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Some more details on China's move to improve accountancy (Someone posted an article here a few days ago indicating they wanted international firms to use selected accountants). This article lists some acceptable ones, including the Big 4 and Grant-Thompson+BDO.
http://www.zdqh.com/article/en_article.php?aid=153221
"China moves to improve accountancy industry
June 27, 2011 5:40 am
By Simon Rabinovitch in Beijing
China has announced measures to consolidate its accountancy industry following a string of financial scandals that has shaken investors’ faith in Chinese companies listed abroad.
Large and medium-sized Chinese companies should choose from a small group of approved auditors, including the ‘Big Four’ accountancy firms – KPMG, Ernst & Young, PwC and Deloitte – the finance ministry said.
Sino-Forest, software company Longtop and China Agritech are just some of the dozens of Chinese companies that have been targeted in recent months by short-sellers alleging that auditors had failed to notice fraud on their books.
The new government guidelines did not appear to be a direct response to those problems, but rather part of a reform effort dating back to 2009 to improve Chinese auditing standards and increase the scale of national accounting firms. China has a bevy of small accounting firms, which, in their pursuit of business, often succumb to client bullying.
Chinese companies with foreign listings – as well as those in finance, energy, communication and the military sectors – should choose auditors with established reputations and international-calibre skills, the finance ministry said.
“This is the necessary choice for our nation’s firms as they try to get bigger and strengthen themselves in going abroad, improving the quality of their accounting information and gaining the approval of international capital markets,” it said.
It added that companies should use one of the 12 firms approved to conduct auditing for Chinese companies listed in Hong Kong. Along with the Big Four, smaller global accounting firms such as Grant Thornton and BDO and a few of the leading Chinese accounting firms are on the list."
-Fernando
CCCL: Alot of the activity seems to come from the west coast, so we should see more buyers/sellers appear a bit later.
-Fernando
Out of curiosity, why would you pick FRO over NNA? Both use VLCC and product tankers...From an evaluation/dividend/etc perspective, I find NNA much more attractive (I just spent 2 minutes looking over FRO)... Given NNA bought all its ships in late 2010, I know their asset values on the books are 'close' to current market reality -- No idea with regards to FRO.
Would be glad to hear an argument of why FRO over NNA :).
-Fernando
It is almost always the role of the audit committee to check into such allegations -- Which is one reason the audit committee is comprised of independent directors.
The fact that the audit committee, on behalf of the company it is a part of, is the one doing this is nothing but expected and normal behavior. Certainly not a 'red flag' as you are seeming to imply by saying it was not CCME who hired Piper.
Thats like having a committee in the US congress start an investigation of some ethics violation and then someone saying congress is not the one doing the investigation. Just a bit silly as an argument, IMO.
Ah well, i'll stop arguing this with you. I don't own any shares so why should I debate this, lol.
-Fernando
You argue about who hired DLA Piper, but really, who is PAYING DLA Piper is the better question -- and that is CCME. The Audit committee is acting on behalf of the company, in their roles as directors, by hiring the lawyers -- Although it certainly might serve a dual purpose of helping protect directors from lawsuits since they are 'investigating the issues' and not ignoring them. CCME is the one paying the lawyers and this was all announced in a CCME press release.
Arguing that the audit committee being the one to retain the law firm does not mean the *company* did it is silly, IMO. The Audit Committee is part of the company, if the members wanted to hire lawyers individually (not connected to the company) they would have not done so through the committee structure.
Your correct to say that we do not know the extent of DLA Piper (and PWC)'s current involvement and activities. We have never been explicitly told 'forensic audit' in writing. So assuming that is certainly speculation -- Perhaps reasonable speculation but speculation nevertheless.
I get the feeling you are dissecting every single word said by the company and ripping the sentences apart. We were not given pages of detailed information, simply a few very short sentences -- Thus any reasonable interpretation will involve speculation and the corresponding uncertainty involved with that speculation.
-Fernando
Actually they are just starting the ADR, at least from what I saw on their website (Sometime in April).
http://www.minerva.ind.br/aspx/Default.aspx
http://www.minerva.ind.br/ir/index.htm -- This one is in English
http://www.mzweb.com.br/minerva/web/arquivos/BEEF3_ADR_07Abr11_ENG.pdf -- This is about their ADR program.
