Beware of Chinese Stocks on OTCBB

If you’re convinced that you have come across an amazing, undiscovered Chinese company trading on the OTC Bulletin Board, do yourself a favor and check out Peter Fuhrman’s blog China First Capital. Peter’s an investment banker who specializes in raising capital for Chinese companies and he knows the Chinese IPO landscape pretty well. And it’s hardly the bargain hunter’s paradise that it might appear.

I sometimes think the Chinese term for IPO, “??” ( “shang shi”) has magical, intoxicating effect on some Chinese bosses. They hear it and suspend all their normal caution and suspicion. Soon, they end up agreeing to what are often truly disastrous transactions that don’t even deserve the name IPO.

There are, by some estimates, several hundred Chinese companies now listed on the OTCBB that are somewhere between “on life support” and “clinically dead”. Their share prices fell steeply immediately after listing (by which time the advisers, bankers and lawyers all pocketed their fees and lined up their next victims) and are below $1. There is little to no liquidity. They often trade at PE multiples of 1-2x. The costs of retaining the OTCBB listing are bleeding the companies of badly-needed money. They have no chance to raise additional capital, nor to do much of anything (except waste money on Investor Relations firms) to lift their share price.

I get angry just thinking about this. I’m offended that people in my field of work would be involved in such self-serving, greed-ridden transactions. Secondly, it’s also brought a lot of harm, and sometimes complete failure, to what were very good Chinese SME companies that once had bright futures, until they had the misfortune of putting their financial futures in the hands of these advisors.

Peter doesn’t name names, but he provides some detailed case studies in a follow-up post entitled “Built to Fail”. It’s fascinating - and very sobering stuff.

Comments

[Danny Furman:]

1. The links don't work. Is this a real reference?
2. This may be a bigger problem with China stocks because the average company is smaller, but this is not a region specific issue.
3. There may be more bad China micros than good ones, but there are good ones. (CHID trades for 40% of cash at a PE under 1).

May 28 10:04 AM

[Karl Glazier:]

Your headline makes no sense, and links don't work.
Some companies on the OTCBB should not have come public, but that does not mean there are not incredible bargains to be found. For instance Orient Paper, OPAI.ob,, is trading at a P/E of 2,5 (2008 earnings) and growing over 30%. Sales were $65 mill., so they are not that small. Why would you want to avoid a bargain like that?
In addition, many OTCBB companies are preparing to transfer to the NASDAQ.
Are you saying we should wait to buy until they have switched and share prices are trading at a more normal P/E (after prices have tripled?)

May 28 11:02 AM

[Brent Ritte...:]

Karl,
Almost every stock trading OTC and below $2 is trading that way for a reason. They have no value. Yes, occasionally small companies issue stock and trade OTC before moving to an exchange, but it's rare. On top of that, many of these Chinese companies have zero transparency. Even if I wanted to, I couldn't find out any information about a lot of Chinese companies trading OTC. This is a problem. Investors should know about what they are investing in.


On May 28 11:02 AM Karl Glazier wrote:

> Your headline makes no sense, and links don't work.
> Some companies on the OTCBB should not have come public, but that
> does not mean there are not incredible bargains to be found. For
> instance Orient Paper, OPAI.ob,, is trading at a P/E of 2,5 (2008
> earnings) and growing over 30%. Sales were $65 mill., so they are
> not that small. Why would you want to avoid a bargain like that?
>
> In addition, many OTCBB companies are preparing to transfer to the
> NASDAQ.
> Are you saying we should wait to buy until they have switched and
> share prices are trading at a more normal P/E (after prices have
> tripled?)

May 28 12:26 PM

[Alan Young:]

The referenced articles are at this link: www.chinafirstcapital..../

All trading on the OTCBB is risky. Even highly successful foreign companies with highly-rated stocks in their home markets can end up with illiquid stocks on this board.

Some OTC listings, a minority, are well-documented, current, and liquid. For the rest, I'd rather pay a commission to a foreign-trading specialist to trade on the Hong Kong or Singapore exchange than risk everything on the BB.

May 28 12:42 PM

[beijingpaddy:]

You can purchase stocks on the Hong Kong Exchange directly via E*TRADE’s Global Trading platform. It is easy and not expensive.

There are some Chinese and HK large caps on the OTC like Tsingtao Beer TSGTY, Cathay Pacific CPCAY, Lenovo LNVGF etc. Before E*TRADE’s GT , there just was no other way for individual retail investors to buy many quality Chinese /HK equities other than OTC. If the Obama administration goes through with the Pink Slip reforms, things might be better. Otherwise, OTC carries too many risks for small investors. Better to buy on their home exchanges whenever possible.

May 29 02:39 AM

[FloridaBoy2:]

I too will pass on the China OTC BB. There is just too much risk and too little info availble. To each their own.

May 29 08:23 AM

[Danny Furman:]

What's "funny" is an inefficient system questioning an efficient one. Chinese companies stop operating when conditions dictate that being the best course of action. People adjust consumption and output there. Here, we just dig ourselves a 6-foot hole because we can't slow down or accept change. CNEH, another OTC "POS" that is finally getting attention, recently announced they will be operating oil wells that had been shut down due to market conditions. CHID does the same thing: they sit on cash when they can't make money.

May 29 11:36 AM

[Dutch Trader:]

China Crescent Enterprises (CCTR) is also such a case. Nice company, but is beaten down by naked short selling from whom:::: I don't know. Maybe their own advisors.

May 29 04:30 PM

[YoYoMama:]

Shouldn't the headline say "Beware of ALL stocks on OTCBB"?

May 29 06:22 PM

[gcaterina:]

I guess I just stumbled on a good one. Look at UTA. It had been UTVG.OB then UTVL.OB, did a reverse split, went to AMEX on 5/28/09 Went from $2.50 (2 PE with 30% cash) to $7.50 and now trades at a 7 PE on guided 2009 income. Serious underpromise/overdeliver so far. Competitor CTRP trades at a 30+PE on 2009 income. All data on the Yahoo “Analyst Estimates” page is incorrect. See earnings release 3/12/09 and Outlook/Guidance 3/24/09 for accurate data. I first bought 10/07 ($11 to $16) and the stock has gone from $16 to $2 and now $7.50. I loaded up at $2.50 (because I could not find anything wrong)( it became my largest stock holding) and I expect it to double or triple again from $7.50 in a year or two as they continue to deliver and build credibility. Investor info at us.cnutg.com/ under investor relations, request info, you will want the “investor relations kit”.

May 31 03:10 AM

[Smallcap Brian:]

I have seen this with my own 4 eyes. Fortunately some companies, like GFRE, have the cash flow that allows them to grow internally. instead of having to raise money while on the BB.

May 31 08:04 PM