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Re: CNIT
This looks suspicious to me.
The company had only $8mm in cash at 6/30 and used $13mm of cash in 1H13.
The stock is trading at 2.5 times tangible BV.
The company has been losing a huge amount of money.
The CEO was buying stock year ago around $1. The company changed form being a US corp to a foreign private issuer. As a FPI, it is not required to disclose insider trading.
It looks to me like there is a strong possibility this news is intended to facilitate insider selling.
Re: SIAF
Uplisting was part of the VLOV pump for about three years
Re: CJJD Link
Get back Jojo, go home
Get back, get back.
Get back to where you once belonged
KEYP: 10Q filed
ST Bank debt up $180mm this year.
And they started construction on their giant new plant in Guangxi.
Re: LTON
No more quarterly reporting. And half-year results are only on the website - no press release. My guess is that they will give up their US listing and only trade in Australia.
LLEN: More smoke and mirrors
The company's intraday press releases seem intended to briefly spike the stock before people have time to grasp the details. In this case the "Increase in ownership" was accomplished without any new cash commitment.
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L&L Energy Announces Increase in Ownership by Management and Board of Directors
PR NewswirePress Release: L & L Energy, Inc. – 31 minutes ago
SEATTLE, Sept. 27, 2013 /PRNewswire/ -- L & L Energy, Inc. (NASDAQ: "LLEN") ("L&L" or the "Company"), a U.S.-based company with a track record of profitable energy (coal) operations in China, today announced that several members of its management and Board of Directors are increasing their ownership of L&L shares. The Company believes that the increase in share ownership demonstrates the collective commitment by management and the board to the success of L&L. The increase also demonstrates their belief that the Company's shares are significantly undervalued.
Mr. Dickson Lee, the Company's Chairman and Chief Executive Officer, recently took possession of 750,447 shares of company stock previously pledged as collateral for a personal loan, a transaction by Mr. Lee that required a cash outlay of over $1 million. This transaction was disclosed in a Form 4 filing with the SEC yesterday. Mr. Clayton Fong, Vice President of US Operations, has agreed to take company shares in lieu of cash salary. Finally, several board members have agreed to take a substantial portion of their director fees in the form of equity rather than cash. L&L directors' cash fees include $80,000 annually per director, where directors may substitute equity for any percentage of their cash fee. Two directors have elected to receive their entire board fee in equity.
CAST: SEC Charges China-Based Executives With Fraud and Insider Trading
FOR IMMEDIATE RELEASE
2013-200 Washington D.C., Sept. 26, 2013 — The Securities and Exchange Commission today charged the former CEO of an education services provider based in China with stealing tens of millions of dollars from investors in a U.S. public offering, and charged another executive with illegally dumping his stock in the company after he helped steal valuable company assets.
The SEC alleges that ChinaCast Education Corporation’s former CEO and chairman of the board Chan Tze Ngon illicitly transferred $41 million out of the $43.8 million raised from investors to a purported subsidiary in which he secretly held a controlling 50 percent ownership stake. From there, Chan transferred investor funds to another entity outside ChinaCast’s control. Chan also secretly pledged $30.4 million of ChinaCast’s cash deposits to secure the debts of entities unrelated to ChinaCast. None of the transactions were disclosed in the periodic and other reports signed by Chan and filed with the SEC.
The SEC further alleges that Jiang Xiangyuan, ChinaCast’s former president for operations in China, avoided more than $200,000 in losses by illegally selling approximately 50,000 ChinaCast shares after participating in the ownership transfer of one of company’s revenue-generating colleges before it was publicly disclosed by a new management team. ChinaCast had a market capitalization of more than $200 million before these alleged frauds came to light. After Chan and Jiang were terminated and their misconduct was publicly disclosed by new management, ChinaCast’s market capitalization dropped to less than $5 million.
“The massive fraud perpetrated by Chan destroyed hundreds of millions of dollars in market value, and Jiang’s brazen insider trading allowed him to profit by dumping his own shares on the market before the fraud was exposed,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.