About buying on the Bovespa, ask your broker... Personally I use accounts i've set up in Brazilian brokerages but non-citizens might have trouble doing that.
-Fernando
Someone asked me awhile back about Brazilian Agricultural companies and I replied they were all too expensive...Well, I have one on my radar that has had a big pullback -- Its called Minerva and symbol is BEEF3.sa. As implied by the name, they raise/sell beef ;).
Its had a major pullback and is now trading right about book value. Currently at a TTM P/E of about 8 but they have only been operating at a low 70% utilization the past three quarters (acquisition, expansions, etc all starting to ramp up now) -- Before last 3 quarters, utilization was 80%-90%. With a 500M reais market cap, 300M reais EBITDA and utilization ramping up -- I can easily see the forward P/E being like 6.
They have a decent chunk of debt but the repayment schedule is pretty light for many many years.
I do not own this stock at this point, but am watching it carefully. If the pullback continues I may nibble...But its one of the more reasonably priced agriculture related stocks i've seen in Brazil.
-Fernando
Hey, your preferred shares got dividends right? :P! Shows they are able to get money out of China if they want to, hehe.
Personally though, I want them to make the acquisition -- I'd rather they spend on that versus buybacks or dividends given the metrics for the acquisition.
This type of business SHOULD pay a dividend though, a solid 10-15% of NI would allow them to keep growing and provide plenty of credibility over time. The impact of such a small dividend-commitment on growth would not be that large -- Plus it would enable them to actually RAISE capital for acquisition at decent multiples versus having to do it all organically.
-Fernando
Note: I do not currently own LPH, sold on that big spike.
UTA will almost certainly be the first one since they got their 10-K out already -- The rest should be easy after passing that hurdle.
-Fernando
CHBT: a VERY detailed description of events by BDO here -- http://geoinvesting.com/companies/chbt_china_biotics/filings
Look at document 2 of the top 8-K.
-Fernando
Article on China Rail: http://finance.yahoo.com/news/HighSpeed-Rail-Poised-to-nytimes-1677776026.html?x=0
Most people really underestimate the long term positive impact of having such a system in place. People might complain about paying $51 for a fare in the new train versus $15 in the old one, but going from a 9 hour ride to a 2 hour ride is certainly worth the extra money for a heck of alot of people.
I wish the USA was spending one fourth as much on its own long-term infrastructure needs :(. Building towards the future, the lifeblood of an economy...
-Fernando
I'll be trading safely near my apartment in Rio De Janeiro, thank you very much...On the beach with a caipirinha in my hand.
I will, however, do a nightly prayer for all those people stuck in either China or the USA though! Poor non-dual citizens ;).
-Fernando
If there was war, some people might buy treasuries -- But we would also have an immense amount being sold by the Chinese flooding the world markets with US treasuries. Which way treasuries would go I think is unknown. If I was another country, I would not want either US or Chinese assets at all given the possibility of massive destruction -- From cities going poof to factories, etc. The US would need to spend gazzilians of dollars in such a war on top of its current fiscal problems, so the dollar printing machine would go out full-tilt too.
Every year I can see coming up will have our military budget get smaller in the US -- As our fiscal problems get worse. Every year I see China's military technology and military budget getting bigger (Even if it stays the same % of GDP, with GDP growth comes more military). Very soon they will have their own aircraft carriers contesting the seas as well.
China has plenty of nuclear weapons -- Can we stop them if they launch? I certainly would not want to be a ship if they launched some micro-nuke missile at our aircraft carrier groups. If we actually invaded, whats to stop them from using such weapons on US soil? Our ports are a joke, our mexican border is a joke. It would not be hard for them to sneak in WMD weapons into the country. What would we do, take all the MASSIVE number of Chinese in our country and put them in camps like we did the Japanese in the previous world war? This is assuming they can't just launch from the PRC and hit California/etc. I would not be surprised if China had some nuclear sub launch capability either.
