Screening Chinese RTO frauds

[prunes]

I'm interested in performing original research on Chinese RTO frauds and am interested in screening companies to investigate. What would be the best way to screen for companies to research? Is this field too picked over at this point to bother?

[Myth465]

There is probably fruit, but I think you are a johnny come lately. Anything Chinese that isnt a well known large cap seems to be getting the Chinese discount. Good luck, I cant offer much advice in terms of screening.

[gfp]

I would say there is very little you can add without being on the ground in China.  If you are there or have the budget to hire local investigators, there is probably still an opportunity to find some dubious practices.  Get used to the idea that some of the companies are 50% real, others 30% real, etc...  There are lots of related party transactions and inflated transaction prices, etc.  The most blatant frauds have already been exposed.

 

Also, if you are intending to make money on your original research - many of the small cap RTO equities are now expensive to borrow (or impossible) and put premiums quite high.  Chinese RTO stocks are showing up on the reg-sho naked shorting lists as people who established short positions through puts were unable to borrow the shares.

 

It's become quite popular and the short squeezes can be very painful. 

[claphands22]

Hi prunes,

 

Here is a website that has a list of all the chinese cos. It's not perfect since it included ADRs & foreign listed ones, but has a good deal of nasdaq/amex listed ones as well.

 

http://geoinvesting.com/companies/all.aspx

 

All these small cap cos have been hit hard, especially after CCME. I'd check out citron/bronte/muddy waters for Chinese frauds, they generally do a good job....sans their experience with ffh.

 

I'd also recommend reading Quality of Earnings by O'Glove if you decide to do some detective work. The Quality of Earnings book does a nice job helping investors see when the accountants are doing funny business.O'Glove goes through examples of companies that report higher income than operating cash flow, over a long period of time, are generally playing with their numbers. You can see that with RCON http://www.google.com/finance?q=rcon  Although, their can be legitimate reasons for such things...the fact an overwhelming majority of chinese small caps do it, is highly suspect.

 

This space still has interesting opportunities but it's now more treacherous for short sellers (high volatility, high short interest.) I'd also wouldn't suggest buying puts on these cos since recently they've only halted trading for the cos instead of kick them off exchanges. Although you can still exercise the puts, you won't be able to sell the stock in the market so you would be under too much uncertainty.

[oddballstocks]

I signed up for a trial of RobotDough, some sort of screener that specialized in value...supposedly.  Anyways the site is junk, probably 90% of the stocks on the value screens are China RTOs, so for your purposes it would work well, for someone looking for value ideas not so much.

[gfp]

Here's an example of a new piece of research that was released recently in the space.  (always a bit shady when they release stuff on options expiration week)

 

http://absaroka.com/uploads/YONG.ResearchReport.051811-vFINAL.pdf

 

full disclosure:  I have researched this company in person in Inner Mongolia and Beijing.  I have no position in the company.

[claphands22]

I don't see the logic in buying puts on these chinese small caps...they are likely to be halted on the exchange making your options unsellable and risky to exercise.  Yet, I think guys like citron/bronte/muddy waters could make a small fortune by buying puts before they release their research and selling them after the market tanks on their findings....i dunno if that's legal or not, but that's the only reason i dare to own options on these companies.