According to the SEC’s complaint filed in federal court in Manhattan, ChinaCast entered the U.S. capital markets through a reverse merger in December 2006, and its common stock was listed on the NASDAQ from Oct. 29, 2007 to June 25, 2012. ChinaCast conducted multiple public stock offerings in the U.S., with the second one occurring in December 2009 when ChinaCast represented that the proceeds would be used for “working capital, future acquisitions, and general corporate purposes.” Chan instead directed and engaged in the transactions that moved investor funds outside ChinaCast’s corporate structure for his personal benefit. He did so without seeking or obtaining the approval of ChinaCast’s board of directors, and the transactions were not publicly disclosed until ChinaCast’s new management prompted the company to file a Form 8-K on Dec. 21, 2012, disclosing Chan’s misconduct.
The SEC alleges that ChinaCast falsely stated in multiple SEC filings signed by Chan that the company indirectly owned 98.5 percent of ChinaCast Technology (HK) Limited – the purported subsidiary to which Chan first transferred investor funds. However, ChinaCast actually held only an indirect 49.2 percent interest while Chan personally owned 50 percent. Chan also signed a number of periodic reports falsely stating that offering proceeds were under ChinaCast’s control and falsely including those funds in amounts that ChinaCast reported as cash and cash equivalents. Chan also defrauded shareholders and prospective investors by secretly pledging ChinaCast’s existing term cash deposits as collateral to secure debts incurred by various third parties that had nothing to do with ChinaCast’s business. Chan signed periodic reports falsely stating that ChinaCast’s cash and cash equivalents were completely unencumbered.
“Chan orchestrated the systematic looting of ChinaCast and hid his misconduct by repeatedly lying to investors about the company’s assets until he lost control of the board and was terminated,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York office. “Officers and directors who misuse their access to the U.S. capital markets will be held accountable for their insidious behavior.”
According to the SEC’s complaint, Jiang was a member of the senior management group headed by Chan. Jiang engaged in illegal trading based on inside information by selling his shares on March 28, 2012, at $4.59 per share. After Chan’s management group lost control of the board, they transferred ownership of ChinaCast’s three profitable brick-and-mortar colleges away from ChinaCast to Jiang and the dean of one of the colleges. They were later sold to others. At least one of the colleges was transferred to Jiang and the dean three weeks before Jiang’s March 28 stock sale. Jiang was terminated on March 29, and NASDAQ suspended trading in ChinaCast on April 2 due to its failure to file an annual report for 2011. ChinaCast was later delisted. When over-the-counter trading resumed on June 25 after multiple disclosures made by new management about former management’s misconduct, the stock opened at 55 cents per share and closed at 82 cents. ChinaCast’s stock is currently trading at 10 cents per share.
Chan is charged with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as violations of various corporate reporting, recordkeeping, and internal controls provisions. Jiang is charged with illegal insider trading in violations of the same antifraud provisions. The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, permanent injunctions, and officer-and-director bars.
The SEC’s investigation, which is continuing, has been conducted by Dominick Barbieri and George Stepaniuk in the SEC’s New York office. The SEC’s litigation will be led by Nancy Brown. Assisting in the investigation was the SEC’s Cross Border Working Group, which has representatives from each of the agency’s major divisions and offices and focuses on U.S. companies with substantial foreign operations.
PACT offer expired
Binding Offer Expiry Date. The Proposal will be effective until 5:00 p.m. Hong Kong time on September 23, 2013, after which we would reserve the right to withdraw the Proposal, which we would notify you in writing, unless the terms outlined in the Proposal are accepted or otherwise agreed.
May explain the weakness in recent days. Given the leisurely pace at which these mergers progress, it seems strange that BX put a 10-day limit on their proposal as if they were bidding on a Manhattan condo. I guess right now the binding proposal has expired, but has not been withdrawn.
KEYP: If you exclude the Apax Partners shares (Dragon State) from the float then the public shares are only 4.8mm
CIS: SCMP article has interesting theory that the price bump was due to a competing bid.
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Camelot raises buyout offer, de-listing looms
Software outsourcing firm Camelot Information Systems (NYSE: CIS) has quietly raised the value of its management-led buyout offer, as it nears its ultimate goal of going private due to lack of interest from Wall Street investors. Even with the increased offer, Camelot is still just worth just under $100 million (HK$775 million), a tiny fraction of what it was once worth when investors were much more bullish on the company and China's software outsourcing sector in general. The looming de-listing also comes just a week after Pactera (Nasdaq: PACT), one of China's only other major publicly traded IT outsourcing firms, said a group seeking to buy the company had lowered its bid due to weakening outlook.
