Tuesday, June 28, 2011
Helping Charles Li find the weeds in his Hong Kong garden
Compared to the Reverse Mergers on the American Stock exchanges the Hong Kong exchange is indeed a beautiful garden with many flowers and some fruit trees.
But there are some weeds there - indeed many weeds there. Some have grown so high they are strangling the light.
And a diligent gardener does not ignore the weeds lest they starve the flowers and fruit-bearing plants.
So I hope to help Charles Li a little. He is blinded by the bright and beautiful flowers of China that litter his garden (ahem exchange). He can't see the weeds no matter how tall, how prominent.
Somebody has to help him so he can continue to tend his garden and so that it might continue to flower into the future.
So I am going to focus a little on Hong Kong in the future: a service to Mr Charles Li and thus a service to Hong Kong.
But hey - I figure there are far more weeds in Hong Kong than the ones I have found (though these weeds are very tall - they almost grow to the sky).
If readers want to help me find the weeds in Mr Li's garden please contact me through the blog.
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John, an easy place to start is Chaoda and China Green. Please finish them off. I've got other ones for you later.
We are already short Chaodo.
Maybe might write it up one day.
Have you looked into the aluminum extrusion (zhongwang) and metal recycling (china metal recycling) sectors? What sectors have you looked into that are dodgy?
How about all the big mainland engineering and building materials companies that are addicted to real estate development? Strip the associated earnings out and they become even less attractive!
CT - I have never looked at Zhongwang - but am starting - send an email to me...
look for companies that are addicted to government subsidies.
eg. Yurun Foods--moved heavily upstream into pig rearing and abbatoir due to govt subsidies. Reaped HK$731M in govt subsidies in last FY.
Yurun has 31 abbatoirs with 65% capacity utilisation but are building more abbatoir due to govt incentives.
Does anyone have a link to the Next magazine article that recently doubted Chaoda's land claims?
Apropos to this new theme on John's blog, what would others recommend as the short list of Hong Kong business publications to subscribe to, in order to get good (preferably skeptical) coverage of individual issues on the Hong Kong market?
Somehow I missed Chaoda, but I too suggest that you look at China Green (unfortunately, not too much meat left on either of those bones)
Check out the Chinese railway companies. The chief official from Government body was arrested early this year. Just wondering how many dodgy contracts he was involved.
To be fair to Charles Li, his actual claims are fairly benign. He says that Hong Kong is "less likely" to be fooled by Chinese frauds. He never stated flatly that Hong Kong would not be fooled.
That sets a very low bar to jump over, because in the US nearly *all* the Chinese RTOs look to be either fraudulent or highly misrepresented opportunities. If 60% in US are fraud, and only 20% in Hong Kong are fraud, then strictly speaking Li is meeting his claim.
Said differently, the regulatory failure in the US is so enormous that almost any level of real regulation is likely to look better on comparison.
To the extent that Hong Kong has *any* regulatory process that is effective in blocking even 1/2 of the potential frauds, that is more effective than the SEC, whose lack of regulation apparently allowed nearly all of the frauds to slip through.
What about REAL GOLD MINING (0246) ?
John, I wonder about the internet gaming companies and their methods of revenue recognition. The shift in recent years in China towards business models that give away the games for free and then charge users for "in-game" purchases means it has been difficult to corroborate what the companies say are their revenues. These stocks are valued at multiples of US equivalents in some cases.
Zhongwang a couple of years ago hit the newswires as it appeared some of their "sizeable" customers might not have been so sizeable after all (or even, customers). This happened quite soon after the IPO.
Coal companies I also think are problematic. Hidili springs to mind... something dodgy happened (unexplained) to their CFO soon after the IPO.
And the property developers... a minefield there.
As a general comment, I would look at where companies of whatever ilk have pledged their shares- not always a disclosure that is made- Given what I feel is undoubtedly a property bubble and massive Ponzi scheme in China, I suspect most companies are leveraged into real estate at some level or another.
David Webb's site at http://webb-site.com/ has always been good on corp governance issues. Read his latest on Real Gold.. maybe some of you know/remember XING.
Caixin (set up by ex-Caijing) which covers macro and financial related issues well, with some decent commentators (Andy Xie writes for them)- http://english.caing.com/
Wasn't the Next magazine article from several years ago... maybe even a decade ago, if I recall (unless you refer to a more recent one)... when they went to take pictures of the sites and found one small farm plot behind a washing clothesline ;)
Got anything new on your NOG story? Thanks much!
