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ETFsRule (99.91)

Another blog 'bout China

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May 24, 2011 – Comments (18) | RELATED TICKERS: CNTF , CBPO , KH

I just came across another approach towards Chinese stocks.

I was looking through some filings of my favorite Chinese stock (CNTF) and I found a Chinese venture capital firm that looks very interesting.

The firm is IDG Capital Partners, and you can see a list of their funds here.

This firm is on the ground in China, researching companies in rigorous detail, and investing in them even before they are publicly traded. After doing some very brief research, I am 99.99% sure that none of their investments has ever been accused of fraud. Basically, I think I have found the jackpot of non-fraudulent Chinese companies.

You can learn more about the IDG funds here and here.

These are some of their holdings, which I've found through their SEC filings. If any of these turn out to be frauds I will be VERY surprised:

CNTF

CBPO

KH

KONG

MEMS

MGH

SOKF.OB

I'll post an update in a few months to see how these stocks are doing.

18 Comments – Post Your Own

#1) On May 25, 2011 at 3:32 PM, ETFsRule (99.91) wrote:

IDG's Pat McGovern on Investing in China - TheStreet

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#2) On May 25, 2011 at 6:51 PM, ETFsRule (99.91) wrote:

Here's a more complete list.

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#3) On June 03, 2011 at 10:57 PM, ETFsRule (99.91) wrote:

One last thing: when you invest on the same side as the IDG China funds, you're investing with one of the greatest venture capitalists who ever lived: Jim Breyer of Accel Partners.

And if this wasn't enough China stocks for you, I found another VC firm with a track record that seems on par with IDG's. That firm is Sequoia Capital. You can learn about them at these links:

Info

SEC filings

They came in at #2 on the Forbes "Midas List".

Some of their Chinese investments are:

ADY AMAP BONA CCSC CTE GAGA MCOX MOBI NKBP NOAH PSPRF.PK QIHU RNHEF.PK SINA

There have been some reports of dishonesty at MOBI according to Citron Research, but, let's just say I found those reports to be very unconvincing.

I haven't seen a single negative report on any other company that IDG or Sequoia has put money into.

Good luck everybody.

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#4) On June 04, 2011 at 10:54 AM, ETFsRule (99.91) wrote:

One more VC firm: Shenzhen Capital Group

Their average annual investment rate of return (IRR) is 36%. They list their portfolio on the site, and if you go to "milestones" they show when some of their investments went public (although most of them are only traded on Asian exchanges).

Some of their holdings include JKS, CNTF, and MY.

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#5) On June 06, 2011 at 4:53 PM, ETFsRule (99.91) wrote:

If anyone is wondering about today's drop in CNTF and some other China stocks, it was due to increased margin requirements going into effect today. Apparently this was announced last Friday evening... so investors had no time to prepare for it.

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#6) On July 24, 2011 at 12:24 PM, ursemm (< 20) wrote:

Hi there

I'm new to the Fool. I'm interested to know how CNTF is likely to perform, in your opinion, after the great bashing its stocks got after mid-May. 

Are there any news to be expected anytime soon?

Thanks for any informations or thoughts.

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#7) On July 24, 2011 at 2:03 PM, ETFsRule (99.91) wrote:

I think CNTF will do great - in my opinion this is the best stock in the world. Their CEO recently bought more shares, they've released a ton of great new products this year, they made the recent deal with Qualcomm, they have great fundamentals, a high growth rate, they trade for barely more than their cash balance, they're in a fast-growing market, short interest is just a little over 1% of outstanding shares, they were recently added to the Russell global index. The list of positives is seemingly endless, and there really hasn't been any bad news at all.

I guess people are still too risk-averse to buy this kind of stock right now. Maybe investors will rush into Chinese small caps after the debt ceiling gets raised (ha!).

Their next quarterly report is due on August 16th... that could potentially be a catalyst for the stock to start moving.

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#8) On July 25, 2011 at 6:09 AM, ursemm (< 20) wrote:

Hi ETFsRule

Thank you very much; this is very useful to me.

 Kind regards 

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#9) On July 26, 2011 at 12:02 AM, ETFsRule (99.91) wrote:

:-)

SOKF.OB is going private! Woohoo!

And yes, they might be getting sued, but it's not for the usual reasons - it's for going private at too low of a price ;-)

I wonder which of these stocks will be the next buyout... maybe DANG...

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#10) On August 19, 2011 at 6:31 PM, ETFsRule (99.91) wrote:

I'm not sure if anyone is still interested in this blog, but I'm going to keep updating it from time to time. So, follow along if you feel like it.

It looks like Alfred Little is barking up the wrong tree this time. He's accused SinoTech Energy (CTE) of fraud, even after they filed their 2010 annual report earlier this year, audited by Ernst & Young.

Not only that, but Nasdaq had halted the stock to request information from CTE. Really interesting stuff. CTE maintains their innocence of course.