There has never been all-out-war between two nuclear powers for a reason. Neither country can win such a battle. Skirmishes around the world I can see happening, but true all-out war where we invade the mainland of the other? No way in hell.
-Fernando
CCCL: Thats the nice thing about all the capex their doing and capacity expansion, we will see their YoY growth numbers get higher and higher as this year goes along.
I would be very surprised if the stock is lower than $4 by the time they report Q2 results personally -- People know the quarter will be strong and buyers will appear as we get closer to the results being announced.
This stock does not have high liquidity, so I have to agree with you that this is not really a short-term trading stock -- I'd only suggest buying it if you plan to invest in it or at the very least hold till Q2 results.
-Fernando
Maybe because they like some RTO's with a P/E of 2 and want to raise cash? (chuckle). They do seem to like SOKF...
-Fernando
CCCL: Great news to see them be the first (I think) company to release 2010 SAIC information :).
Chinese version:
Hengda SAIC: http://www.cceramics.com/images/2010_CN.pdf
Hengali SAIC: http://www.cceramics.com/images/Hengdali%202010%20SAIC%20report.pdf
Looks good.
-Fernando
Great article to improve your understanding of Chinese filings and accounting:
http://www.china-briefing.com/news/2011/02/07/analyzing-chinese-financial-reporting.html
I liked the example around N10, where sales revenue went from 16,991 to 38,676 when they did their 'post due diligence'...Hehe.
Also covers many areas where there are accounting differences from GAAP and reasons for why there may be differences (sometimes large) between filings.
-Fernando
EDS: Ummm, 160k shorts out of 19M total shares is not what i'd call a high short interest (chuckles).
I don't own EDS for other reasons, but its certainly not because of a high short position.
-Fernando
CNTF: Agreed, I wish I had bought shares at $3. I missed that short drop too :(. Woulda been the first time I owned shares (I really don't like the phone industry, lol, and I would only have bought based on the other segments).
-Fernando
CNTF: Yes there have been hit pieces against IPO's before. Not many but some. I expect more will follow in the months to come.
People are very afraid, it would not take a 'smoking gun' hitpiece to drop a stock 20-30% in one day...Unfortunately. IPO or not.
IMO CNTF will likely stabilize and trend back towards $4 now. It spiked up, got hit by shorting and profit-taking, then started going lower and went too far down on momentum...Thats a likely scenario, IMO.
-Fernando
TSTC: #3 Winner in China Unicom (ranked #2 in China and #9 in the world) WLAN open bid. Huawei which is the world's second-largest telecom equipment maker and China's largest telephone-network equipment makers ranked #6.
http://translate.google.com/translate?js=n&prev=_t&hl=en&ie=UTF-8&layout=2&eotf=1&sl=zh-CN&tl=en&u=http%3A%2F%2Fwww.cww.net.cn%2Fopera%2Fhtml%2F2011%2F6%2F21%2F201162103749490.htm
-Fernando
YONG article: http://www.bloomberg.com/news/2011-06-21/china-reverse-merger-pits-morgan-stanley-against-hedge-funds.html?cmpid=msnmoney
This was an interesting tidbit:
"Shares closed yesterday at $5.19, up 13 percent since the day before publication of the Absaroka report. Short selling has fallen to 3 percent of outstanding shares as of June 17 from a record 9.4 percent on April 4, according to Data Explorers, a New York-based research firm. The average short interest for stocks in the Standard & Poor’s 500 Index is 2.7 percent. "
Yowza's, if thats true we should see short-interest go way way way down when it is reported this Friday!
-Fernando
CNTF: You must agree that if short interest skyrockets to a significant percentage of the float, it makes it much more likely a hit piece will come out -- right? ;). Whether the piece is factual or not really won't matter, in this environment it would drop 30%+ when the piece came out.
So if you see people betting against your company, its time to start being careful -- Whether it is warranted by what you know or not. You need to consider what you DON'T know in such scenarios, unfortunately.
Some level of shorting is fine, given the sector weakness, but at some point it goes from 'sector weakness' to 'company specific' levels of shorting...Thats when you need to watch out.