From an industry-specific perspective, these latest developments show that China's software outsourcing sector is sorely in need of consolidation, as most individual players remain too small to compete with global rivals like India's Infosys (Mumbai: INFY) and US giant Accenture (NYSE: ACN). From a bigger perspective, this latest move could indicate that the recent wave of buyouts of US-listed Chinese firms could be starting to wrap up, as many of the weaker players with cloudier prospects have now left the market.
I'm personally a bit surprised that investors weren't more excited about the raised bid for Camelot, as it hints at a behind-the-scenes bidding war for the company. A source had previously told me that China-listed Beyondsoft (Shenzhen: 002649), one of China's more successful players in the sector, had expressed an interest in buying Camelot, even though nothing was ever publicly confirmed.
Camelot's American Depositary Shares (ADS) jumped 0.5 per cent to $1.91 (HK$14.8) after it announced the raised offer late last week. The company had previously received a management buyout offer in March at $1.85 (HK$14.3) per ADS, but has now announced it has entered into an official merger agreement at $2.05 (HK$15.9) per ADS, representing a 10 per cent increase over the previous offer.
I suspect the offer was raised in response to interest from one or more rival bidders, perhaps including Beyondsoft, reflecting Camelot's low valuation. The company's ADSs once traded as high as $25 (HK$194), valuing Camelot at more than $1 billion (HK$7.75 billion) at its height. But interest in the sector has faded, as companies like Pactera and Camelot failed to achieve the strong growth that many had previously hoped for due to their small size and stiff competition from other global rivals.
Pactera itself is the result of a merger last year between two relatively big players, VanceInfo and HiSoft. But clearly this industry is in need of greater consolidation, which could finally start to occur once Camelot and Pactera are no longer publicly listed. Last week, Pactera announced that a group led by private equity firm Blackstone (NYSE: BX) had lowered its previous buyout offer for the company by seven per cent due to the company's weakening outlook. If that deal moves forward, I would expect to see Blackstone ultimately sell Pactera to another rival, either Chinese or foreign, within the next two years.
From a larger perspective, the Camelot and Pactera deals are part of a broader wave of privatizations of US-listed Chinese firms that have been announced over the last year. Most of those deals took place in weaker sectors like IT outsourcing, education and hotels, where growth potential is limited due in large part of a high degree of fragmentation. While we could still see a few more privatizations before the current wave subsides, I do think the biggest part of the wave has already passed, clearing many smaller and weaker companies from the market.
Bottom line: Camelot is likely to privatize at a new, raised buyout offer, as the recent wave of buyouts for US-listed Chinese firms starts to taper.
HGSH: Well-done hit piece on SA
Stock is available at IB at a 57% borrow rate.
ACTS: Even if they make a great product, intense competition means that the customers are the beneficiaries rather than the chip firms. Inside ownership here is too low for management to care about shareholder value.
LLEN: It might be a long wait for news now.
LLEN: LLame company reply
Very similar to Longwei's response
And quite different from Orient Paper's detailed rebuttal which the company followed up with a $2mm independent investigation
Will L&L be trading tomorrow? Seems like it should be T12 unless the company can put together a better response before the open.
LLEN: Yeah, there were only a few hours to get out of LPIH before it halted for two and a half months.
Coal and Ag companies seem to have elevated fraud risk.
LLEN: Full GEO report now available on SA Link
LLEN: GEO Email (I think this is free distribution - I am not reprinting the full report available only to subscribers)
L&L Energy (LLEN) purports to be an American company engaged in producing, processing, and selling coal in the People's Republic of China with vertically-integrated operations that include mining, washing, wholesale, and distribution. GeoInvesting is preparing to file a whistle-blower report to the NASDAQ and SEC that will accuse L&L Energy of defrauding investors by booking substantial revenue from operations that have been idled for quite some time. GeoInvesting also believes that LLEN's string of acquisitions and divestitures of various properties over the last few years amounts to a bait and switch shell game where it claimed to come into possession of assets through swap transactions that never occurred through the exchange of assets it never owned in the first place. Most notably, we will show that revenue of $77.6 million disclosed in LLEN's 2013 10K, generated from its Hong Xing coal washing factory, was actually close to zero, if it is not actually zero. We are short LLEN, plan to continue to short, and have and will be active in the options market.
