the key is that you need to look at the financials from all of the FIE's. The short author leaves out one of them, and tries to convince you that it doesn't matter.

    From the 10-K:

    "SGI was incorporated in the British Virgin Islands on February 13, 2004. On December 9, 2005, SGI incorporated a wholly-owned subsidiary, Growing State Limited, in accordance with the laws of the British Virgin Islands. On September 22, 2006, Growing State Limited established a wholly-foreign owned enterprise, Growing Bioengineering (Shanghai) Company Limited, in China."

    So, Growing Bioengineering (Shanghai) Company Limited has been around for many years, but the author tries to insinuate that they haven't really been doing anything until Feb. 2010.

    That doesn't seem to be the case. It's true that they built a new production facility which came online in Fec 2010. Prior to that time, their operations were done at a rented facility - which was rented by the Growing State subsidiary of the company. Of course, the short author conveniently leaves this detail out of their report. I'm telling you, these shorts are clever!

    It's explained in the Facilites section of the 10-K:

    Facilities

    We do not own any real estate. We conduct our operations from a leased facility in Pudong, Shanghai. Pursuant to our lease for this facility, which expires on October 19, 2011, we pay annual rent of RMB507,532, payable in monthly installments of RMB42,294. This facility, which includes a level 100,000 clean room and a level 10,000 clean room, houses our office space manufacturing facilities and warehouse. The maximum current production capacity at this location is approximately 3.5 million capsules per month. We have received ISO 9001, ISO 14001, OHSAS 18001 and HACCP certifications for this facility. See “Business—Current Operations—Overview” for further information with respect to these certifications.

    We are expanding into the bulk additives business for functional foods through the completion of our 150-ton capacity plant, which commenced production in February 2010. Management estimates that Phase 1 of the project, which involves constructing a facility capable of producing 150 tons of probiotics per annum, will cost $28 million. Phase 2 of this project, which commenced in December 2009, is expected to cost $18 million. The construction cost of Phase 1 of the plant is being funded by cash received from the sale of convertible promissory notes to Pope Investments II LLC on December 11, 2007 as disclosed in “Business-History.” The construction cost of Phase 2 of the plant is being funded by cash received from the public offering of our common stock in October 2009 as disclosed in “Business — History.”

    "On March 21, 2006, Growing State, our subsidiary, entered into an agreement with Shanghai Qingpu Industrial Park District Development (Group) Company Limited for the lease of 73,157 square meters of land in the Shanghai Qingpu Industrial Park District on which we are constructing this plant. The agreement provides for the payment of leasing fees of approximately $2.1 million, 10% of which we paid on April 11, 2006 as a deposit, to be refunded upon payment in full of the aggregate lease amount. The Qingpu People’s Republic Government issued its formal confirmation of the land use right necessary for the plant construction on November 30, 2007 and confirmed the leasing fee of $1,777,680 (reduced from $2.1 million because the size of the leased land was reduced to 36,075 square meters) and a refundable land deposit of $210,083. We paid the leasing fee on December 28, 2007. In February 2009, the refundable land deposit was fully refunded the formal land use right certificate was issued. There are no future lease payments under this land lease."

  • Report this Comment On May 22, 2011, at 10:04 PM, TMFKopp wrote:

    Hmm... A lot of good discussion here. Thanks guys!

    I don't want to end up missing the forest for the trees here and I think the central question is how Foolish investors should be looking at / dealing with the sector as a whole. And, in the end, I'm kind of left where I started -- with three possible scenarios:

    1) Selectively going long or shorting individual Chinese RTOs. This is going to be the least preferable path for most folks. I would trust neither the companies in question nor the short-selling "research firms." And that means that if an investor wants to go *either direction* with selective companies here, their going to have to get their hands really dirty digging in.

    To the question of SAIC filings, for instance, I would want to get my own hands on the filings for the companies I was targeting and get my own translation. It's quite easy for the shorts to say "yeah we got all of the subsidiaries" or the longs to say "no you didn't." In this case, I'd say an investor should see those filings themselves. The only way around that is if a third party that you absolutely trusted did the work. Aside from Tim and Global Gains, I don't see many such third parties. (that's for me, that's not an absolute statement)

    2) Go basket style. This goes back to my assumption that not all Chinese RTOs are frauds. It'd probably be a good idea to keep the most suspect companies (CSKI for instance) out of the basket. But it seems like there are some companies that are willing to aggressively take action against the grain. Both CSR and CFSG have recently announced management-led buyouts. In CFSG's case, it's with Bain Capital -- not a small fish.

