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Chinese scam net-nets


rukawa
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One thing that comes up regularly when trolling for net-nets is Chinese domiciled companies listed in foreign countries that are net-nets. Typically these are scams. I wonder what things people have come up with for identifying scam companies. I have a few:

 

1) A large number of subsidiaries with names like Super Lucky Investments, or Huge Top Aeronautics investing in everything from movie studies to fertilizer production.

 

2) The company never issues a dividend and their explanation says something about challenging market conditions and the need for liquidity despite that fact that they have tonnes of cash. I am not particularly interested in dividends but I know that no scammer will give away cash.

 

3) The company is Chinese with a fully Chinese board of directors.

 

4) A ridiculously low price. Typical net-nets are in the 0.3-0.66 NCAV range. Scam companies are around 0.1 NCAV.

 

Gannon's blog post on this issue is also excellent:

http://www.gannononinvesting.com/blog/why-i-dont-invest-in-chinese-stocks.html

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No 2 is the most common I see. For cigar butt type companies I've done best when they do pay a dividend, regardless of geography. That sets a minimum return and forces management to do something fairly productive with the cash. Most cigar butts don't have great track records of reinvestment, so all else equal I'd rather they just return the cash in a tax inefficient dividend.

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I think 4) is a terrible short cut. It's probably better to buy a scam company that is already valued like a scam company, than buying a cheap company that will turn out to be a scam. 2) is good.

 

Other than that I would just suggest reading the filings closely and see if things make sense.

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