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How China Small-Caps Can Come Clean

1 : GS(14)@2011-01-23 15:04:56

http://www.thestreet.com/story/10952955/1/how-china-small-caps-can-come-clean.html?cm_ven=RSSFeed

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. He is a contributing writer to TheStreet whose views on these stocks are independent of TheStreet's news coverage.

BEIJING (TheStreet) -- On Nov. 19, a certain company listed in the U.S. issued the following press release: (the "Company") today announced that it will restate its previously issued financial statements for fiscal years 2007, 2008 and 2009 and the first three quarters of fiscal year 2010 (including the quarterly data for fiscal years 2009 and 2010 and its selected financial data for the relevant periods), due to errors identified in these financial statements. This decision was made by the Company's board of directors, upon the recommendation of the audit committee and in consultation with management. As a result of this decision, investors should no longer rely upon the Company's previously released financial statements for these periods and any earnings releases or other communications relating to these periods. If this were a Chinese small-cap, the consequences would be predictable: widespread allegations of fraud, the stock would plummet 30%-50% and the usual five to 10 lawsuits would roll in within one week. But it wasn't a China small-cap. It was Green Mountain Coffee(GMCR_), and instead of falling, the stock price rose 11% on the day because the restatement was somehow perceived to be not all that bad. So almost four full years of finanicals can no longer be relied upon, and it's "not all that bad!?"

2010 was a rough year for Chinese small-caps, with a number of earnings restatements, allegations of fraud and confirmed outright fraud cases. Companies who have been (rightly or wrongly) impacted include Fuqi International(FUQI_), Rino International(RINO_) Northeast Petroleum(NEP_), China Sky One Medical(CSKI_), China Biotics(CHBT_), China Marine Food Group(CMFO_), China Education Alliance(CEU_) and Orient Paper(ONP_).
I provide additional detail below, but the key conclusion is simple. Obviously, there does exist fraud in some portions of U.S.- listed China stocks. However, the real problem for the larger space as a whole is that these companies are immature in the U.S. capital markets and leave themselves very vulnerable to speculation of fraud even when none exists. As a result, valuations for the entire space have been depressed.
In my opinion, this immaturity in the capital markets can be witnessed in numerous areas including: lack of emphasis on submitting correct domestic State Administration for Industry and Commerce (SAIC) filings, use of unknown auditors, inaccurate and outdated websites, unprofessional reliance on free email services (such as Yahoo! or Gmail), as well as a lack of responsiveness to investors. None of these things are an absolute indication of fraud, but they do weaken general investor confidence and leave companies vulnerable to speculation by short-sellers. The good news is that many companies (the smart ones) are starting to realize these weaknesses and are beginning to change accordingly.
I address each of these points below.
Lack of emphasis on submitting correct domestic filings
By now, anyone who is familiar with the recent spate of short attacks is well aware that the first line of attack by shorts is to cite the fact that a company's SAIC filings do not match its SEC filings. At first, many investors fell for this ruse blindly and viewed it as concrete evidence of fraud causing massive selloffs in a number of small-cap names.

The issue is actually more complicated than that. Much has been recently written about the significance of discrepancies between SAIC and SEC filings. My experience in dealing with many China small-caps leads me to several conclusions.


1. Minor discrepancies in SAIC filings are no cause for concern due to differences in accounting treatment as well as differences in revenue and income recognition for subsidiaries and international sales.
2. Large discrepancies can be (but are not guaranteed to be) a cause for concern. I have spoken with many Chinese CFOs, and many of them have never even paid attention to their SAIC filings. The filings are a perfunctory administrative filing that is often delegated to junior non-financial staff or even outsourced to third-party filing agents. In addition, these statements are not audited by U.S. or Chinese auditors.
Therefore, in many cases they may have no relation to the legitimate profitability of the company. I do, however, view large discrepancies as a red flag and a cause for concern, partly because it reflects sloppiness on the part of management and partly because it opens up the company to short speculation or an outright short attack
3. The real filings that matter are the SAT (Tax) filings of the Chinese company. The Chinese government is focused on collecting tax revenue, and senior management does pay attention to these filings. As a result, if SAT filings do not match, it can be a cause for significant concern. Unfortunately, unlike SAIC filings, these documents are not public and in fact are almost unobtainable. It is possible to get them in some circumstances and can be a very clear indicator of the presence or absence of fraud.
4. The conclusion is a bit complicated, and many investors miss this important nuance. There are two types of corporate structure for Chinese small-caps, variable interest entities (VIEs) and foreign invested enterprises (FIEs). Getting into all of the details is beyond the scope of this particular article, but I hope to do so later. The relevant point to consider here is that for an FIE structured company, the SAIC and SAT financials are reconciled and audited in China and should definitely match. If they do not, then there exists a high probability of either SEC fraud in the U.S. or tax fraud in China. Neither of these things is good. But if the filings do all match up, then much concern can be alleviated.