    You could probably also go basket style with shorting. I'm not considering that, but it's a thought.

    3) STAY OUT. I'm still here. Frankly, I don't think there's any way that I'll do the work for #1 -- given the amount that I'd be investing in any one of these companies it wouldn't be worth the time and effort that it'd take. As for #2, I continue to bat around the idea. On the upside, the longer I wait, the cheaper most of the sector seems to get. Though as I mentioned earlier, the thin premium that the CSR buyout got wasn't terribly encouraging.

    So... MKArch, ETFsRule, others: Thoughts on broader strategy as opposed to hashing out the particulars of individual companies?

    Matt

  • Report this Comment On May 22, 2011, at 10:14 PM, MKArch wrote:

    I'm assuming the last paragraph is what you are getting at correct me if I'm wrong. From what I can tell Growing state leased some land in order to build a plant on and in February 2009 they were issued a land use right certificate which I believe is an approval needed to build on the land. That would seem to match the 2010 start of operations from a plant on that site. I don't see an issue here and their 10K claims one product from Shanghai Shining accounts for something like 40% of their revenues. That one product accounts for orders of magnitude more than their SAIC for that subsidiary says the entire subsidiary does in revenues.

    BTW I have just started following CHBT but have been following CSKI for a few months now. CSKI recently announced they signed a 30 year lease on a forest that they will supposedly use to forage for the roots and leaves they use for their traditional Chinese medicines. The lease total is $42M however they paid $36M up front to save $6M over the 30 years of the lease. This is at a time when their stock was trading for about 3.5X earnings. John Bird thinks the lease is fake and a way to get $36M they don't really have off of their balance sheet and I believe him. This lease that CHBT has sounds like it might have been a big up front payment as well which sounds a lot like CSKI's forest foraging lease.

  • Report this Comment On May 22, 2011, at 10:25 PM, MKArch wrote:

    Matt,

    I know John Bird posted yesterday that he is short 30 RTO's and only down on 2 right now. He's also doing a lot of ground work but the basket short approach seems to be working for him. That's assuming you believe him which I do. Someone did a SA article detailing Citrons record. It was extremely impressive with a large number of 100% gains on RTO shorts. IMO a basket of companies that BIRD Citron and Muddy Waters are shorting seems like a pretty safe bet. Most of these companies have hit pieces that you can read to see what the issues with the company are. I'd probably stick to companies with substantially mismatched SAIC-SEC filings as I think that's a dead give away.

  • Report this Comment On May 22, 2011, at 10:45 PM, ETFsRule wrote:

    MKArch:

    This is what I think is the key statement:

    "We do not own any real estate. We conduct our operations from a leased facility in Pudong, Shanghai."

    Now, regarding the SAIC form, I don't speak Chinese so I have no idea what it says. The whole thing could be forged for all I know.

    The company said that 40% of the revenues come from a product with "Shining" in its name. That's just the brand name of the product. They never said how much of their revenues came from the "Shining" subsidiary company.

    CHBT said that their operations are carried out at the rented facility that I mentioned earlier. They paid $2.1 million to rent that facility, which was paid by the Growing State subsidiary, not the "Shining Biotech" subsidiary. I think that pretty much clears it up.

    And again, if the short author wants us to believe that the "Growing" subsidiary is unimportant, why doesn't he just show us THEIR financials?

  • Report this Comment On May 22, 2011, at 11:03 PM, ETFsRule wrote:

    TMFKopp:

    My approach is #3 - stay out. The RTO's are too risky. In my latest blog I posted my approach to Chinese small caps... I'm sticking with IPO companies for now.

    A basket approach would be interesting, but I don't have enough cash to actually try it. If I did, I would probably buy companies that have already been accused of fraud, just because you can get them at such a huge discount. Eventually I think all these RTO's will be accused of fraud, because the shorts are making so much money on it.

    So, it doesn't make sense to buy these companies before they are accused of fraud - that's just throwing money away.