Since March 2010 GeoInvesting has exposed some of the most notorious U.S. Listed Chinese company (ChinaHybrid) frauds, including six that resulted in de-listings from major exchanges. Our most recent comprehensive exposé, Longwei Petroleum - "The Most Brazen China-Based U.S. Listed RTO Fraud to Date", published on January 3, 2013 resulted in an immediate trading halt and eventual delisting of Longwei (LPIH.OB). The stock was trading at around $2.20 at the time of our report and now trades for just pennies.
We rank LLEN as bad as or worse than LPIH based on our findings. We are assembling all of our evidence (including all of our videos/audio evidence and transcripts) to present to NASDAQ and SEC.
Background
On August 2, 2011 Glaucus Research issued a report regarding LLEN's ownership of the DaPuAn mine, SuTsong mine, Hong Xing coal washing facility and others.
On January 13, 2012 we first informed investors that LLEN did not own the Ping Yi mine, which LLEN claimed to have owned and acquired for $4 million. We disproved LLEN's ownership claims using SAIC filings, web postings, public articles in China, and a video interview of the legal representative of the Ping Yi mine. Instead of fully addressing our findings regarding the Ping Yi mine, on May 4, 2012, LLEN conveniently claimed it reached an "agreement" to sell the mine back to the "original owners" in exchange for future shipments of coal and future use of the mine's coal washing facility. Hence it is clear to us that LLEN was able to report questionable revenues and earnings from the Ping Yi mine up until its ownership was effectively challenged and then conveniently disposed of the mine to avoid further debate. As our investigation will show, LLEN has now conducted a series of similar such questionable acquisitions and divestitures, inflating revenues and earnings from various questionable properties that are acquired and then somehow profitably disposed before the truth and real performance is exposed.
Summary of Findings
Revenue Misrepresentation
LLEN's Hong Xing Coal Washing Factory, accounting for 39% of fiscal 2013 revenues, has been shut down since 2012,according to interviews conducted in July 2013 by GeoInvesting investigators with the only remaining staff on site as well as local residents.
Hong Xing did not file or pay any taxes to the Shizong County Local Tax Bureau since June 2012, and paid minimal taxes to the Bureau in the first half of 2012, according to our research.
On July 31, 2013, the LLEN management team falsely claimed in its fiscal 2013 earnings conference call "…we've been trending up modestly on the coal washing side." However, twenty days later, on August 19, 2013, LLEN announced in a press release: "L&L to Dispose Hong Xing Washing Facility." GeoInvesting believes that LLEN's abrupt decision to dispose of its purportedly profitable and growing coal washing operation was triggered by LLEN's discovery of our ongoing investigation.
Similar to Hong Xing, LLEN's purportedly revenue producing ZoneLin Coking Plant was shuttered and demolished a few months prior to LLEN's claimed $12.4M sale/exchange of ZoneLin Coking Plant to Union Energy, according to interviews with local residents, workers, and a government official. (see below)
The government mandated decision to shut down the ZoneLin Coking Plant was first issued on June 6, 2012. On September 10, 2012 the demolition was scheduled.Acquisition/Ownership Misrepresentation
LLEN does not own the Hong Xing Coal Washing Factory according to officially chopped (sealed) SAIC records.
Officially chopped SAIC filings show that neither Union Energy nor LLEN own the DaPing mine and ZoneLin Coking Plant.The demolition of the ZoneLin Coking Plant prior to its alleged swap to Union Energy casts doubt on LLEN's acquisition of the LuoZhou and LaShu mines. LLEN claims that it acquired the LuoZhou and LaShu mines from Union Energy through a November 19, 2012 "asset swap" transaction, whereby LLEN exchanged its 98% interest in the ZoneLin Coking Plant and its 60% interest in the DaPing mine for Union Energy's 95% interests in the LuoZhou and LaShu mines. We find it highly implausible that Union Energy would want to acquire the ZoneLin Coking Plant, valued by LLEN at $12.4 million, when the ZoneLin Coking Plant was in the process of being torn down.
The Chinese government assigned the right to consolidate the DaPing mine to another company (not Union Energy).According to local residents, Union Energy never acquired LLEN's 60% interest in the DaPing mine.In addition to the above findings, we have referenced multiple pieces of evidence that have led us to conclude that the asset swap deal never occurred and that LLEN did not acquire, nor does it today own the LuoZhou and LaShu mines. Our evidence includes:
Current SAIC filings show that Union Energy owns the LuoZhou and LaShu mines. These SAIC filings have the official chop (seal) of the Guizhou SAIC.