-Fernando
FUQI: Rising from the ashes? Certainly does not look to be pulling a 'going dark' RINO ;).
http://finance.yahoo.com/news/FUQI-International-Announces-prnews-2851378091.html?x=0&.v=1
http://biz.yahoo.com/e/110621/fuqi.pk8-k.html
"FUQI International Announces Appointment of President and Chief Executive Officer
SHENZHEN, China, June 21, 2011 /PRNewswire-Asia/ -- FUQI International, Inc. (OTC Pink Ltd: FUQI.PK) today announced the appointment of Kim K. T. Pan as its President and Chief Executive Officer. Mr. Pan will work closely with Yu Kwai Chong, the Company's former Chief Executive Officer, who will continue to serve as the Company's Chairman of the Board.
"We are pleased that Kim will be joining the Company as President and CEO," stated Mr. Chong. "Kim brings tremendous knowledge and expertise as a seasoned executive. Kim's success lies in his strong values, strategic thinking, tactical execution and excellent track record of management and growth. His management style is based on developing high performance work teams, and making sure that everyone is connected, informed and aligned with the vision and values of the organization. His leadership and experience will be invaluable in guiding our growth and separating the roles of Chairman and CEO will have the important benefit of strengthening Fuqi's corporate governance practices."
Mr. Pan, who is fluent in English and Chinese, is a seasoned executive with more than 30 years of experience in management and financial operations, business development, and corporate governance. Mr. Pan has served as a director of Fuqi since October 2010. From 1999 to 2011, Mr. Pan has served as the President and as a member of the Board of Directors of Continental Carbon Company, a developer, manufacturer and marketer of carbon-related products. Prior to that, he served as its Executive Vice President and Chief Financial Officer. While at Continental Carbon Company, Mr. Pan was able to actively develop and execute operating and strategic plans to transform the company into a lean and focused organization able to effectively compete in the commodity chemicals market.
Mr. Pan received a B.S. in Electrical Engineering from the University of Texas, Austin, an M.S. in Electrical Engineering from the University of Wisconsin, Madison and an MBA in Finance from the Wharton School at the University of Pennsylvania.
"I am very excited to have the opportunity to join the Fuqi management team," said Mr. Pan. "I am honored to assume the leadership of Fuqi and look forward to working with the Board and management team to strengthen Fuqi's corporate governance and platform for future growth."
About FUQI International
Based in Shenzhen, China, FUQI International, Inc. is a leading designer, producer and seller of high quality precious metal jewelry in China. FUQI develops, promotes, manufactures and sells a broad range of products consisting of unique styles and designs made from gold and other precious metals such as platinum and Karat gold."
-Fernando
O/T: Brazilians will own Miami soon ;).
http://www.bloomberg.com/news/print/2011-06-21/brazilians-buy-miami-condos-at-bargain-prices-after-45-surge-in-currency.html
-Fernando
If we were introducing new concepts about the 'entire space', I would agree. But we are constantly rehashing concepts we already know without really adding anything into the discussion. Such conversations, IMO, simply clutter the board and distract us from talking about specific companies (and their events).
Your posts about how the 'Index' does daily is useful for example in that it gives a lot of new information each day.
A post that talks about an issue which every China stock has, which we all know quite well, or a post that generalizes something 'onto' every company in the space does not have nearly the same level of useful information content.
I would have no problem with people talking about a NEW event which impacts the space as a whole for example...At least until such discussion of this new event became over-explored and once again we reached the 'Oh god, not THAT topic again' reaction level :P.
-Fernando
I'll respectfully decline to list all of them since I am buying them slowly as they get cheaper :P...
I do own YONG and believe its risk/reward to be attractive.
I do own CCCL, and have said so publicly for awhile, and believe its risk/reward to be very attractive. I have little doubt their facilities are what they claim and that they earn their revenues. I find their gross margins believable given comparables I have seen, etc etc.
I have been buying more of both, very slowly, every week.
There are others I like alot, some I find attractive but am more uncertain about (These i'll nibble if they get insanely cheap, etc).