  • Report this Comment On May 22, 2011, at 11:07 PM, MKArch wrote:

    ETF,

    The $2.1M was reduced to $1.77M and it was to lease land not a building. There was a land use certificate issued in February 2009 which should be an approval required before construction can begin. Assuming they started construction shortly after the land use certificate was issued that would match with the 2010 start of production from a plant on that land.

    I'm to tired to check tonight but I believe the Shining product that accounted for 40% of sales was specifically stated as a product coming from the Shangai Shining subsidiary.

  • Report this Comment On May 23, 2011, at 12:09 PM, MKArch wrote:

    http://finance.yahoo.com/news/Longtop-Financial-prnews-10621...

    Another one bites the dust. I think that's number 21. I don't see any reason to suspect this is the last of the bad apples. Why do the shorts need to lie about legitimate RTO's when it seems there are more than enough real frauds to make money on? I can see maybe being a little skeptical of a hit peice from someone with no public record but IMO if Bird, Citron, Muddy Waters are shorting the RTO it's a pretty safe bet that it's a fraud.

  • Report this Comment On May 23, 2011, at 3:06 PM, TMFKopp wrote:

    I've been buried in Longtop so far today. Bad bad bad bad....

    Matt

  • Report this Comment On May 23, 2011, at 4:37 PM, ETFsRule wrote:

    Matt: Sorry to hear that.

    Arch: I just want to point out that LFT isn't an RTO, they were an IPO company. And in this case, it looks like they really were a fraud.

    This could be a real game-changer for China IPO's, and it casts doubt on all the companies that signed off on their financials - including the underwriters. That includes Deloitte, Deutsche Bank, Goldman Sachs, and Morgan Stanley.

    If this company is a fraud, then pretty much any company could be a fraud. The one thing that would have made me suspicious of them is that they have a very strange corporate structure.

    As for the short sellers, I have just seen too many examples of dishonesty from them, including one writer forging an SAT filing. Andrew Left has been convicted of securities fraud. And, the shorts were clearly wrong in the case of ONP.

    I think Muddy Waters is by far the most trustworthy of them all - their reports are a lot more detailed and professional than the others, and they aren't afraid to use their real names and show their faces in public. But most of the short authors popping up on Seeking Alpha are clowns.

  • Report this Comment On May 23, 2011, at 4:43 PM, jackcrow wrote:

    A) If you are going to invest in small caps expect a rough ride, its not the FAULT of the "Shorts" . Small cap, fewer shares, the ride is going to be wild as emotions and conditions change. Both short sellers and long buyers are going to whip the price around.

    B)If you are going to invest in small caps regulated by a foreign government expect things to be wild as someone figures out what the USA deems transparent and what China thinks is transparent is different.

    C)When common sense critiques are met with hostility and accusations the accuser is trading on emotion not on data.

    jack

  • Report this Comment On May 23, 2011, at 8:53 PM, MKArch wrote:

    http://seekingalpha.com/article/251981-a-comprehensive-score...

    ETF I've heard the accusations of securities fraud against Left but I don't know the circumstances. In any case I'd be petrified if he was on the short side of a company I owned.

    As to ONP being vindicated I asked John Bird about this and he thinks they are still a fraud. I don't follow them closely so I don't know the issues real well but I added them to my CAPS on Johns word. I know there were issues about capacity of their equipment and it sounded like they might have bought higher capacity equipment just before an independent inspection was done. John said something to the effect that they're not going to be able to pay the equipment off. In any case with a P/E of ~4 I'd hardly say they've convinced anyone that they are not a fraud.

  • Report this Comment On May 23, 2011, at 9:07 PM, MKArch wrote:

    http://www.internetlibrary.com/cases/lib_case486.cfm

    <<<Left moved to dismiss pursuant to California’s anti-SLAPP statute, Cal. Civ. Code Section 425.16. The trial court granted Left’s motion, and both dismissed plaintiff’s suit and awarded Left the attorney’s fees expended in its defense. On appeal, an intermediate California appellate court affirmed.>>>

    ***********************************************************

    ETF, can you provide any proof that Left was convicted of securities fraud? In Google searches all I come up with is message board chatter about him being convicted except the info above where he won dismissal of the suit and had his attorney fees paid by the plaintiff.

