Gonzhouse (88.94)

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China MediaExpress (CCME): Shorts 1, Longs 0.

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March 20, 2011 – Comments (5) | RELATED TICKERS: CCME.PK , NEP , YONG

The epic battle between the Shorts and Longs over CCME is over. The Big 4 auditor of CCME resigned, saying they could no longer rely on management representations as to the state of the business.

This is not a China Northeast Petroleum (NEP) situation where there was a restatement due to classification of equity versus debt. This is "we are out of here" because we don't really know what is going on.

Unfortunately a lot of U.S. investors will take a hit on this. The situation now is even having a Big 4 Auditor is no assurance as to the legitimacy of a Chinese small cap. Expect another round of downgrades and stock pullbacks for all Chinese small caps, whether deserved or not. For 'real' companies like Yongye (YONG) that make actual products (fertilizer) important to China's development this is not helpful. If you have a long enough time horizon, YONG is an excellent choice as it eventually will grow to the point that it can't be ignored or lumped into the Reverse-Merger toxic waste category.

As painful as it will be for some investors, a shout-out to Muddy Waters. The next to fall: CBEH.

5 Comments – Post Your Own

#1) On March 20, 2011 at 1:14 PM, goldminingXpert (99.77) wrote:

Why are you convinced YONG is real? CAGC wasn't and it (allegedly) made actual products -- fertilizer -- important to China's development.

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#2) On March 20, 2011 at 1:47 PM, awallejr (84.46) wrote:

I have to agree with GMX. I simply don't trust Chinese numbers. The only way I would make a China play is on US companies doing business in or selling to China. While that doesn't preclude another ENRON either, at least there is more disclosure.

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#3) On March 20, 2011 at 1:58 PM, Gonzhouse (88.94) wrote:

goldminingXpert

That's a valid question. The Global Gains team has done a lot of DD, including site visits, direct discussions with management and distributors, etc., including tests of the product on a backyard garden in the US. (Admittedly a back yard test is not scientific but it shows the level of DD.) Additionally, Seeking Alpha has done a lot of work: The 'Truth About Yonge' 2 articles (the first one is linked here http://seekingalpha.com/article/254092-the-truth-about-yongye-international-part-1?source=qp_investment_views

The'Truth' articles refuted most of what they had previously said in 'Too Good To Be True' http://seekingalpha.com/article/251103-yongye-international-why-this-stock-s-story-is-too-good-to-be-true?source=qp_investment_views about YONG. (If you read the 'Too Good To Be True' articles' conclusion as to what they are left as 'proof' of fraud, it's actually pretty ridiculous). By the time Seeking Alpha gets to the end of the second 'Truth' article, the conclusion is the company is for real but the product - fulvic acid - may not be the wonder fertilizer everyone is hoping for. In the real world, that is called Business Risk.

No amount of DD on Chinese small caps is too much: my level of comfort is about 70%. But I'm going with YONG being for real. And I have no qualms with anyone raising questions on what is a rather seedy section of the investment world.

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#4) On March 20, 2011 at 5:04 PM, goldminingXpert (99.77) wrote:

Gonzhouse:

In the interest of full disclosure, it is worth noting that I authored the Too Good To Be True article and I still stand by it and the second article I authored. I'm also very familiar with Mr. Shrout's work (The Truth About Yongye 1 & 2) along with his promotion of CCME and other supposedly unfairly punished Chinese companies.

I'm glad we are in agreement that fulvic acid may not be a wonder fertlizer.

What part of Kurt's argument did you find convincing and which part of my argument did you find "pretty ridiculous"?

Thanks for your comments.

Ian -- goldminingXpert

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#5) On April 13, 2011 at 12:42 PM, Gonzhouse (88.94) wrote:

goldminingXpert

The issue is no longer whether YONG is real; for me, it's whether adequate DD can be performed on Chinese small caps. If regulatory filings and even Big 4 audit reports now come into question, all bets for DD are off. Today, it's NEP in question (even after they got a Big 4 auditor last year).

We can debate efficacy (Chinese fertilizer usage, like Chinese medicine, is different than Western standards) and distribution channels but if the underlying numbers cannot be relied upon the one certainty is how the market reacts.

Even if this turns out to be a short-seller conspiracy, I have better use of my time and money than to argue with Mr. Market, whether he is right or wrong. Even if I'm right about YONG being real, there is no extra tax benefit for a tax loss that is a Moral Victory.

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