Interviews of Union Energy management who all repeatedly assert that, while they are familiar with LLEN, Union Energy, not LLEN, is the owner of the LuoZhou and LaShu mines. Interviews with multiple LuoZhou and LaShu mine employees further confirm Union Energy's ownership and complete control over the day to day operations and coal sales.
Articles in local PRC newspapers and official government websites clearly show that Union Energy, not LLEN, acquired and owns the LaShu and LuoZhou mines.
Signage apparently recently erected at both mines bears Union Energy's name, not LLEN's.
Union Energy's participation in the Guizhou provincial mine consolidation process is ongoing and well documented. Union Energy was assigned to acquire the LuoZhou and LaShu mines in March 2013 and just finalized the acquisition of mining rights for both mines in August 2013.
The nominee who claimed to hold LLEN's equity ownership in the DaPuAn mine and SuTsong mine is an individual who appears not to exist.
LLEN made a misrepresentative statement regarding the legal status of the DaPuAn mine and SuTsong mine.
Our findings greatly help explain LLEN's complete lack of free cash flow and inability to service its accounts payable resulting in a $4,983,075 highly dilutive debt for equity exchange arrangement after creditors sued LLEN in the Superior Court of the State of California for the County of Los Angeles Central District. Most importantly, $800,000 of the dilutive issuance resulted from the exchange of obligations owed to Dickson Lee, LLEN's chairman. Effectively, Dickson Lee indirectly sued his own company and disclosed this fact only after reaching the settlement that occurred on August 14, 2013 and was buried in the proxy statement issued on August 16, 2013.
Like we did with LPIH, GeoInvesting is turning over all of its evidence to NASDAQ and the SEC.
LLEN: Worse than LPIH, according to new GEO report
CIS Increased Offer Link
PACT cut its buyout price by 7%
CIS raised its price by 11%
What will ISS do?
SUTR: Great report, but it looked like there were some lucky guessers in recent days.
Re: ZX
They paid in a dividend in 2012, but not 2013. They say it was due to weak truck market and heavy capex plans. They say they plan to resume dividends in the future.
SA is going to put the article behind their paywall after 30 days so save a copy if you like it.
Re: XNY
Yes, they are still interested in building a production plant. It could be a good idea.
The IPO prospectus explains that until 2006 the company was an OEM making clothes for other brands so the management team has years of experience on that side of the business.
The article mentions the other advantages. Increased control over design and quality. Increased margins. Ability to fill re-orders.
The McKinsey study linked in the article forecasts huge growth in XNY's target market over the next ten years. Given that growth opportunity, investment in business expansion makes sense.
My understanding is that construction of the facility is being held up by provincial land use policy. Local authorities have allocated the land, but the province has a % allocation limit of total land area to industrial vs agricultural usage. If/when that limit is raised then the industrial park where XNY wants to build will be developed.
The company cited a figure on a conference call (might have been $94mm) for the manufacturing facility. Only a portion (less than half?) is for PP&E. The remainder is the increased working capital requirement from holding materials and inventory.
The headline use of $94mm is a bit intimidating, but the details seem to make sense for the business.
XNY Article: Link
ZA: bad outlook balanced by statement that company hopes to be able to announce shareholder value action (dividend or buyback) with 3Q call (November)
NCTY: Merrill comments
Pending the real test in the
Chinese market
?? Overseas launch schedule on track; FF Chinese launch in 14
The9 provided more detail about the launch schedule of its games in its 1H13
analyst call. Firefall, developed by its acquired US studio Red5, started open beta
testing in US and Europe in 2Q13, in line with our expectation. But the company
has not kicked off major marketing campaigns, as it revises the game according
to user feedback. Planetside 2, which The9 licensed from Sony, was also under
testing in China, again in line with our expectation. The company indicated some
hacking issues that the team is working to fix. The real test: the Chinese launch of
Firefall, which is key to our assumption of a turnaround, is scheduled to be in
2014. The9 was running at an average quarterly operating loss of RMB136m in
1H13, narrowed from an average of RMB148m in 2012.
