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The Chinese Contagion - A New Flash Crash

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September 14, 2010 – Comments (42) | RELATED TICKERS: DYP , HQSM , ONP

Here's a revelation you probably never saw coming (notice I'm starting with the sarcasm early here...)...

I have a tendency to not only be a realist in my views but to do the exact opposite of what the majority of traders are doing. Notice I didn't say investors there? That's because people who are investing for the long-term aren't going to be swayed by garbage momentum plays, or bail from a company just because a competitor huffed and puffed and blew someone's house down within a sector. 

Lately, there is absolutely nothing that a small or mid-cap Chinese company listed on the New York or Nasdaq stock exchanges can do to stabilize their stock price from hoardes and I mean hoardes of panic sellers. Short interest has been drastically climbing on these issues and in a few isolated cases we've seen press releases that have been so misconstrued or distorted that some of these companies have lost more than half of their value in the past three months. It doesn't matter what the underlying balance sheets or growth prospects are for these companies, or that the Chinese economic indicators are predicting 8.0%-8.4% growth in Chinese GDP in 2010 - traders (not investors) are out to get these Chinese issues and drive them down in a much more drawn out version of what I'd like to call, "The Chinese Flash Crash."

Now immediately I'm going to be slammed with the bad apples of the bunch that have caused some of this panic selling. Companies like Duoyuan Printing (DYP) today announced that it fired its independent auditor, Deloitte Touche and is practically doing a dice-game rearranging of its board of directors after speculation of possible misappropriation of third-party transactions. China Sky One Medical (CSKI) failed to provide any evidence last quarter that it's sales were slowing due to speculation that its over-the-counter herbal products could cause health hazards. Orient Paper (ONP) as well has been at the head of all speculation with a group of essentially college kids from Muddy Waters Inc. putting out a report "poo-pooing" Orient's cash flow stream and business model. 

Well I have two revelations to make of this... 1) Boy have I been dead wrong about the entry prices of a few of these Chinese companies and 2) I don't care. Why? Because I make a living doing exactly the opposite of what traders do - it works for me and it CAN work for those of you who can see the logic and growth behind the panic. Am I saying that greed and corruption do not exist on some of these boards of directors? Not at all, in fact I mentioned in my "Time to Buy C.H.I.N.A." article that you have to be willing to accept these corporate hiccups now and then from Chinese companies, but you also have to be able to look past the panic and see the underlying value. I mean if someone would step in and save Sirius Satellite Radio it either proves the man upstairs hates me or there are some really terrible evaluators of business value out there (hooray sarcasm!). 

So how do you approach investing in China? Well mainly by walking on water and dipping your toe in every now and then. Keep in mind that the majority of these companies, especially the one's which are already down 60% or more off of their highs have very limited downside left largely because of their amazingly cash-rich balance sheets. The huge profits made during the collapse in March of 2009 were made by taking bets on companies with a far, FAR greater chance of insolvency than I am seeing from these Chinese small and mid-cap stocks. Despite these scandals the prospects for solid growth remain and until proven otherwise you have to take the information from these balance sheets as accurate representations of the company, or you could even do what I do which is take those numbers, discount them slightly and run with that valuation (sort of a worst-case scenario). 

Chinese companies are absolutely swimming in cash and they will either put that money to work in the form of stock buybacks or simply get taken out by larger competitors who value cash-rich, high growth entries into the Chinese market. Take for example the list below which lists the current price per share of a select group of Chinese companies in comparison to their net cash per share on hand. It's astounding just how much cash is sitting out there in the market right now. 

