China Growth Stocks

[Post-it]

Rato - I fear that you hit the nail on the head:

'Most of the CGS companies with cash located in China are generating an interest rate less than the demand deposit rate of .36%. That's impossible'.


It is very difficult to assess what is correct and what is fake what CGS companies feed us as information. The logic here has basically been: if (top 4/10) auditors sign off, the cash is there and if the cash is there the comp, revenues, earnings, EPS etc are real. This reasoning was at least the basis of many of my decisions. However, it becomes more and more clear that auditors' signatures are no guarantee that the cash actually exists...I am still struggling with this, because it totally shatters the fundament of my evaluations.

If the cash is real, I can live with rotating CFO's, sleeping Board members, even lying analysts. But I cannot accept auditors that don't do the most basic of their duties.

I always consider cash the central issue. E.g. in the case of ccme, i never cared too much about the number of buses they had under contract; the discussion whether they had 2700, 2200 or even less buses, though fascinating, was irrelevant as long as the cash was there. For me the discussion was just a proxy for the question how much cash could be generated.

But if we can't rely on auditors, how can we know anything about the cash position? The only way to have some indication is the interest earned. And like you say, it is not possible to earn less than the minimum interest rate. It is not just a question of bad treasury management (most of these companies can easily put a reasonable part of their cash in a term deposit, which I understand, has rates of at least 1,5%), but it logically means that the cash is simply not there. I know, you can keep some in the company's safe (but not 20, 30, or 50 million...) and US and HK accounts generate less, but Chinese accounts should give a 'decent' interest.

Fundamentally, if the cash is not there, the business, revenues, earnings, EPS etc are per definition not as presented.

I have started a few days ago to check interest earned of some of the board's (and my) favorites; so far it does not make me cheerful.

There was actually an SA article about this already in Oct 2010. One of the few where I thought shorts had better arguments than the longs.

http://seekingalpha.com/article/231699-warning-signs-for-chinese-small-caps

I still hope that I'm wrong.