Let me clarify, I do not find potential tax-fraud, especially when a company was private, to be a reason not to consider it 'legit'. This is due to an understanding of it being very common practice in China (heck, in Brazil too!). I do find it a problem if it continues after a company has become public though -- Especially now that investors get SAIC/SAT documentation. Any company that has horribly off 2010 SAIC for example, i'll simply bypass going forward -- Since it shows they do not care to fix something that investors obviously take very seriously.
-Fernando
The discussion won't necessarily be killed, it will simply be SEPARATED into different boards. I have no problems with having space-wide discussions with Rato on the China Stocks board for example -- I'm just trying to establish that this board is not the place for that kind of thing. That board does not require premium membership to post, so hopefully we will also see more people contribute to such space-wide discussions.
Besides, I don't know why I waste time typing so much with Rato. I should just call him up and we can do it much quicker over the phone (laugh). Typing is alot more work than talking, especially at the speed Rato and I talk (chuckle). Its like two chipmunks going at it.
The funny thing is that when we talk on the phone, we aren't THAT far apart in our stances and interpretation of the current situation -- Where we tend to differ is in how we view the future.
I tend to make positive posts but heck, i've been net short the space for months now -- I just have a balanced perspective, where I am long some companies I like while being really short the ones I hate. I'm less net short now than I was three weeks ago though, at about net-zero exposure in fact... So far pretty much everything has been taking a hit, but I figure at some point the ones I like will outperform the ones I hate :). Thats the idea anyhow.
-Fernando
I'll also be deleting any posts asking 'why was this deleted and not that', etc. I have no desire to ban anybody since everybody can contribute worthwhile things -- and most do in fact (at one time or another).
Its simply a matter of not letting the dialogue get too far away from what this board is trying to accomplish -- Which is talk about and find attractive specific China smallcaps to buy OR short.
-Fernando
There are two effective discussion topics really: Fundamentals and CONFIDENCE level in those fundamentals (supported by DD, etc).
Even if fundamentals do not seem to be being given much weight right now, if someone has a longer timeframe such discussions could be very valuable. Shrug, I guess it won't matter to people who are flippers only of course.
I certainly use fundamentals to choose which companies are WORTH doing DD on. So fundamentals are where it all starts, then you verify that data with DD to establish a level of 'trust' in those fundy's being correct.
Of course, when evaluations are so cheap -- the 'trust' factor tends to overwhelm things. People might prefer a company with less solid fundamentals if they have a higher confidence in the company's trustworthiness.
So its really a matter of fundamentals, trust in fundamentals and evaluation ;).
-Fernando
Thats why I will be removing posts which contain space-wide comments from now on. Company-specific only things going forward please.
I should remove most of the posts I made today with Rato actually, since we were discussing things that we ALL know quite well already. There is no reason to re-hash space-wide issues over and over again.
So a note of warning: If you make a post and make space-wide comments, it WILL be removed regardless of the rest of the contents in the post.
(gets his eraser ready).
-Fernando
Chinese authorities have quite a bit of incentive: That of reputation. There has certainly been CONTAGION from the RTO space into the IPO space -- and that will simply continue. Its getting national-level television airtime for gods sake. It impacts how people and investors view China as a country. This is an embarrassment for them and I have little doubt there are wheels turning behind the scenes on this fraud issue and on accounting-practices in China. It will take time though, your right about that.
I'm off for the evening, laters everybody!
-Fernando
Its certainly dangerous -- Part of that risk-analysis I talked about. But once again, such risk can be compensated for with potential reward. It certainly contains an aspect of chance -- No doubt about that. Buying a company that invested in Russia had the same problem. Heck, you run that risk when you invest in some Latin American companies where the government may seize assets or change tax rules to unsustainable levels.
Personally I believe China is moving in the RIGHT direction with regards to things like this though. They are opening up their currency, they are expanding private markets, they are allowing foreign companies to list domestically soon via a new market...
Its slow and it has a long way to go but its improving IMO.