Duoyuan Printing (DYP): Current price $2.99 / Net cash per share $2.51
HQ Sustainable Maritime (HQS): Current price $2.80 / Net cash per share $2.99
China Sky One Medical (CSKI): Current price $6.33 / Net cash per share $3.85
A-Power Generation Systems (APWR): Current price $6.59 / Net cash per share $1.35
SmartHeat (HEAT): Current price $6.35 / Net cash per share $0.95
Jiangbo Pharmaceuticals (JGBO): Current price $8.98 / Net cash per share $6.01
Fuqi International (FUQI): Current price $5.15 / Net cash per share $4.52
KongZhong Inc. (KONG): Current price $6.20 / Net cash per share $3.58
Lihua International (LIWA): Current price $8.05 / Net cash per share $2.95

That's just a small sample of the amount of cash outstanding out there. Now let's look at the projected three-year growth rates for a "few" Chinese small and mid caps...

Orient Paper (ONP): 37% 3-year growth rate / forward PE of appx. 4
SmartHeat (HEAT): 29% 3-year growth rate / forward PE of 7.16
Lihua International (LIWA): 47% 3-year growth rate / forward PE of 4.45
A-Power Generation (APWR): 34% 3-year growth rate / forward PE of 5.76
Harbin Electric (HRBN): 26% 3-year growth rate / forward PE of 5.12
Xinyuan Real Estate (XIN): 22% 3-year growth rate / forward PE of 2.82
Duoyuan Printing (DYP): 12% 3-year growth rate / forward PE of 2.40
China Security & Surveillance (CSR): 17% 3-year growth rate / forward PE of 4.57
China Sky One Medical (CSKI): 12% 3-year growth rate / forward PE of 2.34
China Valves Technology (CVVT): 23% 3-year growth rate / forward PE of 6.08
Advanced Battery Technologies (ABAT): 39% 3-year growth rate / forward PE of appx. 5.5
Andatee China Marine Fuel (AMCF): 10% 3-year growth rate / forward PE of 3.64
AgFeed Industries (FEED): 25% 3-year growth rate / forward PE of 7.27
Zhongpin Inc. (HOGS): 19% 3-year growth rate / forward PE of 7.46
China Fire & Security (CFSG): 20% 3-year growth rate / forward PE of 5.15
Telestone Technologies (TSTC): 40% 3-year growth rate / forward PE of 4.12
Biostar Pharmaceuticals (BSPM): 24% 3-year growth rate / forward PE of appx 4.5
CDC Software (CDCS): 9% 3-year growth rate / forward PE of 4.63
NIVs Intellimedia (NIV): 11% 3-year growth rate / forward PE of 3.00
China Marine Food Group (CMFO): 34% 3-year growth rate / forward PE of 5.15
HQ Sustainable Maritime (HQS): 13% 3-year growth rate / forward PE of 3.15

So again... with very low single digit forward price to earnings ratios, generally mid to high double digit 3-year growth rates, and boatloads of cash, why wouldn't you consider taking a risk in this area of growth and dabble a bit. I mean the probability that every single Chinese company is a fraud is infinitesimally small, so there are some clear winners in that group of companies above along with probably a loser or two. Dabble a bit here and there and you may have a shot to pick up Chinese companies at levels you thought you wouldn't see again after March 2009. You're getting a second chance at catching the panic selling knife in less than two years, don't mess it up!

UltraLong

42 Comments – Post Your Own

#1) On September 14, 2010 at 7:48 AM, Gemini846 (83.54) wrote:

Just curious. What research tool did you use to isolate these chinese companies? I think I've only ever heard of two of them.

Also do you think chinese companies that haven't fallen yet such as JASO are in for a sell off (worthy of selling a 50% gain to wait for a rebuy)?

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#2) On September 14, 2010 at 8:11 AM, MegaEurope (23.80) wrote:

As you probably know, January is on average the best month for small cap stocks.

I think it might be a good idea to think about buying January-March calls in Chinese small caps and others with similarly attractive values.

Of course, an aggressive options strategy like this should only be a small part of your portfolio.

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#3) On September 14, 2010 at 9:08 AM, cbwang888 (25.97) wrote:

You cannot trust how much cash and liability these small Chinese companies from China have just like how much gold US Fed still have in their vaults.

US is pressuring China government for re-evaluation of RMB. That spells downward USD, out of bussiness for low margin Chinese companies and rising gold and silver.