The good news going forward is that companies are starting to see the havoc that SAIC filings can wreak upon their company. I am increasingly hearing that going forward, companies will make it a priority to file SAIC filings themselves with attention from senior management and that they will make sure that the filings do indeed reflect the profitability of the business which should therefore also match the SEC filings. What we will see going forward is that historical SAIC filings do not match, but 2010 and onward filings will be largely correct. Also, in my dialogue with Chinese companies, I am strongly suggesting that they make an effort to make their own SAIC and SAT filings public (disclosed on their Web sites). Whether or not this actually happens remains to be seen.

Use of unknown auditors
Many Chinese small-caps began their public existence as tiny micro-cap reverse mergers. They therefore engaged small unknown accounting firms who were cheap and willing to do the work. As the firms grow, it is obviously appropriate to switch to a top 10 auditor, or perhaps even a big four auditor. Large companies who use no-name (or even shady) auditors are a major red flag for me and there have been many times where I avoided a company that had great financials simply due to its choice of auditor.
Again, the good news for 2011 is that this is already starting to change and in this area, Chinese small-caps clearly "get it."
Based on recent discussions with China small-cap companies, I expect to see a wave of auditor upgrades during early 2011; hopefully some will be in time to process 2010 10Ks due out in March or early April. This will greatly enhance investor confidence in the space, and I believe it will help separate the good companies from the bad. Companies who are unwilling to upgrade to a reputable auditor will see their share prices suffer.
Recent examples of auditor upgrades that have recently occurred include:

It should be noted that there are more than 500 Chinese companies that trade in the U.S., and it is simply not feasible for all of them to be using big four auditors. For most of the smaller companies, I am perfectly happy with the selection of a top 10 auditor, including auditors such as BDO or Grant Thornton which have a strong and reputable China practice.

Inaccurate and outdated Web sites

It is important to remember that with many of these companies, senior management is not fluent in English and therefore does not focus on their English language website. This is often delegated to an outside firm to design on a one-time basis, and Web sites are not updated. Clearly, this is unacceptable. I have invested in companies that I felt were very solid, and in my discussions with management, I emphasized that their Web sites (which are often downright pathetic) can be a deterrent to other investors and can therefore impact the stock price.
In my experience, many Chinese companies still don't get it, and I still see many terrible Web sites even at companies that are performing very well financially. Typically, companies that use a solid IR firm will have a better-looking Web site, but that is still no guarantee that it will be updated on a regular basis. I am hopeful that this will start to change, and in some instances, I see progress, but in 2011, I still expect to see many pathetic Web sites for Chinese companies.
Also, stating the obvious, even while a great company may have a terrible Web site, a fraudulent company may have a fantastic Web site. The point is that a bad Web site is unacceptable for a company that wants to be shareholder-friendly and, despite being a triviality, it can have an impact on investor demand for the shares, thus affecting the share price.
Unprofessional reliance on free email services
When an investor tries to email the CFO of a NYSE, Nasdaq or Amex-listed company (with a market cap of perhaps several hundred million dollars) and the CFO can only be reached at wang1634@ yahoo.com, it certainly does not inspire confidence. In fact, it immediately conjures up the image of a fraudulent company operating out of someone's basement. With one company, I was so adamant about it changing to professional emails that I even bought a domain name for the company and signed it up for email. The company's excuse was that it had been using the existing Yahoo! email so long that it was reluctant to change. Ultimately, it did acquire a real domain name and now they use professional emails. It took more than a year.
Again, this is very common in China at companies big and small, public and private. It does not raise any eyebrows with investors in China at all, but for companies listed in the U.S., it is not acceptable simply due to the negative image it creates among investors. That said, even a fraudulent company (or perhaps especially a fraudulent company) can have a very professional-looking email address and not be legitimate. My point is that this is just a cosmetic issue that companies need to pay attention to.