  • Report this Comment On May 23, 2011, at 11:18 PM, ETFsRule wrote:

    He was found guilty of securities fraud by the National Futures Association and was barred from trading for a few years. Apparently he was defrauding his customers in some way.

    I don't think he's ever been convicted of a crime in a criminal court, but this is still a pretty serious ethics violation. And I think the whole reason he discontinued the StockLemon website to start Citron was because StockLemon was in some pretty serious legal trouble.

    http://www.investorvillage.com/smbd.asp?mb=1314&mid=2439...

    http://www.nfa.futures.org/BasicNet/Case.aspx?entityid=02447...

    ANDREW LEFT -

    THE PANEL FOUND THAT LEFT MADE FALSE AND MISLEADING STATEMENTS TO CHEAT, DEFRAUD OR DECEIVE A CUSTOMER IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). LEFT'S CONDUCT WAS INCONSISTENT WITH JUST AND EQUITABLE PRINCIPLES OF TRADE.

    CONSEQUENTLY, THE PANEL BARRED LEFT FROM ASSOCIATION WITH AND FROM ACTING AS A PRINCIPAL OF ANY NFA MEMBER FOR THREE YEARS; ORDERED HIM TO TAKE AN ETHICS TRAINING COURSE; AND PLACED RESTRICTIONS ON HIS ACTIVITIES FOR TWO YEARS WHICH PREVENT HIM FROM SUPERVISING ANY AP AND REQUIRE HIM TO TAPE RECORD AND LOG ALL CONVERSATIONS WITH CURRENT AND POTENTIAL CUSTOMERS.

  • Report this Comment On May 24, 2011, at 12:50 AM, TMFKopp wrote:

    While I don't think it's non-material to consider Left's ethics, I think that distracts from the issue a bit, because the bottom line is that from what I've seen, he has a pretty impressive track record. Or a pretty intimidating record if you're on the bullish side of one of his targets... to echo MKArch:

    "I'd be petrified if he was on the short side of a company I owned"

    Ditto for me...

    Matt

  • Report this Comment On May 24, 2011, at 7:04 AM, MAURIZIO400cc wrote:

    mat.

    m still tring to make up my mind as to wich side you really are, ...but motley or not motley, intentions or interests or lack of it, coming from the devil or the holy water...it doen't look as if the number of articles coming from you on the subject have ended up doing the god's work so far. so if your intentions are kosher i'd suggest you get even more careful of what you write on this subject (seems you are more careful lately at least answering posts) i'd say mighty careful.after all you are getting mixed up in an increasingly emotionally charged subject that might provide some violent blowups with unpleasant consequences. and your name is out there, involved with it. I would not want to be in your shoes running in some mad investor rightly or wrongly blaming you for monetary loss. (ease up, it will not be me) all the best

  • Report this Comment On May 24, 2011, at 8:04 AM, dbtheonly wrote:

    Good Lord,

    "Maurizo's" comment might be taken from a 1930s gangster movie. In the lousy Humphrey Bogart "gangster dialect, " Youse been sayin tings the Boss don like. I suggest youse be careful or somebody come to break your knees."

    Fool On, Matt.

  • Report this Comment On May 24, 2011, at 12:37 PM, HedgeFund007 wrote:

    "As to ONP being vindicated I asked John Bird about this and he thinks they are still a fraud. I don't follow them closely so I don't know the issues real well but I added them to my CAPS on Johns word. "

    MKArch why don't you and John Bird go get a room or something?? Seriously..I mean daanng every single post you have written incudes John Bird said...John Bird said... John Bird believes...ASK John Bird...

    I mean wowzers!! You'd think this is Warren Buffett he's talking about!!

    This is some SERIOUS idol/hero worship you got going on, just let him invest your money for you if you have that rock solid conviction about him.

    i mean this is almost some freaky cult-like adoration you have for this amateur investor, just saying

  • Report this Comment On May 24, 2011, at 12:53 PM, MKArch wrote:

    I reference Bird because he has put a lot of time into researching the frauds and is good enough to post about it on public forums so that someone like me can learn from him. I also listen to the people attacking his arguments and he consistenly makes more sense than they do so I believe he has this whole thing figured out.

