In a previous post I raised questions about China Sky One Medical Inc. (Nasdaq GM: CSKI), including an unusual insider stock transaction, past accounting irregularity, use of dubious auditors, frequent changes of auditors, and the appointment of a non-financial graduate student as a director and “audit committee financial expert.”

Here I’m trying to unveil China Sky One’s despicable, fraudulent business practices with hard facts. (Note: some of the links provided below can be slow or not functioning occasionally. If that occurs to you, just try again at a later time. In some cases, I provided double links. Note also that many of the links given here had their origin in government or quasi-government websites.)

As one of the success stories among Chinese reverse-merger stocks, China Sky One Medical (CSKI) ascended from OTC BB to AMEX and then all the way to Nasdaq Global Market, all in the last year. Until last week, the stock has been one of the better-performing small-caps in the present market turmoil. Then the music stopped last week when the company was unable to file its 2008 annual report with the SEC on time.

To some, the stock’s recent retreat means an opportunity to buy into a growth story at bargain prices. To some others, however, there are ominous signs that cannot be ignored. Can the company’s 10-K filing extension be a warning sign of something deeper in its business practices? Here are a few things to consider:

Since the China Expert Tech (CXTI.PK) scam last summer, I have promised myself not to touch OTC stocks again. But then there are occasional exceptions. China Yingxia (CYXI) has now made my exception since I found it to be a credible growth stock that is trading well below its book value.

At $0.67 a share (June 23 close), this stock is trading at about 0.76x its book value and 3.58 to 3.70x the company’s projected earnings for FY 08 (using total diluted shares of Q1). This seems outrageously cheap for a company that, from 2005 to 2007, grew revenue by 157% ($6.18M to 15.91M), operating income by 121% ($2.76M to 6.08M), and net income by 233% ($1.84M to $6.12M).

Update on GA: Giant Interactive Soars on $200M Repurchase

The secret is out. Online gaming is the most lucrative IT industry in China. That is why new players are keeping on emerging every year. More are set to come into existence and get publicly listed, in mainland, Hong Kong, or U.S., in the next couple of years.

For long-term investments, I look for businesses that operate on high margin, produce high investment return, generate a lot of cash, and trade at attractive valuation. The recent IPO of Chinese online gaming company Giant Interactive (GA) is one that I find meets all of these conditions.

GA is a three-year-old company and a newcomer to the Chinese online gaming industry, specializing in MMORPGs (Massively Multiplayer Online Role-Playing Games). Its first MMO game, ZT Online, went into commercialization only in January 2006. The game established Giant as an industry leader, as ZT Online was rated the most popular online game in China in the same year by both IDC and game players.

The market is a voting machine in the short run and a weighing machine in the long run. That was how Benjamin Graham, the Father of modern security analysis, characterized it. On Wednesday, shareholders of Tongjitang Chinese Medicines (TCM) overwhelmingly voted “no confidence” on TCM’s management team. Shares of TCM closed down 25.87% on heavy volume.

Before the market opened, CIBC World Markets analyst Elliot Wilbur downgraded Tongjitang to "Sector Perform" from "Sector Outperform”, citing disappointing revenue growth from the company’s flagship product XLGB (Xianling Gubao). Following her lead, investors run for exit in great panic, in a day when S&P 500 lost 2.94% and FXI lost 4.77%.

A reader recently asked for one or two negatives aspects of Tongjitang Chinese Medicines (TCM). In response I have posted a few risks associated with investing in this stock. For most part, they are either uncertainties in the Chinese pharma industry or minor issues common to small caps. But I do want to single out the brand protection issue and discuss it a little more here.

Although not as famous as Tongrentang (which dates back to 1669 and is probably the best-known “senior” medical brand in China), Tongjitang is still a well respected brand in China. The brand dates back to 1888 when once-governor of Yungui (Yunnan and Guizhou provinces) Mr. Tang Jiong and his friend invested 2000-liang (2025 ounces) of silver to open Tongjitang Drugstore.

At this late stage of the China bubble, I’m looking around for great Chinese names with fair valuation. One such name is Tongjitang Chinese Medicines (TCM). Here are some of the reasons I think it will be a winner in the next decade:

1. “Tongjitang” is a Chinese name brand with more than a century-old history. The brand dates back to 1888, is known by many Chinese households, and was officially honored by the central government. Company CEO Mr. Wang Xiaochun was a career lawyer until 1997, when he bought Xianling Pharmaceutical. He clearly understood what’s in the name and merged Xianling with Tongjitang in the early 2000s under encouragement from the Guiyang city government.

When I first wrote about China Expert Technology (CXTIE.OB) on Aug. 13 there appeared to be still hope (though not likely) that it would file its 10-Q report for Q2 on time. The second day, however, the company filed for the five-day extension, citing the following reason:

"The review of the financial statements has not yet been completed."

China Yingxia International (CYXI.OB) released its Q2 earnings recently. Before the earnings release, the company also completed two rounds of sales of common shares to a total of 23 private investors. So I think this is a good time to share some of my new thoughts on this company with my readers.

The company has delivered a solid quarter with revenue growth of 59.8% and net income growth of 20.9%. Revenue and net income for the quarter were $5.2M and $2.5M, respectively. But of course, what´s of real interest to us is what lies ahead.

Sounds like a scary and risky stock, right? That indeed is true if you are a short-term trader who likes to follow the herd and have bought in at around $8, expecting to ride it to $12 in a few months. But if you are a patient investor looking for value, this might just be one of those rare opportunities you have looked out for so long.

