Fraudulent Chinese Stocks

[Ballinvarosig Investors]

There have been quite a few people investigating Chinese companies that are listed here on American stock exchanges, and a lot of red flags have been raised!

 

Motley Fool have done an interesting peice on a company called China Sky One Medical (CSKI) - http://caps.fool.com/Blogs/a-lack-of-logic-around-china/416849

 

Much of their research came from a man named John Bird, who goes into quite a lot of details listing inaccuracies between the companies American, and Chinese financial information. For more information, look here - http://www.waldomushman.com/Intro.html

 

Since then, I've noticed that another person has emerged doing similar things. He alledges that Orient Paper (ONP) and China Marine Food are also fraudulently reporting their numbers - http://www.chinesecompanyanalyst.com

 

I have a tiny interest in China MediaExpress (CCME) and am considering dumping it. I can't find any hard evidence of fraud, but the numbers just seem too good to be true. Thoughts?

[dual_bid]

There's a similar thread at the VIC:

http://www.valueinvestorsclub.com/value2/Topic/TopicDetails?topicId=16

[beerbaron]

I looked a Sky Medical and even discussed it on this board. The rule here is if it's too good to be true it probably is...

 

BeerBaron

[abyli]

I own some CCME. I also own some shares and warrants of CCLWF and CHOP. There are lots of problems with those small cap chinese stocks, either loose internal control, accounting problem, cheating, etc. Someone guestimated that 1/3 of those small cap chinese stocks are fraud, I think it might be higher than that. ONP's story can not be true, must be faked numbers. CMFO's acquisition smells problem too. FUQI had some accounting problem, can not release 2009 earnings yet. TXIC missed the deadline to file 20-F. The extreme case I find so far was SBAY. They own 2/3 of the subaye.com. To get 100% of the website, somehow the original 1/3 owner of subaye.com in the end now owns 60% of SBAY and the management claims this is good deal! Yeah, this might be good deal for them, definitely not for shareholders.

 

There is no concept of shareholder oriented culture in China today. People think stock market as casino. In a sense, the A Shares listed in Shanghai and ShenZhen are real casinos. The cost for management to fake numbers is very low and the gain for them could be very high. In public TV, they boasted how they worked hard to get IPOed in wall street and received $$$ from wall street. Then they will spend those money fast, some into their own pocket.

[Ballinvarosig Investors]

I own some CCME. I also own some shares and warrants of CCLWF and CHOP. There are lots of problems with those small cap chinese stocks, either loose internal control, accounting problem, cheating, etc. Someone guestimated that 1/3 of those small cap chinese stocks are fraud, I think it might be higher than that. ONP's story can not be true, must be faked numbers. CMFO's acquisition smells problem too. FUQI had some accounting problem, can not release 2009 earnings yet. TXIC missed the deadline to file 20-F. The extreme case I find so far was SBAY. They own 2/3 of the subaye.com. To get 100% of the website, somehow the original 1/3 owner of subaye.com in the end now owns 60% of SBAY and the management claims this is good deal! Yeah, this might be good deal for them, definitely not for shareholders.

 

There is no concept of shareholder oriented culture in China today. People think stock market as casino. In a sense, the A Shares listed in Shanghai and ShenZhen are real casinos. The cost for management to fake numbers is very low and the gain for them could be very high. In public TV, they boasted how they worked hard to get IPOed in wall street and received $$$ from wall street. Then they will spend those money fast, some into their own pocket.

Yet you're still happy to hold CCME?

[valuecfa]

I looked a Sky Medical and even discussed it on this board. The rule here is if it's too good to be true it probably is...

 

BeerBaron

 

There are many red flags at this company. At least there were a few years ago and i doubt anything has changed there.

[claphands22]

I believe a lot of these US listed Chinese small caps have gone public for dubious reasons. I've owned a few and have done well but was probably dumb luck. I think there could be a day of reckoning for these cos.

 

I'd suggest doing the following for checking on the integrity of the company

 

(1) I'd make sure the company has high insider ownership

(2) that company didn't go public by raising equity at dumb prices

(3) preferably a well known auditor

(4) company has a good relationship with a bank

(5) company has a good relationship with their shareholders

(6) check their SAIC reports (reports they publish to chinese government) with http://www.inter-credit.net/ - the SAIC reports are done w/ chinese accounting but should be reasonably similar with US GAAP [currently in the process of trying to get these papers]

(7) their financial statements make sense (should not be posting a positive net income yet posting a negative operating cash flows)

 

Of course every company demands thorough due diligence but I think Chinese companies demand a double dose of skepticism.

 

I really don't know why these companies list in the US. US listed Chinese companies generally get lower multiples therefore raising capital is more difficult. Maybe it's because the Chinese exchanges demand the company to be larger before listing (?) - I really don't know.

 

CCME does look extremely interesting but my question for them is - why list in the US? Also, if I remember correctly, the management gets a bonus based on how well they do on an net income bonus  - I think this gives them an incentive to fudge GAAP figures.