Very good article. An important excerpt:
"This is setting the bar higher for Chinese companies to build up their internal accounting and finance teams, engage better known audit firms, and make sure that they have respected and active independent directors," Coulson said.
"After a very active run of equity financing by Chinese issuers, some investors are also questioning if the money they put into these companies is being deployed effectively.
"In today's market, it is not enough to have strong numbers. Trust in management is the most important factor driving investor decisions."
"We expect companies that listen carefully to what matters to investors, show their commitment to public company infrastructure, and consistently execute their business plan will be rewarded over time," he added.
A due diligence session on all these concerns was part of the 2010 ROTH Hawaii Conference held from Sept 1-3 at the Grand Wailea Resort in Maui.
This is consistent with a theme we've been harping on. These companies are learning. They are coming to understand and appreciate the importance of credibility. The market has put them under pressure, and naturally, they are responding to that pressure. They are taking actions. Adding boards of directors, upgrading to top 10 auditors, instituting buybacks, paying dividends. Going forward, lo and behold, you will start to see SAIC v. SEC numbers matching. It's not that hard for companies to make that change, and under pressure and scrutiny, believe me they will.
That's bullish, not bearish!
You don't want to buy these stocks once they have fully evolved, because then you'll have to pay normal multiples for them. You want to buy them just as the process of their evolution is beginning, while people are still scared by the slanted articles, the noise from bloggers, the message board nonsense, and so on. In other words, you want to buy them now. Or even better, you want to buy them on July 7, 2010, the day the sky fell.
I've been fully invested in this space even as the sky has fallen. And I'm up substantially from where I was back in May, before the anti-RTO noise really got loud. My strategy: the same as everyone else, stay away from junk. There is plenty of quality in our space right now selling at a depressed valuation. That includes RTO quality, because not all RTO's are the same.
The only long-term risk is that these companies might actually be massive frauds. In my view, that risk is not a meaningful risk. It's like the risk that a meteor might strike the earth and destroy everything, causing all stocks on the planet to go to zero. Not a risk that you invest based on or take seriously.
You can't have 250 audits, including many conducted by big 4 firms, that all missed a Ponzi scheme. It's just not possible. If someone's argument leads to that conclusion, then the argument should be rejected right off the bat as bullshit.
There may be a few frauds in the space, maybe some of the well known offenders like CSKI that we have all hopefully avoided by now, but even if you lose your principal on a POS like CSKI, you have more than one stock that will double to make up for it.
The SEC v. SAIC issue is a non-issue IMO. Even the IPO's don't match. Take BORN as an example. It is not an RTO. It was underwritten by Oppenheimer and Piper Jaffray, and went straight to NASDAQ, just like CTRIP and BIDU. If SAIC numbers are to be taken seriously, then we should short BORN immediately, monday at the open.
Where is CCA on that? Why isn't he shorting the living snot out of BORN? The answer: he's not stupid. He knows better than to rely on SAIC over SEC in the case of a chinese company that has been fully vetted by major, well-known investment banks and audited by a top 10 firm.