Just make a trip to China and do some small trading with them. You will realize that anything cheap is no good (fake) and anything expensive can be even worse (overpaid).

 

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#4) On September 14, 2010 at 9:18 AM, Valyooo (99.64) wrote:

Just because a company says they're making tons of money doesn't mean they are going to let shareholders get even a cent of it though. Why would I want to invest in a company that screws me over? If I worked for a company that paid me 5 million a year and I only had to work 20 hours a week, I would think wow what a great job. But what if the boss kept not giving me my paychecks? Then I wouldn't be making anything

But why not just buy HAO? A lot less headline risk

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#5) On September 14, 2010 at 9:26 AM, Seansonfire (39.30) wrote:

cbwang888- "US is pressuring China government for re-evaluation of RMB. That spells downward USD, out of bussiness for low margin Chinese companies and rising gold and silver."

 Actually for many of the companies above they generate their revenues internally in China, so a revaluation of the RMB would actually help their bottom lines, as the exchange rates that they get for their reveunes would be better and thus increase there revenues (via exchange rate revaluation). 

Also you might not realize it but for many of the companies that are listed especially dealing with the Solar industry, the main market is Europe and not the US, so a revaluation vs. the US wouldn't matter.

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#6) On September 14, 2010 at 9:37 AM, Valyooo (99.64) wrote:

Hey megaeurope,

If you bought jan-march strike calls now, wouldnt time decay erode a lot of your gains? Youre probably better off either buying calls at the end of december, or buying the SAA at the end of october

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#7) On September 14, 2010 at 9:44 AM, JaysRage (90.55) wrote:

I agree with the premise that this is the time to buy the quality Chinese small caps.   Every Chinese small cap that I track has tanked....the great, the good, the bad and the ugly.....ALL OF THEM have fallen.    I'm a buyer of the good ones.    I do agree somewhat that you can't always trust the numbers, but there are some real gems out there that are being shorted down to great valuations.....it's a reverse bubble caused by irrational fear.   I'm greedy here. 

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#8) On September 14, 2010 at 1:19 PM, TSIF (99.96) wrote:

Good ones/gems.  The pattern shows it's very difficult to play these. Buying a "basket" may shield you some.  As usual UL, I appreciate your analuysis, good food for thought, even if some of the food is fried squid. 

While P/E, Cash, forward earnings, margins, all do look great for many of these companies, how can you trust it?  If a company is fudging receivables or accounts payable how much margin is really there? How much cash is "free".  Why do these companies insist on issuing new stock even when they supposedly have a hoard of cash?

As long as investor attitiude is to stay away, then some of these companies will continue sporting very low P/E. If the P/E's climb to 8-12 then yes, you have a multi bagger on your hand, but I don't see sentiment turning in that direction. Especially since too much of the investor base is mutual funds and few trade in International.  If the retail investor stays on the sidelines, there is no upside.

Still, I'll continue poking on a few of them. My focus of late, however, is to look for ones that have a few years under their belts and a few international retail investors that have bought in.  While they may be fooled as well, misery loves company and they are less likely to dump their larger positions as quickly into an open market if the tide turns.

I struggle with Buy and Hold being dead, but if you're looking at some of these Chinese Companies, then I do agree with your earlier blogs and this one, expect a wild ride, maybe even getting cut in half. 

Good luck.

TSIF

P.S.  If Sirius turns on you then I will start shorting your picks....your logic and analysis are very good but after first IKAN and now DYP a week after you picked it, it does look like someone has it out for you!!! :)

 

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#9) On September 14, 2010 at 2:21 PM, noirblood (93.98) wrote:

What about GU? Their cash per share is higher than their stock price.

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#10) On September 14, 2010 at 3:20 PM, MegaEurope (23.80) wrote:

Valyooo (94.58) wrote:

If you bought jan-march strike calls now, wouldnt time decay erode a lot of your gains?

