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Blogger, Self-Made Analyst, Trader, Investor, Crowdfunder and Critical Thinker. Currently, I am looking for a job in the investment space. Job offers are always welcome.  The name "Dutch Trader" refers to The Golden Age. This was a period in Dutch history, roughly spanning the 17th century,... More
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  • Guanxi: Business Weakness for US-listed China stocks 6 comments
    Mar 30, 2011 4:50 AM | about stocks: NIVS, CILE
    In a society based on collectivism, being a member of a close and committed group is vital.  Since the Chinese approach relationships with the belief they will develop over time, and admire respect, loyalty, and trust, there is no such thing as a purely business relationship. Building mutually beneficial relationships is the core of Chinese business.

    The Chinese prefer to work with those they trust and have personal relationships with. Guanxi is the Chinese term for relationships. Guanxi, in the corporate world, is a network of relationships that support one another. To build Guanxi, it is expected that you treat others with decency, and be a trustworthy and dependable person.  

    Guanxi is also a sense of mutual obligation and reciprocity. People with Guanxi will do favors for members in their network, such as, acting on another’s behalf and doing whatever is necessary for the other party. When a favor is complete, reciprocity is expected. It doesn’t have to be in like kind, but an effort must be made. If you are unable to meet your obligation, you must find another way to fulfill a favor or request.

    Guanxi is also used to ensure mutual obligations are met. Meeting obligations through Guanxi is especially important in China because contracts are not reliably enforced. .

    Investors in US-listed China stocks are now facing problems because we don’t understand Guanxi. The trading halts of China Intelligent Lighting (NASDAQ:CIL) and NIVS IntelliMedia Technology (NIV) are recent examples of how things can go wrong.

    Most of us don’t have Guanxi because we do not know anyone. Since foreign investors’ do not know anyone in the Guanxi network, investments often turn sour because the red flags regarding the trustworthiness of management are not received. If we had been in the Guanxi network, we would have known otherwise.

    Investors can become targets to those with dishonest intentions. According to some experts many Chinese RTO and IPO transactions in the U.S. are ego-driven and undertaken only to build the resume of local country management.
    I wrote some positive articles about China Intelligent Lighting (CIL) and NIVS IntelliMedia Technology (NIV), because I really thought those were legitimate companies.

    The main problem with
    NIV and CIL is too much Guanxi: they share the same facilities, same auditor, and there are many connections within senior management (founders, directors).
     
    Another article I would recommend about this debacle is called WestPark Capital's RTO Deals http://china.fixyou.co.uk/


    Disclosure: I am long CIL, NIV.
    Stocks: NIVS, CILE
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Comments (6)
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  • Jion
    , contributor
    Comments (794) | Send Message
     
    Interesting article, as CELM also halted today, it will take some time to see what really happened with this stock and NIV, CIL and CDM.

     

    According to the article you linked, these four are not "normal" IPOs.
    For now, the only Chinese IPO with such problems is DYP but this didn't stop investors to avoid Chinese IPO stocks indiscreetly. This behavior gives some good buy opportunities also, for the patient investors.
    31 Mar 2011, 11:33 AM Reply Like
  • Clearwave Capital
    , contributor
    Comments (137) | Send Message
     
    Dear Dutch Trader,

     

    How much research have you done on NIV?

     

    It seems like NIV is a real company making real products. I watched their videos:
    www.tudou.com/programs.../
    www.tudou.com/programs.../ (Do you know what they are saying in this video?)

     

    I watched their commercials:
    www.tudou.com/programs.../
    www.tudou.com/programs.../
    www.tudou.com/programs.../

     

    I corresponded with one of their employees. He said that they:
    - Are a “big” company
    - Started in 1993 and have been growing “very fast”, now with 5 product business division and 43 branch companies
    - Have factories in HUIZHOU, HUBEI, SHANDONG, and the headquarter factory is in HUIZHOU with 6 manufacturing buildings
    - Have offices in offices in HUIZHOU, BEIJING, SHANGHAI, GUANGZHOU, SHENZHEN and other cities
    - Have 5,000 employees
    - Have 9 apartment buildings for employees
    - Make products, such as speakers and cell phones, for Samsung and LG

     

    Maybe he’s off with some of the above numbers because he’s not an executive.

