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Be very afraid of this type of Chinese stock

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August 30, 2010 – Comments (6) | RELATED TICKERS: CGA , FEEDQ , SPU

 

In the past here on  my blog have discussed I have wondered aloud if any high quality Chinese companies are essentially babies that have been thrown out with the proverbial bath water by investors who are afraid of all of the scams and funny business that been uncovered at many companies from the country.

See Post: Have any Chinese babies been thrown out with the fraudulent bath water?

The multiples to sales, earnings, etc... for many small Chiese companies look almost too good to be true.  Perhaps it's because they're not.  As mind-boggling as some of the metrics for these companies are, I just can't bring myself to purchase any in real life.  Heck, I haven't even touched many here in CAPS.

This week's Barron's contains a great article on just how dangerous investing in small Chinese companies, specifically ones that have been brought public in the United States via a type of transaction called a reverse merger.

The list of companies that have gone public in the U.S. is long and probably very familiar to people who read a lot about investing. It includes companies like China Green Agriculture (CGA), China Integrated Energy (CBEH), Gulf Resources (GFRE), Orient Paper (ONP), AgFeed Industries (FEED), Deer Consumer Products (DEER), CleanTech Innovations (EVCP), SkyPeople Fruit Juice (SPU), China Natural Gas (CHNG), and RINO International (RINO).

Investors should be particularly wary of stocks that have been brought to the U.S. market by Roth Capital, Barry Kitt, or Colusion IR.  Companies that are associated with these three firms have particularly bad track records.

There's a whole lot of shadiness going on this these stocks. I'm not saying that some of them aren't legit and won't do well in the long-run, some probably will be big winners.  However enough of them are probably scams to cause me to steer clear of the entire sector.

Beware This Chinese Export

Deej 

6 Comments – Post Your Own

#1) On August 30, 2010 at 12:03 PM, SweetMircha (92.05) wrote:

Should APWR be included in this warning? They supply wind turbines to the industries generating & building green energy worldwide.

I own both CGA & APWR. Neither has done well; actually the opposite.

I'll unload them both when I clear my cost on them. The other drawback is that they don't pay a dividend, either.

Mary.

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#2) On August 30, 2010 at 12:46 PM, MegaEurope (< 20) wrote:

One way to avoid risk is to find companies that have paid dividends.  The fact that companies like CYD, GSH, JST have distributed cash to their Western shareholders says a lot.  I own shares of CYD.

Anyone know of other small to midcap Chinese companies that pay dividends?  Or that have undertaken share buybacks?  Either of those would suggest a shareholder friendly approach inconsistent with fraud.

(xposted to other thread.)

Barry Kitt and Roth Capital clients look like they're doing relatively well, unless I'm reading those graphs wrong.

I think the cases of fraud combined with the number of Chinese reverse mergers has overwhelmed the US market and caused an overreaction.

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#3) On August 30, 2010 at 1:06 PM, TMFDeej (99.43) wrote:

You're right, Europe in that the stocks that are associated with Kitt have been OK...around flat.  However, I wouldn't consider the average return of -30% on the 28 Roth Capital stocks as doing "relatively well."

As a general rule of thumb, I try to stay far away from any small-cap Chinese companies in real life. 

Deej

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#4) On August 31, 2010 at 2:10 PM, JaysRage (88.89) wrote:

As a general rule of thumb, I try to stay far away from any small-cap Chinese companies in real life.

This is why there is a great deal of opportunity for those who are willing to wade through and find the gems that are there for the taking.   I'm not saying that there isn't risk.   Certainly, there is a great deal of risk involved with investing in small caps to begin with.....and then foreign small caps....and then Chinese small caps.....but you will also be able to get entry points that more than reflect that additional risk that you will be taking.  

I'd also like to point out that uplisted stocks have usually already had a huge surge prior to their listing on U.S. exchanges, so any analysis of the stocks post-listing is certainly going to be skewed to the downside.  The smart investor gets into the stock when it is in .OB status and enjoys the ride upward as it gets listed.    If you pick a solid company, it will stabilize far above where it was prior to the listing announcements, but there is additional profit to be gained by jumping off at the top after the surge.  

You could make the argument that this is more speculation than investing.   I would probably not argue.....but if you pick solid companies that you wouldn't mind holding under any circumstances, you certainly decrease your risk exposure. 

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#5) On September 01, 2010 at 3:44 AM, passengerjia (< 20) wrote:

As for your statement regarding IR firm, here are some hard data. I suggest you do more comprehensive research before making judgment and singling out one particular firm. IR/PR is not magician. Final decision is upon the management.

 

China Green Agriculture (CGA) – HC International

China Integrated Energy (CBEH) – HC International

Gulf Resources (GFRE) - CCG

Orient Paper (ONP) - CCG

AgFeed Industries (FEED) – N/A

Deer Consumer Products (DEER) – N/A

CleanTech Innovations (EVCP) – N/A

SkyPeople Fruit Juice (SPU) – HC International

China Natural Gas (CHNG) – RedChip

RINO International (RINO) – Brunswick

APWR-ICR

NEP-ICR

IDI-ICR

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#6) On September 15, 2010 at 4:51 AM, bluesplash (< 20) wrote:

I submit, for your consideration...

 http://seekingalpha.com/article/224913-the-myth-of-underperforming-chinese-reverse-mergers?source=TheMotleyFool 

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