Foreign investments have always been regarded as riskier equities to buy into. Whether it be regulatory issues, auditing practices, or differences in cultural norms, foreign companies hold significantly more amounts of uncertainty to domestic investors and therefore form a less stable market to properly assess. Further compounding the issue of a stable market in foreign equities is the fact that institutional investors, who make up the bulk of monies trading on the stock exchanges are internally restricted by various rules and regulations (i.e. credit rating restrictions, share prices restrictions, diversification restrictions, etc.) that often prevent a heavy interest in foreign equities. As a result of less overall coverage, many foreign equities can appear to trade erratically as the whims of retail investors and hedge funds control more influence on the pattern of normalized share price movement. The lack of a stable institutional investment base can result in wild price swings absent of the aforementioned stability.
One of the more recent debacles in investing history lies in the invasion of Chinese reverse mergers, which allowed for previously unknown Chinese companies to trade on domestic markets. Taking root in 2011, resulting accusations of scandals, fraud, and poor accounting practices in a few companies such as China MediaExpress Holdings (CCME), Orient Paper (ONP), China Marine Food Group (CMFO), Sino-Forest Corp (SNOFF.PK), and etc. began a widespread sell-off that affected nearly every small-cap Chinese-based company trading on the domestic U.S. exchanges.
This prevalent fear was coupled by another in the looming expectation for a hard crash of the real estate market leading to a rapid slowdown in the Chinese economy. Taken as a whole, 2011 has been scathed by investment disaster for many legitimate Chinese companies that are traded domestically.
Perhaps to make matters worse, the triple threat came in the over-hyped expectations that were attributed to Chinese internet companies. Idealized ambitions for an awakening internet-ready population allowed for lofty IPO prices for several companies such as YouKu (YOKU), Renren (RENN), and DangDang (DANG). Such share price collapses that often exceeded 70% losses blurred the lines for retail investors that began to question the legitimacy of such companies that were once hailed as industry leaders in their respective market niches.
For value investors, the time may now be right to consider investing in Chinese companies that have been sold in a panic and perhaps even given reason to suggest that they are indeed undervalued.
- Companies that have IPO’d tend to have gone through rigorous vesting by its underwriters thereby indicating legitimacy.
- Share buybacks and strong insider buying express management’s confidence in a greater intrinsic value than what the market is assuming.
- Net tangible asset values that exceed market capitalizations could also indicate oversold positions.
Looking for the babies that were thrown out with the bathwater is never an easy task, but here is a list of a few companies that could be indicating that they're buying opportunities:
|Name||IPO?||Share Buyback?||Insiders Buying?||NTA > Mkt. Cap?|
Xinyuan Real Estate
China Grentech Corp.
China Information Technology
China Yida Holding