     

    He sent me a brochure invitation to their booth at an upcoming Hong Kong trade show. I confirmed their booth:
    www.hktdc.com/fair/exd...
    www.hktdc.com/em/nivsi...

     

    It doesn’t seem like NIV is a mirage created by pump and dumpers.

     

    I agree that the Chinese use Guanxi, probably too much so. Do the favours involve bribery? In North America, buying lunch for somebody is not a bribe, but giving them a TV is. What is the threshold of favours or gifts in China, before they are considered bribes? Cell phone? TV? Car?

     

    Is it possible that NIV is giving TVs and DVBs as gifts to CIL and CDM? Is it possible that NIV, CIL and CDM are paying each other with products or inventory instead of cash?

     

    It seems that doing all of their audits together at NIV’s office is an obvious example of Guanxi…maybe to save costs?

     

    Unfortunately, Guanxi is a normal way of conducting business in China. Maybe it’s this Guanxi that Americans, such as the auditors, consider as fraud or accounting irregularities? Is there any “lost in translation” between American auditors and these Chinese companies?

     

    Maybe the truth lies somewhere in between a fast growing company and the recent fraud allegation by NIV’s auditor, MaloneBailey? Maybe their true revenue should be X% lower, but not zero? Maybe a lot of NIV’s business activity, such as exchange of favours and gifts, is off of income statement or off balance sheet? In which case, maybe their true revenue and expenses should be higher?

     

    If Americans auditors have different standards that don’t accept Guanxi, then this could be a persistent problem. Guanxi is not going to go away. In the meantime, some of these Chinese companies can continue growing with or without Western investors.

     

    What are your thoughts?
    31 Mar 2011, 01:07 PM Reply Like
  • Dutch Trader
    , contributor
    Comments (1306) | Send Message
     
    Author’s reply » It could be that there are some discrepancies in financial numbers. So some previous years have to be restated.
    31 Mar 2011, 01:33 PM Reply Like
  • phinance101
    , contributor
    Comments (475) | Send Message
     
    So what you are finally admitting to is that you are a serial dupe. You were told. You can call it guangwhatever, but it is fraud.
    31 Mar 2011, 04:30 PM Reply Like
  • bazooooka
    , contributor
    Comments (3686) | Send Message
     
    Dutch, you seem like a good guy. You're one of the few who could admit your error and maintain some of the goodwill your past writings may have earned you. Chinmin did that with CCME and you too can now repent since you're beginning to see the real picture. I hope that you apologize to your followers who lost money based on your DD (or lack thereof). Sometimes the water is too rough and only experienced swimmer should wade in. Here's to reading your analysis in the future. Hopefully it wont be on RTOs with PEs that are too good to be true.
    31 Mar 2011, 08:04 PM Reply Like
  • Jion
    , contributor
    Comments (794) | Send Message
     
    As the majority of the american and other foreign stocks have made an upward course, following the market, it's time to separate the sheep from the goats in China space and find the opportunities.

     

    An example are the chinese solar stocks. IPO mid caps with big-4 auditors are traded at P/Es even below 4, as the analysts for months claimed oversupply, decreased prices and subsidies cuts in Europe etc...but the profits of chinese solars were growing and the demand was increased also (that's why the polysilicon prices doubled in a year) and Europeans never made any subsidies cuts (in the contrary they suspended their nuclear plans). Same good news came from China, which planned to increase its capacity from 2GW to 5GW in five years but now they reconsider this number to 10GW.

     

    In the meantime Credit Swiss, which is one of those who are strongly criticizing chinese solars, increased its stake in some of them, for example now they hold a remarkable 15% in CSUN...
    1 Apr 2011, 04:17 AM Reply Like
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