Overseas operating costs, including amortization of Firefall’s development costs,
are larger than our former expectations. In addition, there was a US$32m
impairment charge in 2Q13. As a result, we model a larger 2013E loss and lower
our 2014E EPS by 20%, to US$0.57. Hence, our PO is lowered to US$3.1, based
on the same 6x 2014E EPS and a 10% discount rate to make it comparable to the
2013E PE. Upside risks include a strong performance of Firefall in China and
special dividends.
1H13: overseas FF, webgames offset by maturing old games
1H13 revenue of RMB47m was down from RMB53m in 2H12 and RMB110m, as
the contribution from Firefall in US and Europe and a new webgame was offset by
the decline in its key game ShenXianZhuan. The net loss of RMB282m was
similar to that of 2H12, but bigger than RMB229m in 1H12. The9 had 4
webgames under operation and plans to launch another 2 in 2H13. It is also
launching its first mobile game in 3Q13. But we expect limited scale of mobile
revenue in 2014E.
Re: VNET
Timing seem strange with the stock at a nearly a 2 year high and an aggressive capex plan.
I wouldn't be surprised if they issue more stock over the next 12 months than they repurchase.
China Finance: What makes a company short-selling resistant? Link
After a couple of years of short-seller attacks, we’ve seen a number of stocks crash under the pressure of allegations. However, we’ve also seen companies take the initial hit, respond with strength and bounce right back perhaps, if nothing else, demonstrating the inherent bias that can flavour a short-seller report.
Finding the companies that are short-resistant is all about doing your own due diligence in the same manner as a shortseller would, and that starts with looking through the financial statements.
This is where shortsellers would start, and it’s where you should start as well. What you’re looking for is usually not something entirely specific - most shortsellers talk about claims made by companies that simply defy reason. What they claim has happened is that investors have been duped by the “China” tag on the company into believing that impossible claims are actually credible. At times these claims have been substantiated, at others they haven’t, but the starting point always appears to be the same.
Now, looking for gravity-defying claims in general isn’t very useful as a strategy for the regular investor, especially if you lack the experience that the shortsellers have on their side. So we’ll be creating a bit of a shortlist, based largely on what claims shortsellers have been making in the past. None of these are proof of fraud or irregularities, but they are common red flags with a proven track record.
Margins
Top of the list for early signs are incredible margins. Some companies have been reporting margins well above what any of their competitors are able to achieve. This case becomes especially strong when we look at smaller companies operating in commodities businesses.
For instance we’ve seen companies operating in the oil business and agriculture showing margins well above the norm, even when logic would suggest they should be under considerable pressure from their bigger competitors. The big questions here is if the story for how these margins are achieved is believable, and by extension if there’s any way for investors to check the credibility of these claims.
Accounts receivables
Accounts receivables is one of the true classics of the red flags. It’s been used a lot and has shown itself to be pretty open to manipulation, especially as you can hide things for years in overdue accounts, or try to roll the whole thing over. There are a couple of things to look for here that can guide your further work.
If the growth in AR outpaces the growth in sales, we could be looking at something worrying. This implies one of two things, either there is an aggressive sales pattern of giving your clients more credit to increase your sales, or it’s being used to beef up sales figures.
While the first one certainly does happen in the normal course of business, giving extra lines of credit especially to SMEs in China comes with a good amount of risk at present, and there have been claims of things bought on credit being used to secure other loans as well, so even this is a worrying development. Interesting examples I’ve seen in some companies along these lines have been the entire increase in sales being exceeded by the increase in AR dollar for dollar, which while not proving anything would seem very aggressive.
A second thing to look out for is allowance for doubtful accounts, or more specifically lack thereof. Firstly, this is a very aggressive accounting policy that seems ill advised for getting an accurate picture of the company’s finances. More importantly a lack of write-downs means your potentially non-existent AR accounts don’t disappear, thus potentially perpetually beefing up your balance sheet.
Cash
So, if you have extraordinary margins created by AR that doesn’t exist, you will also normally have a big cash position that might not actually exist. Looking at a cash position, the big question is really if it’s outsized, and if it’s outsized, why isn’t it being used.
Cash is normally a safe position because it’s relatively easy to audit, but as we saw with long top financial, it isn’t always quite as straightforward in China. Faked cash confirmations have happened, and it’s actually considered relatively tricky to audit.
As I’ve stated previously, one of the hallmarks of a fake cash position is that fake cash is notoriously hard to spend. So a huge cash position just sitting there, while the company is securing loan financing for expansion should raise questions.