Lack of responsiveness to investors


There is a wide gap between Chinese small-caps in terms of their responsiveness to investors. Yesterday, I sent an email to a Chinese small-cap company's internal IR person; he called me within an hour and he was very well informed. In other cases, companies are slow to respond, if they respond at all. Some of this can again be blamed on the language gap, but for larger companies, they either need to be able to respond to investors on a timely basis or cough up some money and hire an external IR firm. The ones who figure this out will trade much better than the ones who don't and as a rule I make it a point to not invest in companies who are not responsive.
The conclusion I reach from all of this is that, while there are frauds in Chinese small caps, the very widespread lack of confidence and depressed valuations for the space as a whole are a crisis of their own making. Some companies will figure this out and make the right changes and will see a benefit to their share price, others will not and will continue to languish.
My goal in 2011 will be to distinguish between the companies that can make these changes on a rapid basis and restore investor confidence. Obviously, the most important changes will be the switch to focusing on filing correct SAIC documents (and hopefully disclosing them) as well as the upgrading of auditors. I am hopeful that we will see significant progress in this area in the first quarter of 2011 and I will be sure to highlight companies that are making the right moves.
Disclosure: The author is long ONP.
The author can be reached at [url=mailto:comments@pearsoninvestment.com]comments @ pearsoninvestment.com. [/url]
2 : GS(14)@2011-01-23 15:05:31

中国在美上市“问题”公司如何自我救赎?
imeigu.com 2010-12-23 22:46:37 来源:i美股 原文链接 作者: 共 7 条跟贴
一位专注于中国概念股研究的美国投资者Pic Pearson 近日在TheStreet撰文表示:在中国在美上市的有些小公司确实存在欺诈行为,而投资者对整个中国概念股的信心不足和估值偏低,其实是这些公司一手造成的。如果这些公司能知错就改,立即采取有效地措施,他们的股价也会随之上涨。而那些执迷不悟的公司只能被投资者遗弃。

(i美股讯)今年11月19日,一家在美国上市的公司公布了一则消息:

“根据公司审计委员会的建议以及在跟管理层商议后,公司董事会做出以下决定:本公司将重新公布2007财年,2008财年、 2009财年及2010财年前三个季度的财务报表,原因是在这些财报中发现了错误。在公布这一决定后,投资者将不要再依赖公司之前所公布的错误财报信息。”

如果这是一家市值比较小的中国公司,我们很容易预测到可能出现的结果:纷至而来的欺诈控告将会使该公司的股价大跌30%-50%,在未来一周之内,该公司将会面临5至10起诉讼。但这家公司不是中国公司,她是绿山咖啡公司(美国一家知名特种咖啡生产商)。奇怪的是,该公司的股价没跌反而一日大涨10%,因为投资者认为他们校对后的财报看起来还不错。

2010年,对在美上市的中国小公司来说是一个“多事之年”:频繁的修改财报数据和收到欺诈指控(甚至被确认为明目张胆的欺诈)。其中涉及到的公司(无论结果是好还是坏)包括福麒国际(FUQI,5.56,-1.24%),绿诺科技(RINO,2.72,-11.11%)、东北石油(NEP,5.90,-3.44%),天一药业(CSKI,6.38,-3.33%),中国生物(CHBT,15.38,+2.33%),海洋食品、中国教育集团和东方纸业(ONP,5.53,-1.95%)。