Contrary to mainstream Wall Streeters, value investors ruthlessly reject the notion of risk level being increased by volatility associated with depressed stock prices. Quoting investment master Warren Buffett from his 1993 letter to Berkshire Hathaway (BRK.A) shareholders:

The company did not just introduce new products. Despite heavy discount on these new products to gain market awareness, CYXI reported increase of gross margin to 54.35% in 2006 from 51.44% in 2005. The gross margin could have been higher if not for the price discounts. Obviously the company has selectively introduced new products of higher overall gross margin.

One the other hand, the elites within this group have performed extremely well and often made their way straight into major U.S. stock exchanges. Savvy investors have been able to profit handsomely from these superb reverse-merger Chinese issues. Just take a look at China 3C Group (CHCG.OB). Since I wrote about it in mid January at $4 per share, this stock has almost doubled by now. When counting from last October’s intraday low of $1.08, this stock has multiplied by more than 700%. The company is aiming to be listed in a major U.S. exchange by the end of the year.

Right, CHCG investors have made a bunch. But clearly the easy money has been made. So your question is who would be the next CHCG. That was my question too. And after a little study, I think I have cornered a candidate.

That certainly sounds exciting; but this unfortunately is not the end of story. You could be greatly disappointed when you find out that its goodwill stands at $102.20/share out of its book value of $118.11. In other words, 86.5% of its book value is goodwill.

Much (90%) of this monstrous goodwill was originated from the recent acquisition of the former Houston based Veritas DGC to form CGG Veritas. However, the purpose of this article is not to assess the quality of the goodwill. Rather, my major intention is to figure out the worth of the entire CGV enterprise from a value investor’s perspective.

The problem is that few microcaps have a sound underlying business. So small investors often buy into hot trends, cool but empty business concepts, hypes, or even worse, outright scams. And this is the root cause of the incredibly high failure rate associated with microcap investment.

The key to success in microcap investment is to select value stocks with a liquid and profitable business, solid investment returns, and high growth rate. Stocks that satisfy these criteria are what I call two-in-one stocks, i.e., a value stock and a growth stock in one.

Competing to benefit from the strong commodity prices, land drillers have raced to add drill rigs in the past few years. According to RigData, the average weekly (operating) land rig count increased from 1213 in Jan. 04 to 2018 in Nov. 06, a 66% increase in less than three years. This inevitably led to the oversupply of drill rigs; and rig count (and day rate) finally began to head south in December (See Fig. 1).

Not surprisingly, the rig overcapacity has been widely predicted by the Wall Street. Since early 2006, PTEN has registered nine analyst downgrades as tracked by Briefing.com. In the past three or so months alone, analysts revised the FY07 EPS estimate downward from $3.73 to $2.52. And the current EPS estimate $2.52 represents a 37% drop from the $4.02 reported for last fiscal year, FY06.

Correspondingly the "smart money" exited the stock wave after wave. The April 24 market close of $24.17 was a 37% correction from the peak price of $38.49 back in Jan. 2006. This compares to the Oct low of $20.81, which was a 46% correction from its peak. Practically the mass exodus appears to have abated since last October.

1. The company's recent acquisition of FISH (Fluorescent in situ Hybridization) technology enables it to enter a huge and virtually untapped Chinese market.

The potential market for prenatal genetic defects diagnostics alone is 1.6 million patients. And that for cervical cancer diagnostics could be as many as 5.76 million patients (120,000 in Shanghai city alone). Were affordability not a hurdle, there would be as many as 19.2 million women that need cervical cancer diagnostics.

When a mining company has limited proven reserve, the reserve itself becomes the only thing that captures investor attention. This is no different with Aspreva. Tell me, who cares about P/E when Aspreva's sole "gold mine" is the CellCept partnership with Roche? Not to mention CellCept patents are set to expire from mid 2009 to late 2010 throughout its major global markets. P/E (5.9), ROE (57.8%), and net margin (57.8%) are no longer meaningful yardsticks to the street. All that matters now is CellCept's finite potential.

I'm not about to argue with anyone who postulates that ASPV's fair market value at this juncture is more appropriately determined by CellCept's discounted cash flow than by ASPV's P/E ratio. Aspreva's current sole reliance on CellCept is as plain as a piece of white paper. And that was why I started with the mining stock analogy in the first place. However my question is if Aspreva's P/E ratio is still relevant at all?

The dewatering in the Shouyang block near HZ01 well area is proceeding effectively. The company's observation well in the No. 15 coalseam indicates they are getting close to the desorption pressure at which the natural gas should begin to release. They are beginning to see some free gas in the reservoir, something they did not see several months ago.

However, the water production is still lower than the company's target of 2000-3000 barrels/day. Once the water production rate is in the target range, the company expects to see first significant gas production and will be able to project peak gas production rate. At this point, the company estimates that the first significant gas output is from a few weeks away to a few months away.

Cabeza Howe Far East Energy Corporation's (FEEC) Operations Update & Investor Q&A Webcast is right around the corner. I encourage my fellow investors and interested parties to call in and ask questions. This is an opportunity for us to help promote the company's shareholder communication, corporate governance, and enhance shareholder value. It is also a window for us to learn from the management, which I think very important for any serious investors.

The following is a list of questions I put together. I encourage you to ask any of the following questions during the webcast, whichever makes sense to you.