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Have any Chinese babies been thrown out with the fraudulent bathwater?

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July 09, 2010 – Comments (2) | RELATED TICKERS: TXIC

Normally I stay the heck away from Chinese companies, period, because I don't trust any of their financials...not even a little bit. Some analysts estimate that as many as two-thirds of U.S.-listed Chinese companies are involved in some sort of fraud.

Having said that, man Chinese small cap companies have been pretty beaten up lately.  The Claymore/AlphaShares China Small Cap ETF (HAO) is down nearly 15% over the past three months.  I can't help but think that a few honest, well-run companies are being thrown out with the fraudulent bathwater here.  I saw an awesome write-up on an unbelievably cheap Chinese small cap on Sum Zero, so I figured that I'd take a CAPS-only flier on one. 

This idea was presented by Ryan Morris of Meson Capital Partners. The company is called Tongxin International (TXIC). Tongxin designs and "produces engineered vehicle body structures" which in laymen's terms are essentially frames for trucks and light vehicles. TXCI is China's largest independent supplier of vehicle frames.

So how cheap is TXCI? It is currently trading at between three and four times its trailing 2009 earnings. Its tangible book value after the assumed exercising of some outstanding warrants is $7/share versus its current share price of $4.77. Now that's pretty darn cheap for a company that has been growing at 20% per year. 

A nice potential catalyst for this stock is scheduled to happen in July 15th. After receiving a 15-day extension to work with a new, very reputable auditor (BDO Seidman) TXCI is scheduled to publish its Q4 2009 earnings. Assuming the report doesn't contain any red flags and Tongxin's results continue to be solid the release could cause the company's stock to increase.

As I mentioned, I don't trust most Chinese companies and I don't plan to buy TXCI in real life, but given the lack of Chinese companies in my CAPS portfolio I figured that it was time to add some exposure.  I gave TXIC the green thumb in CAPS today with a starting price of $4.75.

Deej 

2 Comments – Post Your Own

#1) On July 09, 2010 at 12:24 PM, EPS100Momentum (72.36) wrote:

TSTC is one , its fallen from $24 to $9 area eventhough its eps estimates still at $24/shr levels for both 2010 and 2011.

 

http://finance.yahoo.com/q/ae?s=TSTC+Analyst+Estimates

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#2) On August 30, 2010 at 12:39 PM, MegaEurope (21.42) 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.

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