Part of the protection US investors have is that Chinese CEO's want access to our capital in the future. For this business and also for other business ventures in the future. If the company has real assets and is highly profitable, not respecting shareholder rights is a very short sighted thing for someone to do -- especially in a culture known for long-term planning. This gives some protection to investors. Why would companies continue to pay audit fees, IR, conferences, etc if they did not plan to support shareholders and be ABLE to raise money in the future? We would be seeing alot of companies go dark en-masse if such was their intention and they had given up on US shareholders.
-Fernando
BSPM: Of course, if the only fear was competition the stock would be a super-buy at this evaluation ;). Their growth has certainly been very solid -- even in the face of such competition.
Would be nice if someone did extensive DD on them to verify activity at their facility, sales, etc. Without some confidence that things are as they say, i'm not a buyer for sure though (even at $1.2).
-Fernando
These clowns definitely pull shenanigans, but that does not mean investors also have no claim. PUDA is one situation -- we will see if they do that LBO on it or not (I hope not since i'm still short shares, LOL).
XING/QXM there were no shenanigans AFAIK, the CEO made a great deal for himself with an acquisition when the stock price was super-low but that was a legal move (if not very shareholder friendly)... Its not like he did the deal below-market prices and the price for the acquisition was actually very reasonable. Its not his problem is shareholders allowed the price of the stock get so far below cash-on-hand.
This kind of problem exists for every Chinese company though, heck it existed for Russian assets too! Look at Yahoo and Alipay -- I bet you Yahoo gets value for that shenanigan.
Of course, with microcap companies the likelihood of such shenanigan being allowed to happen is higher than with larger companies like BIDU. The space certainly, no question about it, deserves a discount to 'fair value' based on this risk. But this risk has ALWAYS been there, it hasn't suddenly gotten worse in the last 2 years.
-Fernando
BSPM: So that answers my question about competition, thank you (Like I said, I haven't done in-depth DD on them for a long time specially since its a pharma company which I dislike based on industry alone).
-Fernando
BSPM: Do you know of any other SFDA approved OTC Hep B drug being sold in China thats not from that oleanolic capsule type? How effective are those drugs compared to oleanolic solutions?
Depending on the answers to those questions, that issue might really not be a functional-lie -- more like a 'We needed to simplify things into a single bullet point for presentations'.
-Fernando
BSPM: Agreed on the CFO thing, thats part of the reason I have not bought any -- Although if CFO's are so 'out of touch' with PRC businesses as many claim, I guess he could be innocent (laugh).
Regarding competitive advantage, there has always been debate about that. They got grandfathered in for OTC sales of their Hep B drug but only for that specific drug -- Which means they can advertise on TV which prescription drugs cannot do.
What exactly was their lie again? Was it a situation where they emphasized a 'small truth' without explaining the full situation? So a lie by omission maybe but without them saying anything untrue?
Regarding him being in the entourage, I saw a picture so he was there (Forget where I saw it, been a long time). No idea under what capacity -- Maybe China private-business representative since he owns a US-listed company?
-Fernando
BSPM: I don't own it...But it was at $1.8, then spiked to $3 on earnings and now its at $1.2. Its at a P/E of 2 -- Just like many other names I like more.
Does it have short interest? Not that I know. So why did it go down? Because longs got scared, NOT because shorts have conviction.
I am not a fan of the pharma sector, especially China pharma, thats why I don't own it(and haven't really done extensive DD on them). I forget, are they a VIE or FIE? I've never seen their filings but if they are a VIE then that means nothing (SAIC is only realiable for FIE structures, for VIE its usually not even audited -- Of course if you get a audited SAIC then it bears weight even with a VIE).
All I know is that BSPM is doing insider buys right now (not that much dollar wise) and the CEO was part of the entourage on the Premier's visit to the White House in 2010... So hes got lots of connections in the party.
-Fernando
Shorts coming in might have nothing to do with a hitpiece. TRIT fell from $12 to $7 based on nothing for example, aside from general China fear and higher-than-average P/E multiples.
Maybe some people simply don't like CNTF's phone segment -- Thats actually the reason I never owned it, I hate that industry and will wait till other company segments are a larger percentage of revenue before getting interested.
Of course, if it keeps getting cheaper, i'll hold my phone-hating nose and buy it anyhow ;).
-Fernando