More Great Commnication from the VP of IR.
This company is for real folks, when this is trading up above $5.72, (FMV) anyone not buying at these levels will be really saying WHY DID I NOT....I try to add a little everyday, up over 23K in my personal port. GLTA!
On 05/03/12, Steve Ross<SRoss@mtncapital.com> wrote:
Michael,
I appreciate your continued support of Longhai. I’m not sure exactly how to respond to the concern raised in the article though. While it’s true that Chinese public companies must utilize a VIE structure in order to list as a US public entity, that is an entirely different consideration from fraudulent conduct (which is certainly not unique to Chinese companies). In Longhai’s case, we have adopted world class standards of corporate governance and transparency, and I have personally been to the operation three times since I agreed to join. Four of our five Board members, and all three Independents, are US citizens with substantial public company experience. Our legal and accounting firms are among the best and highest regarded practicing in China, and we secured underwriting for D&O coverage through a top tier Lloyd’s syndicate. All of this should give investors confidence in Longhai’s transparency and accountability, and confidence in our results.
Best,
Steve
From: xxxxxx@verizon.net [mailto:xxxxxxx@verizon.net]
Sent: Thursday, May 03, 2012 7:29 AM
To: Steve Ross
Subject: Re: Longhai
Hi Steve:
Glad to hear the trip went well and that you can get the first 1/4 numbers out early. We really need some game changing releases here. I keep adding bit by bit to my posision, now 23K shares, but really need some confidence, especially since the stock trades at .98 a share and it earns 1.12 a share, that makes it look like something smells really bad. Plus, I got this fom the NY Times... Can you please read and give me some added confidence as to why Longhai is legit and wouldnt fall into this profile? Thanks again Steve!
Fraud Heightens Jeopardy of Investing in Chinese Companies
By STEVEN M. DAVIDOFF
DealBook
New York Times
April 24, 2012, 5:40 pm
dealbook.nytimes.com/2012/04/24/fraud-heightens-jeopardy-of-investing-in-chinese-companies/?smid=tw-nytimesdealbook&seid=auto
You might think that if you bought shares of a Chinese company that was listed on an American stock market, you would actually own a piece of that company.
Unfortunately, it is not that simple. The recent cases of the ChinaCast Education Corporation and the Sino-Forest Corporation show that in many instances, foreign investors in Chinese companies might have bought shares that don’t really represent much. It’s a problem that has the potential to extend to even the soundest Chinese company listed in the United States.
The ChinaCast case is not the most egregious, but it is certainly the most scandalous. In March, its chief executive, Ron Chan, was ousted in a battle for shareholder control of the company. An American investor succeeded not only in replacing Mr. Chan, but also in obtaining control of the ChinaCast board.
Yet that turned out to be only the beginning of the battle.
Last week, ChinaCast disclosed that it could not find its company seals, or authorized signatures, for its Chinese subsidiary. Seals are necessary for ChinaCast’s Chinese subsidiary to undertake any business in China. Without them, ChinaCast can’t sign contracts or even pay employees. In other words, China appears to have “Lord of the Rings” corporate governance — one seal to rule them all.
Mr. Chan was believed to have possession of them but now claims to know nothing.
Two of the universities owned by ChinaCast appear to have been transferred to ChinaCast’s former chief investment officer and president of its Chinese operations. And last week, according to the board, about a dozen people broke into the company’s Shanghai office and stole a number of documents and computers.
ChinaCast has a revolt on its hands that it is finding difficult to quell.
One reason that ChinaCast is having a problem is that shareholders did not actually buy an interest in its operations. Instead, to avoid Chinese restrictions on foreign investment, ChinaCast’s shareholders invested in a United States company that has contractual arrangements with a Chinese company. But the Chinese company remains in the ownership of Chinese citizens.
The problem with this structure, known as a variable interest entity, is that it may be illegal under Chinese law and has been criticized by Chinese regulators. Even if it is legal, if the Chinese owners decide to go rogue, the United States-listed entity must sue and obtain a judgment from a Chinese court to enforce these dubious contracts. Good luck with that. Such a litigation can take a long time to resolve, if ever.
In ChinaCast’s case, it can’t do anything until it has control of the corporate seals, but under Chinese law it needs them to sue to recover them. In the meantime, the operators of the Chinese subsidiary can take full advantage of the situation.
Unfortunately, ChinaCast is not the only Chinese company with dubious claims to its assets.
Sino-Forest, listed on the Toronto Stock Exchange, is the most prominent Chinese company to experience this problem. Last summer, Sino-Forest was accused by Muddy Waters Research of fraudulent accounting with respect to timber lands. At the time of the report, SinoForest had a $4 billion market capitalization.