    Now since we are on a TMF forum and I respect the fact that they like to keep these discussions civil I'll just say if you don't like my posts don't read them. If we were on a different format I'd have another response for you.

  • Report this Comment On May 24, 2011, at 6:35 PM, TMFKopp wrote:

    @MKArch

    Thanks for keeping it civil....

    WRT your healthy referencing of John Bird, I think your point is valid -- that he's done a lot of work on the subject and digging into the companies and so what he has to say is of interest.

    However, I'll also say that personally, I never invest simply on the strength of somebody else's work. And it appears that you may not either -- after all, your primary action against the RTOs is to give the thumbs down in CAPS (though you do have an impressive score to defend!)

    For others reading, if you've got an itchy trigger finger, I would just caution that the well-publicized short sellers in this game are in it for themselves (for the most part at least) and you're not going to be the first on their call list when they decide to change their zag to a zig. So just make sure you've dotted at least a good number of the i's yourself rather than relying on their say-so.

    On a side note, I did get a quick response back from John and am hoping to have a more detailed exchange with him when he has some time.

    Matt

  • Report this Comment On May 24, 2011, at 6:39 PM, TMFKopp wrote:

    @MAURIZIO400cc

    Not sure if that was tongue-in-cheek or what, but I got a good laugh out of it.

    I will say that I have a mean spinning roundhouse kick and can lift 100 pounds straight up over my head.

    Seriously though, I'm a distance runner so they better start training if they hope to catch me when I start running and screaming.

    Matt

  • Report this Comment On May 24, 2011, at 6:40 PM, TMFKopp wrote:

    Finally, in case anybody missed it, my surrender:

    http://www.fool.com/investing/general/2011/05/24/waving-the-...

    Matt

  • Report this Comment On May 24, 2011, at 8:34 PM, MKArch wrote:

    I saw it Matt it was a good article. Just to clarify a bit why I referenced John Bird. You fairly pushed me to defend my position that the SAIC was a the true story of these RTO's financials and since my understanding of the SAIC came from following John Bird I had to reference him when explaining my points. I know it wasn't you who made it an issue it was 007 but I didn't bring Bird into the conversation because I worship him just to be fair about where my information came from. Thanks for the props on my CAPS record which if 007 wants to look at he will see I've done pretty well on over 400 recs since 2006 with only a handful of RTO's added recently. I follow knowledgeable people to learn something not to cheat off of them.

  • Report this Comment On May 24, 2011, at 9:01 PM, TMFKopp wrote:

    @MKArch

    "I follow knowledgeable people to learn something not to cheat off of them."

    As far as I'm not concerned, that's not cheating. Far from it... it's by following better investors that I've learned all that I know.

    Matt

  • Report this Comment On May 26, 2011, at 5:47 AM, MAURIZIO400cc wrote:

    matt

    glad you have a sense of humor.

    hope your giving up on chinese small caps does not extend to you writin on them.

    I counted some of your comments as some of the most intelligent on the subject.

    I just wish we had some more facts to discuss on this subject rather than a seemingly endless stream of opinions and mindless repetition of them. alas! that seem to be the state of the subject. that sayd, if you do quit, I'd sympatize with that as well.

    stay sharp

    mau

  • Report this Comment On May 26, 2011, at 4:38 PM, TMFKopp wrote:

    @MAURIZIO400cc

    "I counted some of your comments as some of the most intelligent on the subject."

    Thanks! That's much appreciated.

    "hope your giving up on chinese small caps does not extend to you writin on them."

    For better or for worse, I will continue to write about them. My fascination with the situation won't allow me to do otherwise. Actually getting ready to spend the long weekend with a stack of reading materials on the subject.

    Matt

  • Report this Comment On May 27, 2011, at 4:41 PM, whyaduck1128 wrote:

    Just because there may be a pearl within the pile of sh** doesn't mean I'm willing to spend my time sifting through the sh**.

    There are many, many opportunities elsewhere, companies with far less chance of turning out to be hype and ephemera.

    That's where I'm going--closer to home and larger than these companies. If I lose out on some treasures, I can handle it--and I'll sleep better at night.

  • Report this Comment On May 29, 2011, at 1:55 AM, mike2153 wrote:

    I'd gladly pay you Tuesday for a hamburger today.

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