Acquisitions
One way that seems to have been used to get rid of non-existent cash has been M&A transactions, especially if the acquired party has some link to the company or its owners. What essentially happens here is that the company “overpays” for the acquisition, thus getting faked money off the balance sheet.
A series of relatively small acquisitions containing a lot of goodwill is a red flag, and something which leads us to our next topic.
Goodwill
Goodwill and other soft positions on the balance sheet are always open to interpretation, so it’s sometimes hard to just say that something is wrong. But because it is a bit of a wild card, companies should also be aware that it raises red flags, especially when you saw an explosion of goodwill and AR bolstering a balance sheet, as we did in the China Minzhong case. While China Minzhong may have many good reasons as to why this happened, it certainly shouldn’t be surprised that it will have raised some eyebrows.
The problem with short reports that focus mostly on these positions is that they’re almost as hard to judge as the position itself. Sure you can argue the value of an acquisition or a patent, but unless you can offer up a strong case based on other evidence you’re really peddling opinion and conjecture.
Insider dealings
Finally, a good thing to look at is what the owners of the company are doing. Are they selling off shares, or not participating in a new issuance of shares? Are they starting, or involved in competing businesses? These are issues that should be looked into.
If the company has a VIE, these issues take on a new importance, as the alignment of interest between the VIE equity holders and the listed company could be jeopardised from any of these disruptions. The potential negative results from it could also be far worse.
However, in the more general sense, what we’re looking at here is if management is staying committed to the company, and if its shareholding is decreasing we would certainly want to know why. This is especially true if it's involved in a lot of companies who are in business with the listed company, so checking related party transactions is also key in this.
Conclusions
If we’re investing in smaller Chinese companies we want to make sure that we check out all of our investments to make sure they're short-report resilient. Checking these key tenets, that have been the starting point of many short reports is a good place to start, although it’s not conclusive.
If there are no issues in these areas with a company, hopefully it looks pretty sound, even to shortsellers, and as such we might feel more secure in these investments. If there are issues here, that doesn’t mean we have to stay away, it simply means we need to look deeper to find out if it’s a viable option.
CHC: IMO this has the best risk/reward of the current arb plays. Amazing to me that it traded under $2.50 this morning.
Amit invested in this company even before the IPO so he knows everything about the business very well. He bought out two other major shareholders in the past year.
My guess is that he's going to take it private, bring in new equity and financial partners, grow the business, and then relist it in Asia. Last year he told me he's looking to realize fair value on a 3-7 year horizon.
CHC Buyout offer Link
On September 4, 2013, the Reporting Persons submitted a preliminary, non-binding letter (the “Letter”) to the board of directors of the Company (the “Board”). In the Letter, the Reporting Persons outlined their proposal (“Proposal”) to acquire all of the outstanding share capital of the Company through a going-private transaction (the “Transaction”) other than those shares beneficially owned by the Reporting Persons (the “NewQuest Shares”) or that will be rolled over by other shareholders in connection with the Transaction. Under the Proposal, the Reporting Persons propose to acquire all of the outstanding share capital of the Company (other than the NewQuest Shares, which will be rolled over in connection with the Transaction, and any other shares that will be rolled over in connection with the Transaction) for US$2.97 in cash per ADS, or US$0.99 in cash per Ordinary Share
Re: ZA
Phillip Ventures is part of a prominent Singaporean merchant bank (Link)
XNY answers SEC questions Link
Routine stuff, but the company provided a very detailed explanation about audit procedures.
MY: citi research report estimates that domestic market share increased from 8.7% in 2012 to 10.2% in 1H13 and that the company is now China's third largest producer.
WH: Short Interest at 8/15 only 8627 shares Link
So the heavy selling after those Seekingalpha pieces was mostly panicky capitulation by former longs.
Winner Medical Class Action Lawsuit Settlement
Got a notice in the mail. The terms of the settlement are that the company filed additional proxy disclosures for its 2012 buyout. No extra cash for shareholders, but the lawyers will get paid $420000.
Re: DHRM
Earnings on Monday.
My guess is that SEC reporting and regular press releases produce intangible benefits in keeping them more visible and transparent to international business partners.
JST: Graduating out of scam valuation
Transformers business strength might be a signal about overall industrial development in China