至于原因我将会在下文作详细说明,但得出的结论很简单——很明显,确实有一些在美上市的中国公司存在着欺诈行为;由于这些公司在美国资本市场上显得比较稚嫩,使得他们很容易成为人们质疑的对象(即使他们根本就没做过任何欺诈行为)。因此,投资者这种以偏概全的思维也使得在美上市的中国概念股普遍被低估。

在我看来,这些中国公司在美国资本市场上表现出的不成熟体现在以下方面:

1)不重视提交给中国工商管理总局(下文统称为“SAIC”)的文件;

2)使用不知名的财务审计机构;

3)公司网站信息不准确或者已经过时;

4)不专业地使用的电子邮件服务(如yahoo和Gmail);

5)对投资者不负责

尽管这些都不能被绝对指控为欺诈,但他们确实消弱了投资者对公司的信心,并且使公司容易被卖空者“盯”上。

不重视提交给中国工商管理总局的文件

最近卖空者“围攻”了几家被指控存在欺诈行为的公司,任何熟悉这几起案例的人都知道,卖空者发起的第一波攻击就是举证这些公司向中国SAIC提交的文件跟美国SEC文件不匹配。起初,许多投资者盲目地相信了卖空者的这种“伎俩”,认为这就是证明这些公司实施欺诈的证据,并随后大量抛售这些公司的股票。但这一问题事实上绝非像我们所看到的那么简单,有关SAIC文件和SEC文件之间存在差异的报道很多,但根据我的经验,我做了以下结论:

1)由于中美会计计算方面的不同和子公司和国际业务在营收、利润方面会计计算方面不同所导致SAIC文件上财务信息的细微差异不应该成为我们“担心”这些公司的理由。

2)如果上述差异过大,我们的担心就是有必要的。我曾跟许多中国公司的CFO打过交道,他们表示,他们从未对SAIC文件太过在意,因为在他们看来这些文件只是一个繁衍了事的行政文件,经常会会被分配到非财务职员手中,甚至外包到第三方代理机构。除此之外,这些文件都未受美国或者中国审计机构的审查。

在我看来,如果这些文件中的财务信息偏差很大,投资者就会给予这类公司红色警告,自然他们也就会成为被“关注”的对象。部分原因是这种偏差会反映出公司管理层的草率,而另一方面这个公司将会因此成为猎头(短期投机者或者直接做空者)“攻击”的对象,

真正至关紧要的文件是这些公司提交给中国国家税务局(下文统称为“SAT”)的文件。中国政府比较关心财政税收,因此这些公司的高官也就比较重视这类文件。如果SAT文件和SEC文件不匹配,一般会引起市场的极大“关注”。不幸的是,不像SAIC文件,SAT文件不对外公布,实际上想要得到这些文件是很困难的,不过在有些情况下,还是有机会看到这些文件,这类文件将会是判断公司是否存在欺诈行为的一个明确指标。

结论有点复杂,许多投资者都忽视了这一重要的细微差别。中国这类小型公司的组织形式分为两种,即外商投资企业和可变利益实体(是指没有持投票权的股本投资者或未能向这些实体提供足够的财务资源的公司)。需要指出的是,属于外商投资企业结构的公司向SAIC和SAT所提交的财务信息是要在中国进行核对和审查的,并且彼此之间要求绝对相匹配。如果他们存在偏差,极有可能会在美国遭到欺诈指控,或者在中国遭到骗税指控。这两个结果对公司来说都不是什么好事。而如果他们相匹配,外界对这类公司的质疑可能大大减少。

另一个好消息是,现在有许多公司的管理层已经开始认真地做起他们的SAIC文件,从而确保这些文件可以真实的反映出公司的财务盈利能力,当然也必须跟 SEC文件相匹配。我在跟这些公司管理层交谈时,我也强烈建议他们作自己的SAIC和SAT公开文件(在其网站上披露)。不过这种建议到底是否可行还有待观察。

聘用不知名的审计机构

许多中国小型公司都是通过反向收购的方式在美成功上市。因此,他们会雇用一些不知名的、便宜的、规模较小并且愿意为他们工作的会计公司。随着这些公司的不断成长,他们会重新聘用知名的会计事务所,其中就包括我们通常所提及的“四大” ,而那些仍然在聘用不知名的会计事务所的公司现在已经曝露出危险的信号。

