As an investor, unless you’ve been living under a rock for the past two years it’s been pretty much impossible to avoid the cascading stampede of research outfits (many anonymous, some not) who have been staging a classic “Witch Hunt” against Chinese company’s screaming fraud, while shorting company stock. The evidence to support their claims is a fairly standardized formula: finding discrepancies between SEC and SAIC (State Administration of Industry and Commerce) filings, looking for transactions that appear to funnel money out of the company, excessive secondary equity issuances – then of course typically the researchers scour the internet for any tenuous further evidence to support their claims. To be fair, some of the accused have warranted the attention and have been exposed as frauds, but many companies and their shareholders have simply become victims, losing substantial value due to the old “Guilty By Association” – if you are a Chinese company you must be crooked.
2012 is right around the corner and promises to be yet another interesting year for US listed Chinese companies, with many trading at just above 1x earnings, longs with an appetite for risk are sharpening their knives, or more specifically making sure their passports are up to date and downloading the online Chinese visa application. The relative risk reward of buying Chinese equities at these depressed prices while popping across the Pacific on due diligence is too tempting to ignore.
As a case in point, after China Agritech (OTCPK:CAGC) took a beating earlier in the year from an outfit calling itself Lucas McGee Research, Jesse Glickenhaus from Glickenhaus and Co visited the company to conduct in person due diligence and confirm the existence of the company, it’s production and distribution channels. With recent coverage on Pimm Fox, the company recovered from its low of $0.50 and is now trading just below $2.00.
Gulf Resources (NASDAQ:GURE) is another company that has struggled for credibility against an onslaught of negative articles. In September of 2011 a well written rebuttal was provided by Seeking Alpha author Marc Chang, which was followed up by verifications by local and provincial governments.
The most recent surprise has been the work of an independent investor who travelled to visit Advanced Battery Technologies (OTCPK:ABAT) facilities throughout China during the opening ceremonies of the companies Dongguan property. The photos the investor posted on Flickr show a celebratory crowd in the hundreds. More telling however, were the photos of the interiors showing a bustling business.The path to reclaiming good valuations is fraught with potholes and companies are obviously struggling to see what works best, the primary concern of course is investor confidence and when all else fails - the final option that seems the most welcome is simply to take the company private as in the cases of Harbin Electric (NASDAQ:HRBN) and, well, soon to be, ChinaCast Education (OTCPK:CAST). The title of this article hinted at some sort of a prediction for the sector in 2012. Our crystal ball is pretty rusty and it would be foolish to say anything other than expect the unexpected. For those who have weathered the storm, remember that confidence and trust takes time to re-build. To everyone we wish a happy healthy holiday season and a prosperous new year.
Disclosure: I am long GURE, OTCPK:ABAT.