Yes, if you are sure that the upside will be concentrated in January then you might want to hold off buying (shares or calls) until around December.

I view value as the primary driver and the strong seasonal trend as secondary. Call options (mostly on positions I also own shares of) are a very small part of my portfolio now, but I intend to increase them over the next few months.

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#11) On September 14, 2010 at 4:07 PM, leohaas (36.25) wrote:

I would not touch these companies with a 10-foot pole, because I don't know enough about them. But if your analysis is right, you stand to make a pretty penny buying them. Don't worry about the short-sellers: the only sure future buyer is a short seller!

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#12) On September 14, 2010 at 5:41 PM, Momentum21 (96.83) wrote:

Proud owner of HEAT, CSR, XIN, FEED and CDII. 

I have a pretty big position in CSR and like it long-term at the current price. Becoming skeptical of FEED after last earnings report and recent activity. I think it has some short-term upside but sustainability of growth is concerning (hog business is a mess). I would consider it a hold or speculative new buy. 

CDII is just speculative but I like my .99 buy in...I think I stole that idea from you btw.

I agree with your premise...and agree with TSIF to an extent...you have got to be ready to nut up if you want to play this game with China. 

 

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#13) On September 14, 2010 at 5:53 PM, Dormin111ob (97.12) wrote:

To anyone who actually owns shares of DYP (like myself) i urge you to contact the Law offices of Howard G. Smith which is launching a lawsuit against Duoyuan Inc. on behalf of its investors. I have alredy sent and recieved an email with the offices and have signed up for their clinet list. Payment is contigent upon a court victory, otherwise there is no cost.

 The email is: hsmith@howardsmithlaw.com

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#14) On September 14, 2010 at 8:06 PM, TSIF (99.96) wrote:

Dormin, you have a lot to learn. Filing a class action lawsuit is generally done immediately, before there are any facts or information.   If they get enough to sign up and IF they find someone to be lead, the cases take years and are rarely settled for more than the lawyers fees.   In the rare case they do win the company losing is further damaged, assuming they even have the funds to pay.  Good luck with your court case and feeding the economy by allowing some lawyers to buy new suits.

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#15) On September 14, 2010 at 10:15 PM, DarthMaul09 (29.95) wrote:

Hopefully the conference call on Sept 15 will help with the stock's recovery.

I wonder how many people have been successful in suing Petro Algae for all the wild price drops?

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#16) On September 14, 2010 at 11:24 PM, walt373 (99.76) wrote:

They way I see it, there are two main risks in these stocks: 1) fraud, and 2) value remains unrealized and cash is squandered

I think a good way to address these risks is to look at the companies' histories of returning cash to shareholders. There are some Chinese companies that have paid a dividend/bought back shares, such as ATV, NTE, and DSWL. I think the chances of these stocks being frauds is much smaller. Similarly, I would be wary of companies that continually issue stock despite a cash-rich balance sheet, as TSIF pointed out. The people running these companies clearly have an ulterior motive or are just ignorant. Also, consider companies that do business with well-known companies, such as GIGM, which is distributing Activision Blizzard's Starcraft 2 in Asia. These companies have businesses that are real enough for other people to trust them and do business with.

I agree with you that these stocks are very cheap, though it might be a while before they pay off, as historically these companies have not been keen on helping out their shareholders. However, this trend might be reversing. Recently, the famously cheap Chinese net-net stock QXM received a buyout offer in cash and stock from XING (which already owned part of the company). It might be only a matter of time before these Chinese microcaps see some more M&A activity.

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#17) On September 14, 2010 at 11:34 PM, weihou258 (< 20) wrote:

If you are interested to buy these stocks, I suggest wait after 10/5. The Aug CPI is 3.5%, it is 22-month high. Many people worry about the government may raise the interest rate during the holidays.  From 9/22 to 9/24 is full moon 3-day holiday; from 9/29 to 10/5 is notional day* holiday. Traditionally, the government loves to do this during the holidays. It will give the market more time to digest the news. But this is just guessing, may not be true.

