U.S.-Listed China Space Wake-Up Call

Includes: ALN, CNTF, LPIH
by: Dutch Trader

The high-profile short-selling attacks of 2010-2011 in the China space devastated the appetite for U.S.-listed China small-cap firms. For a reason of course.

Thanks to Trading China we now know that more than 50 Chinese companies have been delisted over the past two years with more to follow. The conclusion the author made was the following:

and with very few exceptions all those companies were frauds or they have now stopped filing reports with the SEC for other reasons. Only the handful of companies that stayed current in filing its Form 10Qs and 10Ks at all times since the delisting are worth a second look.

A very interesting research article that every investor interested in the U.S.-listed China space should read.

Foreign short-sellers are telling China it has a credibility problem, and China seems to be listening.

Not so long ago, Beijing could have ignored the foreign calls for greater transparency or doubts about business models, even after investors were burnt. The China story of limitless growth sold itself, and investors were keen for any entry into the world's biggest growth engine.

Officials from the Shanghai and Shenzhen stock exchanges embarked on a global tour in September aimed at restoring overseas investors' appetite for Chinese equities, in particular mainland-listed companies available through the Qualified Foreign Institutional Investor (QFII) program.

China may also be finally warming to the prospect of U.S. regulators double-checking the work of Chinese auditors. An official at the U.S. Public Company Accounting Oversight Board (PCAOB) said on September 21, that U.S. authorities have reached a tentative agreement with Beijing to allow them to observe official auditor inspections in China.

Credibility and Communication

U.S.-listed China companies need to become more transparent to attract foreign money. A great example of transparency is Longwei Petroleum Investment Holding Ltd (LPH).

Longwei Petroleum Investment Holding Limited is an energy company engaged in the storage and distribution of finished petroleum products in China. The company's oil and gas operations consist of transporting, storing and selling finished petroleum products.

The company recently reported revenue of $510.6 million and net income of $65.1 million for the fiscal year ended June 30, 2012. EPS came in at $0.61 and book value per share was $3.31.

The finalization of its $110.6 million purchase of the assets of Huajie Petroleum Co., Ltd. ("Huajie"), a fuel storage depot in northern Shanxi Province with a 100,000-metric-ton storage capacity, will drive EPS growth the coming years.

The company has been in touch with investors all the way and in my opinion this is a perfect example how companies should communicate.

Going public in the U.S. is not just about sourcing your money from a different group of investors, it's about a commitment to communicating. I hope management teams learn to be transparent and communicative.

China companies such as American Lorain (NYSEMKT:ALN), China TechFaith Wireless Communication Technology Limited (NASDAQ:CNTF) and many others should learn from their compatriots listed in the U.S.

Disclosure: I am long ALN, LPH, CNTF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.