不过可喜的是, 这些公司已经清楚地认识这一问题的严重性,他们现在已经开始做出一些变化。 我希望在2011年初,我们能看到一波更换公司财务审计机构的浪潮,并希望在明年3月份或者4月初,这些公司能在2010-10Ks中公布这些信息。届时必将大大提高投资者对整个中国概念股的信心,并将“好”“坏”公司区分开来。那些不愿更换审计机构的公司到时只能坐等股价大跌了。

在最近一段时间内,有几家公司已经付之行动更换了他们财务审计机构,如西安宝润(CBEH,6.47,+0.15%)聘用毕马威会计事务所,万得汽车(WATG,7.56,-1.05%)、UT斯达康(UTSI,2.32,+0.43%)、中汽系统(CAAS,13.87,-2.12%)三家公司聘用普华永道。

需要指出的是,在美国交易的中国公司超过500家,不要指望所有公司都能聘用四大会计事务所来充当他们的审计机构。对于那些小型中国公司来说,我想“top 10”会计事务所是一个不错的选择,如德豪会计师事务所、何均富会计师事务所等,他们在中国都有着不错的口碑。

公司网站信息不准确或者已过时

我们必须牢记,许多这类公司的管理层英语都不咋地,因此他们一般不会太在意公司英文版网站。通常他们会将设计公司网站的工作外包给其他代理公司来做,而且都是一次性的工作,网站信息一般很难更新。这是让人无法接受的,事实上我也投资了这类公司。在和这些公司管理层交谈时,我也强调,他们糟糕的网站让他们错失了许多投资者,这样会对他们的股价不利。

根据我的经验,很多中国公司仍然没有认识到这一点。我也看到,一些财务数据很好的公司,他们的网站却看起来很糟糕。通常情况下,公司会聘用一个固定的公关公司来“美化”公司的网站,但由于都是一次性的工作,无法保证网站信息的更新。我希望在2011年,这种情况能有所改变。

当然,一些知名公司的网站是看起来也是很糟糕的,同样,也有一些“有问题”的公司的网站看起来却很“赏心悦目”。但有一点需要指出的,如果公司想要讨好股东,糟糕的网站是无法被接受的。糟糕的网站会影响投资者对公司股票的需求,进而影响公司的股价。

不专业的使用免费的电子邮件服务

如果投资者想要向给在纽交所、纳斯达克或者美交所上市的中国公司CFO发送电子邮件时,只能发到如wang1634@yahoo.com这类地址,这势必会消弱投资者对公司的信心。通常,人们提及“欺诈”首先想到的是就是公司在地下室经营的场景。我是极力主张公司向专业邮件依赖的转变,我甚至恨不得给这些公司买一个域名,通过它来向公司发送电子邮件。但这些公司给出的理由是:他们的管理层已经使用yahoo邮件很长时间了,因此他们不愿做出变化。

这种现象在中国各类大中型企业中很常见,中国的投资者对这种事也习惯了。但对于在美上市的公司,这是投资者无法接受的,因为它会损害公司在投资者的形象。我的观点是这是一个面子工程,公司应该注意一下。

中国中小企业对投资者的反应差别很大。昨天,我给一家中小企业的投资者关系负责人发了电子邮件,他在一个小时内就给我打电话,而且很多东西都讲得很清楚。但也有些公司反应就很慢。有些可能是因为语言的缘故。但是对绝大多数公司来说,他们应该对投资者询问做出快速回复,或者可以花点钱雇佣专门的公关公司来处理。

我得出的结论是,中国在美上市的有些小公司确实存在欺诈行为,而投资者对整个中国概念股的信心不足和估值偏低其实是这些公司一手造成的。如果这些公司能“知错就改”并立即采取有效措施,他们的股价也会随之上涨。而那些“执迷不悟”的公司最终只能被投资者所“遗弃”。

本文作者为Pic Pearson 是一位专注于在美上市中国公司股票研究的投资者,目前持有东方纸业的多单。
How China Small-Caps Can Come Clean
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