A subsequent report by an independent committee of directors denied that there was a practice of fraud at the company, but also acknowledged that much of Sino-Forest’s property was held through a variable interest entity, or otherwise under contractual rights without an actual title.
Sino-Forest has filed for bankruptcy in Canada. Its assets far exceed its liabilities, but shareholders are likely to end up with nothing, in part because Sino-Forest’s rights to its assets are tenuous at best.
The variable interest entity structure may be the root of the problem when foreign investors own shares in Chinese companies, but it is only part of it. The norms for business are different in China, and enforcing legal contracts or rights is sometimes impossible. Legal title to assets is often not formalized, and even when it is, Chinese executives can use the lack of rule of law to take advantage of foreign shareholders.
Other disputes show that ownership of assets in China can be fleeting.
Yahoo got into a tussle with Jack Ma, the chairman and chief executive of the Alibaba Group, in which Yahoo has a substantial interest, when he transferred Alibaba’s online payment platform, Alipay, to a private company controlled by him. Mr. Ma and Yahoo eventually resolved their disputes, but the transfer was a warning sign that Mr. Ma was willing to take all steps to ensure that the only buyers for Yahoo’s Chinese assets were Mr. Ma and his co-investors.
In the case of Nasdaq-listed GigaMedia, a Singapore-based online gaming company, it wasn’t the variable interest entity structure that did the company in. Instead, the head of its Chinese business simply made off with the seals for GigaMedia’s Chinese company and transferred ownership of the assets. GigaMedia appears to have given up on getting the business back.
And it’s not just a few bad apples. At least 105 Chinese companies listed in the United States have been delisted, are under investigation or have financial problems, according to The Pittsburgh Tribune-Review.
Even when there is no suggestion of fraud, the wide use of the variable interest entity structure by Chinese companies listed on United States stock markets should trouble investors.
The structure is used by a number of prominent Chinese Internet companies including Ren-Ren, Baidu.com and Sohu.com. In most cases, the actual Chinese assets are held by the company’s executives. Ren-Ren’s Chinese assets, for example, are 99 percent owned by Ren-Ren’s founder and his wife. This puts these executives in prime position to fend off any challenges by foreign shareholders.
Investors seem to heed the warning signs only half-heartedly. The recent Chinese initial public offering of VIPshop and the pending I.P.O. of AdChina both use the variable interest entity structure. AdChina disclosed that if the parties controlling its Chinese operations “fail to perform their obligations under their agreements with us, we may have to rely on legal remedies” under People’s Republic of China law “which may not be effective.”
VIPshop’s I.P.O. had top-tier underwriters, including Goldman Sachs. But don’t depend on the underwriters to stick around to make sure that American shareholders can enforce their rights. After an I.P.O., the underwriters tend to disappear.
This is not just a problem of a questionable legal structure, but Wall Street’s apparent willingness to ignore the fact that investors in the United States have tenuous claims when they buy shares in Chinese companies. And underwriters and Chinese issuers have taken advantage of the hunger for Chinese stocks.
The Securities and Exchange Commission and Washington seem to be almost as absent. The S.E.C. just brought charges against one Chinese issuer, SinoTech Energy, claiming it overstated its assets. The regulator has issued a warning about investing in Chinese companies listed on American stock exchanges, but the conduct in the ChinaCast case appears to be outright fraud. The agency simply has not followed up aggressively in most of these cases, most likely because it is overwhelmed with other tasks. The United States government has also not pressed China to vigorously and quickly enforce its own laws to help American shareholders.
Here lies the ultimate lesson. An investment in Chinese companies is really an investment in the people who run these companies. While some, if not most, of these executives are well intentioned, there seems be a lot of suspicious activity out there. Even more so, when those executives are threatened, they can use the weak legal structures and rule of law to maintain control of their companies. And heaven forbid they should steal the seals.
For American investors, it may be that the risks are worth the potential gains in investing in China, but don’t say you haven’t been warned.
On 04/30/12, Steve Ross<SRoss@mtncapital.com> wrote:
Michael,
Sorry for the delayed response. I just arrived back from China last night. It was a great trip, and we mapped out our communications/IR strategy for the next 90 days. While I don’t know what will be accomplished this week, there are a number of very positive steps the company will be taking that should generate investor interest and build shareholder value. I’m sure you understand that it would not be appropriate for me to preannounce anything, but I can tell you that Longhai’s Chairman and Board are fully committed to our uplisting goal.
Our first quarter filing is due on May 15th, and I would expect that we will file a day or two early.
Best,
Steve
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