Is there any sort of primer you would recommend to help novices like myself find fraud opportunities. I continue to read your blog and appreciate previous posts that discuss this, but a blog post or book you recommend would be awesome
Will you be posting on CIGX soon?
Have you looked at Sinolink Worldwid Holdings Ltd? It's traded as HK:1168. Its valuation is US$150 million less than its net cash position -- i.e. market cap = US$380 million and net cash = US$530 million. Either its a fraud and the market is discounting it or its a terrifically cheap investment.
john, I'm a huge fan. i love what you do. I love what you do because you seem to me to be a reluctant teller of truth--i get the sense you'd rather there not be fraud in the system...this post sounds a little taunting, coy, and maybe a little mean. i like you much better as the reluctant general doing his duty despite his disdain for bloodshed, as opposed to the bellicose general enthused with war.
just to reiterate, i think you're doing a valuable service--just think that the tone sounds weirdly bellicose.
i think you were trying to comically mimic the kind of weird opaque analogies that come from the chinese about flowers and turtles and tigers and other stuff.
jut wanted to point that out.
Have you ever cast your eye over China Modern Dairy (1117 HK)? Basically some ex-China Mengniu (2319 HK) employees set up the company in just 2005 and they simply produce raw milk (Aussie Holstein cows with some U.S. input, so to speak). One customer – China Mengniu. Tax-free treatment ‘till c.2018. No real comparatives as most dairies are consolidated with logistic ops. In any event, I’m somewhat dubious of their margins, especially in such a short time. Perhaps I’m underestimating the power of the cow.
KC, I agree with your comment on internet gaming and property developers (I'm not so familiar with coal). However, hard to find concrete evidence.
Other dodgy sectors that come to mind are the milk/infant formula, outdoor media, forestry and sports apparel sectors. Issues range from outright fraud to highly aggressive accounting. Actually, if you include aggressive accounting, then the list can potentially be very long...
@Jeff - how can I contact you?
A good history lesson / precedent is to revisit the S-Chips debacle in Singapore (which John has highlighted before). Most of those Chinese companies that listed in Singapore under lighter touch regulation pretty much ran into difficulties. I would look at the types of industries they operated in; that is a decent starting point to identify HK listed names in similar sectors.
CT- Agree. Extremely hard to prove on the internet / gaming companies as their entire revenue recognition method is so subjective and can be manipulated in a variety of ways. Easier to identify questionab;e property developers however, where at the very least, you can count the empty apartments ;)
@Ike - Send me an email at jeffrey.nathan at gmail.com
Check out 0276:HK-Mongolia Energy Corp. Auditors have issued qualified statement on their coal reserves. Looks like it is going down fast and hard. Another bite the dust.
Go after any company incorporated in Bermuda, Cayman Islands, British Virgin Islands. Target companies included in the MSCI P Chip Index.
Not truly HK related, but Bloomberg TV just sent a reporter and camera crew to HRBN's US offices...it is an awfully nice house.
Some of the companies which have issued bonds recently - Winsway, Fufeng to name two. If they are not outright fraud in accounting terms, they are definitely using some shady business practices.
Hey John the Clown how is that $SNOFF short working now. Wellington just made a $100 million investment in Sino-Forest. Now should I trust your $100 short or a company with $660 billion under management?
How is that $SNOFF short working out today?
Not really on-topic, since it doesn't refer to a HK listed company, but Caixing has a great article on how Valin Steel was stolen piece by piece by its executives.
Chaoda I would have flagged, but clearly this is a widely known target.
However, I would be very interested in what you think of China High Precision (591 HK): 1) super-normal profit margins that do not seem to correlate with comparables (c.f. rotork) 2) possibly low reported staff numbers 3) recent listing vs low capex history 4) very complicated corporate holding company history 5) some other subjective oddities in the formulation of its corporate story and business model which I can go into.
I'd have loved to do more work on it, but unfortunately I don't get paid for being short stock.
please keep up the great work,
If you think having a large AUM means they have better judgement, then you should look at the historical performance that points to how large asset managers under performed the market. If anything, size is the enemy of performance in this business, and numerous high profile asset managers have lost money on frauds (Fidelity on Longtop). The only reason it has not killed their fund is just because they are way too big for it to move the needle.
Looks like another analyst is finding problems with Sino Forest namely material misstatements. Any thoughts John? You may want to write a post...
Li will only notice the weeds when they start to tickle his chin.. and when he's awake he will realise Hong Kong is not JP or Lynch... time to think about a new gardener.
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