 

* Why national day is one week?  The national day is 10/1. Officially, it is a 3 day holiday. But in order to stimulate the consumers, government allow people work on Saturday (9/27) and Sunday (9/28) and take off on 9/29 and 9/30. So, people will have enough time to travel and spend. I wish we have the same stimulate plan here.

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#18) On September 15, 2010 at 12:09 AM, FleaBagger (29.42) wrote:

I haven't liked FEED for a while - so long, in fact, that I forgot why. I think Chinese food companies are a good investment idea in general, though. I'm going to look into companies on this list, and I'm leaning toward HOGS.

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#19) On September 15, 2010 at 1:09 AM, FleaBagger (29.42) wrote:

TSTC, which had the best numbers on the list you gave, has an ugly, nay, fugly receivables/cash flow picture.

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#20) On September 15, 2010 at 9:22 AM, JaysRage (90.55) wrote:

There are risks with investing in Chinese small caps.   Those who don't do their due diligence are more likely to get exposed to those risks than those who don't.   With the prices as low as they are, there really is no reason to reach for the speculative ones.   There are some rock solid gems out there for the taking.  

Personally, if I see a small cap stock that is paying a dividend, I'll walk away.    Bleading away the growth lifeblood is the last thing that I want my small companies to do.   Dividends are for mature companies, not growing companies.   I expect my small companies to reinvest earnings back into the company.   If I want a dividend, there are plenty of stable large caps to put my money with.   To me, investing in a small cap that pays a dividend and then expecting them to grow their market cap is ridiculous.    It's not risk avoidance, it's illogical.  

If you're going to wade into the Chinese small caps, you're going to need to do it with good old fashioned investigation and due diligence, and even then, you'll get surprised from time to time. 

TSIF is one of the five investors that I most respect on CAPS, but I don't think you can buy a basket of Chinese small CAPS either.   You're bound to get stuck with a couple of lemons. 

I respect Ultralong a great deal, but there are some companies on his list that I don't want my money in right now for various reasons.   CSKI (legitimate fraud), CDCS (parent company meddling), CSR (dilution), DYP (possible fraud)......

Some of my out and out favorites such as LLEN and YONG aren't on the list

Someone mentioned FEED.   You should know that they lost a large number of hogs with the flooding.   It will undoubtedly affect their earnings for at least one more quarter.   They are downplaying the impact, but it was a major problem.     

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#21) On September 15, 2010 at 9:32 AM, GundersonGroup (29.25) wrote:

UL,

 No offense bud but you have really become much less objective over the past 8 months or so. You used to point out stupid but recently it seems to me that you have been pumping stupid. You used to tear apart financials to show how stupid a company or management was from an investment standpoint. Now it seems you would rather take numbers at face value which begs the question where has the stupid gone?

I will leave you to figure out the answer to that...

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#22) On September 15, 2010 at 10:00 AM, TSIF (99.96) wrote:

Gundersongroup, I'm not sure how you start a sentece with "no offense bud" and then then tear apart shared opinions.   There are few players who can be both pessimistic (tear companies apart) and optimistic (try to find some gems in the dirt).  The metrics we use, what works and what doesn't will vary.  I do agree that we can't take any of our data at face value, but we have to take the sum of the data and try to do something with it. With Chinese equities, it is certainly more difficult to validate the inputs of our models.  UL seems to be getting more than his fair share of the outlyers in his China basket.

Jaysrage, thanks for the kind comment!  By basket, I usually mean 3-5 of something that is similar. In this case, Chinese equities.   I certainly don't advocate buying haphazardly, but one must consider the higher risk.  With due diligence there will still be some losers, (as with any equity worldwide).   My thought is that if I have 5 and one loses moderately, two gain smartly and two tread water, that I'm in good shape overall and better off having played the game.   If I buy just one and it pulls a FUQI, DYP or ONP on me then I'm not as likely to be a "happy trader"!!!  :)

Good luck.

