China Growth Stocks

[ratobranco]

BORN - heads up, Little has another instablog out.

http://seekingalpha.com/instablog/647781-alfred-little/105826-borun-upgrade-contract-proves-management-lied-about-its-technology

He obtained and posted a scanned photo of the contract whereby BORN requested upgrades to its Wet Process Method from Henan Sheng Wantongtong Machine Manufacture Corp. According to Little, this contract was not disclosed in the filings and inflicts serious damage on BORN's claim to have industry leading wet process technology. If their wet process technology is industry leading, and gets them higher margins, why are they shifting to the semi-dry process, which their competitors use?

I think Little is definitely winning this argument.

As indicated in their SAT filings, I suspect the likely truth is that BORN was insolvent and needed cash from the equity markets. Obviously, they wouldn't have been able to generate interest here or in China with their negative or very small earnings, so they fabricated higher margins (to 23% whereas their most efficient competitors who use the semi-dry process can only get 16%) to arrive at the reported EPS. In the earlier article, Little calculated 7% for BORN's ttm margins, which cuts EPS down by a factor of more than 5 times.

I keep going back to that same point, which has become a lesson for me. Do not buy shares that the companies themselves are willing to sell at firesale prices. Buy what the market sells you at firesale prices--that is when you are probably getting a good deal. But if the company is the reason why the shares are selling at firesale valuations--because they are willing to take a firesale price--then something is wrong.

It is very unlikely IMO that this company could have a dominant market position in a sexy chinese industry, a patented technology that sets it apart from competitors, a ttm EPS of 1.77, positive cash flow, cash on the books, no liquidity issues, and then go public at 7.00, a ttm P/E of less than 4. That's a huge red flag. No rational entrepreneur would do that IMO.

I think BORN is a clear sell until we hear something substantive from the company. Anson Chan, the analyst at Piper Jaffray, has been making very weak responses on behalf of BORN. He appears to be a rookie at this game.