Replies to post #77610 on China Growth Stocks

[lostmyballs]

Looks like not many are coming out to defend themselves,with detailed full discloser of absolutely every detail from day one of becoming public..I think this would certainly get noticed and raise the pe values..

[skier1]

One has to be living under a rock not to know there are some fraudulent chinese companies listed on the U.S. exchanges. Negativity, albeit justified, is at a fever pitch with long term players abandoning the space in droves. However, I believe people will be surprised how quickly the sector will sort the good from the bad, the culling process has begun with the audit season this year and the easy money on the short side either has been made, or may not last more than a couple of months. Of course great trading opportunities will continue to be afforded to the nimble. But there will be massive, life changing return opportunities in a dozen or so names in this space imo on the long side before the year is over. My criteria for locating such high quality companies is as follows:

1) Private equity sponsorship by a quality firm with deep china ties
2) Board representations by Americans that I can check out through my industry contacts
3) Pass the common sense smell test, i.e margins, ROE, etc. don't seem too out of whack with other industry participants. The company's growth trajectory seems reasonable, financing and sponsorship history, related party transactions, etc seem logical.
4) Brand name and customers that can be checked out thru local channel checks
5) Have gotten loans from a local bank
6) Growth is mostly organic, acquisitions if made are highly credible
7) Cash cycle is reasonable, A/R collected on a timely basis, etc.
8) Capital raises are made with credible use of proceeds
9) Management teams come across as polished and seem focused on building long term value through investment in brands, new products, innovation, technology, etc., even at the expense of short term profitability hits
10) Auditor is one of the top 10

Of course, the traditional valuation criteria of valuation, industry dynamics, competitive strengths, balance sheet, etc have to be met. I try for my investments in this space to tend to meet a vast majority of the above criteria, if not all. For me, none of the companies in the CGS index on this board, except CCCL meet my criteria. Love to hear others views on their screening criteria and methods.