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#23) On September 15, 2010 at 10:36 AM, JaysRage (90.55) wrote:

3-5 of the very best of an asset class, when carefully evaluated is a very wise strategy, especially in this case.    I agree and appreciate the clarification.    A basket could easily be interpreted as roughly buying small pieces into a list similar what UL had proposed above, which could be a complete disaster.  

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#24) On September 15, 2010 at 10:56 AM, Momentum21 (96.83) wrote:

Just for fun I picked up a decent amount of DYP for 2.42...hold on! 

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#25) On September 15, 2010 at 11:04 AM, TSIF (99.96) wrote:

I saw DYP tank this morning after the company's CC.  I'm not sure what investors were expecting. This will take a long time to sort out.  The sale off took out some speculators who had gotten in when it recovered from $2.90 to $3.30 on Monday.  DYP at $2.42 might be a short term, but high risk play. I played DGW twice this week.  I think it's a little safer!  :)  Good luck.

JaysRage, I'm taking a stab at LLEN today based on your DD and the apparent disappointment that their annual meeting didn't bring in a different auditor.  Overall I'd have to do a lot more DD on this one for a longer term play.   I was going to say that from the standpoint of baskets, I rarely have more than two players in a given US sector at any given time, although I seem to have gotten top heavy miners with the rise in gold prices.  Calling China a "sector" probably doesn't make much sense from an investment perspective, since my 3-5 basket is pretty sector diversified, but deciding how to factor in "globals" into a balanced potfolio is a little tricky no matter what you call it.  There are sector risk and global risks, and with China Small cap, the risk is very high due to the auditor/accountability issues that dominate currently.  Hopefully these settle back down over the long run.  Good luck! 

 

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#26) On September 15, 2010 at 11:21 AM, Momentum21 (96.83) wrote:

TSIF - definitely risky! In my travels I have found when you think things can't actually get worse they usually do go a bit lower before improving. 

So the big question is was that moment Monday, Today or Next Week?  : ) Timing is everything...the contagion must have spread into my head. 

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#27) On September 15, 2010 at 11:50 AM, TSIF (99.96) wrote:

This past Monday  DYP's jump $3.10 to $3.70 was a huge surprise to me, especially since DGW didn't really recover.  I was glad to see DGW and DYP "part ways" today.  Monday DYP would have been a better day trade than DGW, which makes no sense to me.  Today's move makes a little more sense. If things made any sense then I guess it wouldn't be half as much fun, but I'd enjoy the stress relief!   I would agree that the likelihood of a further drop in DYP seems greater to me than a rise in the short run, but your risk/reward of a $2.40 equity is certainly higher and it wouldn't ake much upward pressure to lure the speculatiors back in.  I need DGW up between now and Friday at 3:59 PM!  :)   Good luck!

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#28) On September 15, 2010 at 12:46 PM, TSIF (99.96) wrote:

momentum21, joined you at $2.41.  Misery loves company!  :)

Hope I didn't jinx you.  That DYP has only been public a few months means only a few quarters to scrub. The tradeshow costs are clearly listed in their 10Q.  The question of whether the money really went where it should have is a real question, but doesn't speak of the books in general being misaligned. Meaning that the company book value of $76 Million when they have $91 Million of cash is a decent moat, (if you believe the cash on hand is real).   Definitely a HIGH RISK Play.  Good luck!  I don't think these short trades, however is what UL had in mind with his thesis. 

I believe his point that some of the Chinese Small caps that look undervalued may take a long time to be validated, but given enough time there are some good plays out there.

Jaysrage...short term play... my basket is getting full...I don't consider the short term plays part of my basket of DD....just part of my tendency to have some side money with some high beta calls.   :)

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#29) On September 15, 2010 at 12:51 PM, Momentum21 (96.83) wrote:

TSIF - nice, good luck! Hopefully a 70% sell off in 5 days is enough to shake things out (or at least close!)...