The thing is, Sequoia Capital owns over 5 million shares of CTE - and their due diligence is second to none. As I mentioned earlier, neither Sequoia nor IDG has ever invested their money in a fraud. So if there really does turn out to be evidence of fraud, this will be a real game changer.

On a side note: CNTF has really gotten hammered lately, for no apparent reason. Short interest remains very low, so it looks like it's just a lot of panic-selling and generally low interest in the company. CNTF is not followed by any analysts, so I don't think many investors outside of China are familiar with them.

Anyway, I'm not discouraged. I've taken this opportunity to buy a lot more shares and lower my cost basis... CNTF is now 22% of my real life portfolio. Their fundamentals are incredibly strong and they have over $4/share in cash.

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#11) On August 20, 2011 at 10:01 AM, ETFsRule (99.91) wrote:

The investment in CTE by Sequoia was based on the work of two of their analysts: Neil Shen and George Xu. Neil is a Founding Managing Partner of Sequoia Capital China, and George is a Vice President of Sequoia Capital China.

This article points out that, "Neil Shen, photographed, has been spearheading the firm’s charge into China."

Another article points out that Neil Shen was named the #1 venture capitalist in China for 2010. It also mentions the lawsuits against Mecox Lane (MCOX), an investment that Shen worked on personally. The lawsuits alledge that MCOX "didn’t come clean with investors about its prospects."

Even if MCOX was overly optimistic in some of its estimates, I'm sure a lot of US companies could be accused of the same thing... these are much less serious charges than the ones against CTE, which basically say that the company is a complete fraud.

For now, I'm actually avoiding Sequoia's investments until I see how things shake out with CTE. Neil Shen is the #1 guy at Sequoia, so if these charges are true, then Sequoia's reputation is pretty much completely ruined. I don't think that will be the case, but for now I am sticking with IDG's portfolio. IDG seems like the safer bet, and they are not having any of these issues.

As for CNTF, there is plenty of due diligence on them - you can find videos, commercials, and demonstrations of their products all over the internet. Here's a video game world champion using their new game console. Techfaith is mentioned a few times in this book. I could go on, but it's not necessary.

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#12) On August 21, 2011 at 9:49 AM, ETFsRule (99.91) wrote:

Andrew Left Loses His Mind

The widely-respected John Hempton of Bronte Capital gives his 2 cents, in his usual blunt fashion.

Regarding Chinese stocks: many of them are frauds, and many short-sellers (like Carson Block and John Hempton) have done a good job of exposing some of those frauds.

But that doesn't mean that all short sellers are worth your time. Keep this in mind the next time a crook like Andrew Left starts making accusations.

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#13) On September 04, 2011 at 9:44 AM, ETFsRule (99.91) wrote:

I finally got my $4.50/share from the SOKF.OB sale, and put it all into another Chinese small cap: Bosideng International Holdings (BSDGF.PK), for $0.23/share.

Bosideng sells very fashionable winter coats, a segment which should do well as the Chinese consumer market continues to grow. Also, they are now starting to get into the non-seasonal apparel business.

Some facts about Bosideng:

-They were founded in 1975 and own many of the top winter apparel brands in China. Source. (I know Wikipedia is a lame source to use, but this is widely available information).

-Their 2010 annual report was audited by KPGM, a top-4 auditor. Source.

-They have an agreement to manufacture and distribute the fast-growing Rocawear brand in China. Yes, that Rocawear.

-IDG owns 2.5M shares, or 2.8% of the company. Source.

-At their current price ($0.23/share) they trade for these multiples:

Market Cap: 1.8B

PE: 9.69

Price/Sales: 1.76x

Price/Book: 1.8x

Price/Cash Flow (ttm): 9.28x

Dividend Yield: 9.06%

Note: Their dividend was a bit higher than normal last year, due to a special, one-time dividend. But they have consistantly paid a high dividend for years.

These numbers are straight from my brokerage (TD Ameritrade). You won't be able to find accurate numbers for a stock like this from a source like Yahoo... so, trust your brokerage when dealing with thinly-traded ADR and pink sheet stocks.

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#14) On October 06, 2011 at 11:08 PM, ETFsRule (99.91) wrote:

Well, based on this and other recent news, it looks like I was wrong about CTE. Alfred Little appears to be right, and I was completely, utterly wrong on this one. Luckily I didn't have any money in CTE.

We already know that the top-four auditors have a poor track record among Chinese small-caps... and, most banks, underwriters, and major investors haven't faired very well either. I thought Sequoia's due diligence was good enough, but obviously I was wrong. And considering that this investment was personally researched by some very high-ranking people at Sequoia, I have lost all faith in the firm.

Amidst all the carnage and the blood in the streets, IDG is the only one left standing. IDG has invested in dozens of Chinese small-caps, and there is not even a hint of fraud among any of them. I will continue to invest in their portfolio with full confidence.