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#30) On September 15, 2010 at 1:07 PM, TMFUltraLong (99.96) wrote:

Again, to sum up about 10-15 comments, but I'll have more to say about this later this evening....

No these are not the safest plays in the egg basket, yes the yolk could already be broken, but the chances that every yolk of every egg is broken is very very small. I'd say at least 80% of these Chinese listed companies have valid balance sheets and I think I am being far too pessimistic with my 80% number. I feel that if you were to begin nibbling at these Chinese names, and not necessarily just the ones I mentioned (those were simply the first one's I came across - there are over 200 ), you should be able to significantly outperform the S&P 500 over the next 2 years. It's not that I'm finding less "stupid" in the market, it's just that stupid works both ways. Punishing 200 stocks because 5 have irregularities is in itself pretty stupid and creates a valid buying opportunity.

UltraLong

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#31) On September 15, 2010 at 1:27 PM, AndreylikesMTL (97.80) wrote:

Thanks UL for timely post

After I added DYP to my watch list this morning id dropped, so I got you some (10000)

Before we made some good money on CSKI remember?

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#32) On September 16, 2010 at 12:54 PM, MashkiaTsair (< 20) wrote:

Dear UltraLong and other Investors,

   This time it is not traders, but INVESTORS, that sell Chinese stocks en-masse. Why ? Because they are *all* frauds. Want a proof? Like at their turnover ratios and auditors, and their corporate practices. No Intelligent Investor will invest in those scams.

Chinese make up the numbers.

 

 See here:

http://www.magicdiligence.com/members/articles/selling-all-china-CSKI-CEU-UTA-2010-09

Here is the list of Chinese stocks that I consider fraudelent:

China Sky One Medical... CSKI
China Marine Food Group... CMFO
China North East... NEP
Orient Paper Inc. ONP
China Integrated... CBEH
Fuqi International, Inc. FUQI
Lihua International... LIWA
RINO International Corp. RINO
China Green Agriculture... CGA
Biostar Pharmaceuticals... BSPM
Gulf Resources, Inc. GFRE
ZHONGPIN INC. HOGS
Universal Travel Group UTA
Duoyuan Printing, Inc. DYP
China Education... CEU

Having a top 4 auditor may restore my confidence in Chinese, however. Until then I consider them all *liars*, and I say so as an Investor.

-----------

Dear Investors: Chinese small-caps financial reports are fraudelent. I recommend you to skip *all* Chinese stocks unless they are signed-off by a top 4 auditor firm, and even then careful analysis is required.

-MashkiaTsair, 16.9.2010. (al4321@gmail.com)

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#33) On September 16, 2010 at 8:40 PM, TSIF (99.96) wrote:

Did you know that there use to be FIVE Top auditors?  You needed one of the BIG FIVE.  That was before one of the BIG FIVE got caught cooking their books and went out of business.  If everyone needed one of the TOP FOUR to be creditable then those TOP FOUR would have all the business.

All an Auditor does is check to see if the records are being presented in the correct format for the SEC requirements.  Data is only as good as what is given to them to review.  Anyone good at cooking thier books can fool any of the auditors, even the BIG FOUR! 

If a BIG FOUR Auditor is your only requirement then look out!

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#34) On September 16, 2010 at 9:12 PM, soycapital (< 20) wrote:

I've owned several of these Chinese small caps in the past and have made a little money but the money I lost due to fraudelent books took my profits and then some. I will never invest in an individual Chinese small cap again. My experience has taught me this. Choose for yourself of course if this is right for you.

I believe in China/India overall long term, and am looking for a small cap fund that is in that realm. Anyone know of any to recommend?

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#35) On September 16, 2010 at 9:23 PM, portefeuille (99.44) wrote:

#34 HAO might be okay.

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#36) On September 17, 2010 at 1:16 AM, Haugurafpeningum (78.21) wrote:

34 and 35

Buying small cap China fund is a way to spread the risk. UL started this disc by reflecting on individual small cap. On september 14th I had this to say:

"If I'm right, then yesterdays panic selling was spooked by payment irregularities regarding an advertisment of 24M RMB wich are roughly about 3,5M USD. It would not surprise me that some of the executives abused their positions and did the hanky panky.
Looking at the balance in DYP this is translates to about 11 cents per share, AND is already "paid" and booked. In my opinion it is a local china custom to undercut the cash register and a closer look reveals that most of Chinese executives are infected by this virus. It’s just a question of how much and how good they are to hide their transactions. In DYP’s case, it was the auditor Deloitte blew the whistle.

On the other hand I frankly believe that it is impossible to fuel growth of 8-10% annually in a country crowded by scam, scumbags and stupidity."

In the light of this and that the selling pressure seems to be fading (the buyingpressure comes later), a bought some shares yesterday at close ( 2.53). Once in a while a stock get crushed like DYP. some of them recover others don´t. The ones that recover, tend to recover quickly. I believe that DYP is one of them. Remember: This is a high risk play and I could easily lose this gamble.

Gamble like this can be described as " double or nothing"

 

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#37) On September 17, 2010 at 1:03 PM, portefeuille (99.44) wrote:

#36 Recent holdings of the HAO ETF are shown here. Quite a few of the "top holdings" are not small market capitalisation companies.

Air China Ltd

http://www.bloomberg.com/apps/quote?ticker=753:HK

Shandong Weigao Group Medical Polymer Co Ltd

http://www.bloomberg.com/apps/quote?ticker=1066:HK

PICC Property & Casualty Co Ltd

http://www.bloomberg.com/apps/quote?ticker=2328:HK

...

So the fund I suggested is not really be a "Chinese small cap" fund.

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#38) On September 17, 2010 at 4:49 PM, JaysRage (90.55) wrote:

Buying small cap China fund is a way to spread the risk.

No, it's just trying to find an easy way to solve a hard problem.  It might decrease your risk, but it will certainly decrease your returns, and it will most certainly give you a lesser risk/reward ration vs buying quality individual stocks.   I think avoiding China entirely is a better strategy than blindly buying an ETF, as long as avoiding China means that you are spending due diligence somewhere else.   The lazy approach to investing will not work in this market (and it doesn't work as well in ANY market).    

On the other hand I frankly believe that it is impossible to fuel growth of 8-10% annually in a country crowded by scam, scumbags and stupidity."

That's pretty much how the U.S. got it done for a long time. 

 

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#39) On September 21, 2010 at 2:51 PM, bendlund (99.76) wrote:

It all comes down to fraud.

Any company on your list that isn't fraudulent is likely to be a big winner. But, I think you are very optimistic about the prevalence of fraud among Chinese companies listed in the US, especially those that trade so cheaply.

The reason they're so cheap is 1) Many investors have already been burned by fraud in very cheap Chinese companies (e.g. GUPR, CHFI, many others I've forgotten); 2) There are persuasive arguments out there that several of the companies on your list (e.g. LIWA, CSKI, ONP, FEED, CMFO, ...) are frauds - the shorts are usually right on this; 3) Others on the list have some scandal that has or will likely lead to an SEC investigation (e.g. DYP, FUQI); and for the rest, who knows?

I think some of the companies on your list are probably very good investments, but I'd guess over half are scams. 

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#40) On September 21, 2010 at 5:49 PM, bendlund (99.76) wrote:

Sorry, an edit to my above post - I haven't actually heard anything, good or bad, about FEED; I was thinking SEED.

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#41) On September 21, 2010 at 5:49 PM, bendlund (99.76) wrote:

Sorry, an edit to my above post - I haven't actually heard anything, good or bad, about FEED; I was thinking SEED.

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#42) On October 13, 2010 at 9:04 PM, stocki711 (98.89) wrote:

i really like TXIC. Trading around $40M with $20m in cash and made nearly $20M last year. waiting on old quarterly reports. like all chinese companies it has a problem.

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