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#15) On January 25, 2012 at 2:28 PM, ETFsRule (99.91) wrote:

Well, Sinotech Energy (formerly CTE) has officially been de-listed and now trades as CTESY.PK.

Sequoia Capital, meanwhile, has removed all references to their investment in this company, without any explanation. Before, you could see it listed on the pages of Neil Shen and George Xu, as mentioned earlier - as well as in their portfolio of energy investments.

I guess they are hoping that if they just pretend this whole thing never happened, they won't lose any credibility. Good luck with that. It's not hard to find evidence that they owned over 5 million shares of this company.

Regarding China stocks, I own the following: MY, CNTF, MEMS, JRJC, and BSDGF.PK. So far, they are off to a good start for 2012. The past couple years have been brutal for this sector, but I think investor sentiment is finally starting to turn around, and I predict a very strong year for Chinese small-caps.

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#16) On February 10, 2012 at 6:40 PM, ETFsRule (99.91) wrote:

If anyone finds my reliance on IDG to be a questionable strategy, then a quick look at the registration statement for a company called "Facebook" might change your mind.

From the management section of that same filing, there is a nice bio of Jim Breyer, who I mentioned earlier:

James W. Breyer has served as a member of our board of directors since April 2005. Mr. Breyer has been a Partner of Accel Partners, a venture capital firm, since 1987. Mr. Breyer is also the founder and has been the Chief Executive Officer of Breyer Capital, an investment firm, since July 2006. Mr. Breyer is also a co-founder and has been co-lead on the strategic investment committee since inception of the IDG-Accel China Funds. In addition to serving on our board of directors, Mr. Breyer currently serves as a member of the boards of directors of Dell, Inc., News Corporation, Prosper Marketplace, Inc., and Wal-Mart Stores, Inc., where he is the lead/presiding independent director. Mr. Breyer previously served as a member of the board of directors of Marvel Entertainment Inc. from June 2006 to December 2009 and RealNetworks, Inc. from October 1995 to June 2008. Mr. Breyer holds a B.S. in interdisciplinary studies from Stanford University and an M.B.A. from Harvard University. We believe that Mr. Breyer should serve as a member of our board of directors due to his extensive experience with social media and technology companies, as a venture capitalist, and as one of our early investors.

From the ownership section, we can see that Mr. Breyer controls 11.4% of the shares of Facebook. Not too shabby for one of the early investors in the company.

The point of this post isn't to brag on behalf of someone else. I just think it's important to realize that Jim Breyer is the real deal, and IDG-Accel is the real deal. They have never been burned by a Chinese fraud before, and I don't think they are about to start now.

My plan is to continue piggybacking off IDG-Accel's Chinese investments; this includes micro-cap, pink-sheet stocks that no one has ever heard of. In fact, those are the companies that I prefer to invest in (ie: Soko Fitness). And I sleep very well at night.

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#17) On March 27, 2012 at 1:47 AM, jsch08 (31.27) wrote:

Hi ETF. This is my first blog post on Fool, but I've found your blog very insightful! I'm still a neophyte investor, but this particular blog post got me interested enough to dip my toe in the pool of fool blog posting, so to speak.

 

What are your updated thoughts on CNTF? The company is trading at a massive discount to cash with no debt and seems too good to be true. Their doesn't seem to be a justification to these prices at the moment.

 If everyone is so hesistant of China, maybe this is the year to start picking up massive value plays.

 

What are some good articles you've read about this company and their plans for expansion?

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#18) On April 08, 2012 at 9:15 AM, ETFsRule (99.91) wrote:

Hi jsch08. Thanks for the comment.

CNTF recently posted some negative guidance for Q1 2012, including a big decline in revenue. They will probably post a loss for the quarter, once the financials are officially announced. Maybe some larger investors knew this was coming, which could explain why the shares have gone so low.

CNTF has some very impressive and unique cell phones, but the demand for them has been disappointing so far. There is a lot of tough competition in the cell phone business. But once the Chinese economy starts to pick up steam again, I think we will see this stock recover and reach a more reasonable share price. And there is definitely the potential for them to go private because they are trading at such a discount right now.

For the future, I think the gaming business will be their biggest area of growth. There hasn't been much written about them, but there is a lot of info in this company presentation:

http://www.techfaithwireless.com/english/document/CNTF%2059-v4%20July%202011.pdf

(it might take a minute to load)

Here is the recent negative guidance:

First Quarter 2012 Outlook

The following forecast reflects the expected material impact of seasonality in the first quarter of 2012. The forecast is TechFaith's current and preliminary view, which is subject to change. TechFaith currently expects total revenue for its ODP, branded and gaming businesses to be in the range of US$41 million to US$45 million in the first quarter of 2012. The anticipated decline from the fourth quarter of 2011 and recent revenue levels is driven primarily by the expected material impact of seasonality in the first quarter, combined with higher competition and expected lower overall demand for its ODP and branded mobile phone business.

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