In Q4 2010, I mentioned an arbitrage idea, regarding two small cap Chinese stocks which returned to investors over 40% in less than 60 days. They were XING and QXM. Using the same algorithm, I came up with the next ten big ideas within China ADR small Caps that may offer the best risk/reward ratio to Investors. Few of them are reverse mergers, but most of them are not. Lately, I have been studying some of the reverse merger stocks because of the bad publicity initiated by Barons last year and where shorts keep on feeding once in a while on the speculation of bad accounting and scams in order to create fear to investors and profit on the very trade. Even though, I believe Baron's article had some truth in it, one cannot generalize that all reverse mergers are a scam.
I could write a book on this subject, but the point I want to make is very simple:
Lately, we have seen many of these Chinese stocks that have been attacked by shorts (hedge funds) were or are willing to take them private, offering investors over 40% premium from the current stock price level. However, the same funds refuse to accept the deal because insiders are trying to buy out these companies below its books value or at substantial discount of its cash. Hence, it does not make any sense to me when the same funds doubt about their accounting practices and drive the stocks below its true intrinsic value and do not accept 40% premium from their current price levels. If they believe the accounting on these firms is a fraud why do not take the deal? Who are they trying to protect: the minority shareholder or their best interest? Something the regulators should start to do some work right away on who is shorting, who is benefiting from these trades, and what stories are true or false!
I will give you few examples on Chinese companies that are not even reverse mergers, but want you to believe they are. I hope you can come to the same conclusion I did through your own reseach and clear see the game these institutionals are playing.
QXM is a subsidiary of XING. XING has offered $0.80 (cash) per share plus 1.9 shares of XING for each share of QXM. A special committee was called as it is required by law in order to protect the minority shareholders. They had no comment, after spending resources of the company, affecting shareholders by running extra expenses because the truth is if they recommend the deal, they were out of a job! On the other hand, Shah Capital Management which had and still has the majority minority shareholder votes did not even show up to vote which resulted in failing the "scheme". QXM at that time was trading at $4.5, before trading at $5.96 in early January when the minority shareholders thought the deal was going to get approved! Today is trading at $3.01 or 160% below its book value of $7.84! Further, and accordingly to the SEC filings, Shah Capital Management sold 8.94% of its shares by December 31, 2010. You may take your own conclusions!
CSR, recently offered $6.5/share to shareholders to take the company privately. The company believes the company is not fairly valued on Wall Street, and it is offering a 44% premium from what the stock is trading at. The same story goes on: shorts believe this is just a game in order to get higher valuation, but my question remains: why do they not accept the deal if the accounting raises concerns? I am still waiting for the feedback on the Special Committee! However, I can almost assure you that the special committee will make no recommendation, and some fund who represents the biggest percentage share of the minority shareholder will give the same reason " they are trying to buy the shareholder below its book value" while shorts keep on playing the game on accounting irregularities. If so why do not take the deal?
On the Chinese solar sector, I can understand the argument coming from Italy that subsidies from the Government may substantially decrease. However, in my opinion that will not happen at the rate analysts are expecting until 2012. While Italy created a huge demand for some Chinese solar companies, I believe a company like JASO may be immune from such rumor, once, the country in Europe they export the most is Germany. With the recent events happening in nuclear energy in Japan, German policy may further shift towards wind and solar for years to come. But, the JASO market is not only Germany, it is the US and China where demand is still picking up. Its revenues have been growing at triple digit returns in the last twelve months. But let's assume JASO will grow at 0% in the next 5-10 years. JASO has a book value of $6.26 and 2011 EPS of 1.29. I am cutting EPS by 29%, which gives it, EPS of $1.00. This means if I assume 0% growth for the next 10 years which is a ridiculous assumption, my algorithm tell me that JASO is worth $10+$6.26(book value)=$16.26. Folks it is trading at $6.15, below its book value. Go figure!
Another example is APWR which has book orders of over 1 billion USD in 2011- 2012, and it is trading at a market cap of 200M when book value is $6.26, trading at $4.31. Indeed, these numbers may be all a lie, and if so, regulators are not doing their job!
I could go on and on and mention even better future values such as BORN, FEED, CHOP, GSI, HSOL, etc.
So here are my 10 stock pick values if the numbers are correct: XING, QXM, JASO, APWR, CSR, FEED, BORN, HSOL, GSI, and CHOP
I always thought the markets were efficient, at least that is what they taught me in Economics, but I am starting to believe the markets have become more and more manipulated since Hedge Funds (the power of money) become the new market participant. It reminds me of big investment firms and the mortgage industry that took the world economy for the abysm. My last conclusion is the more the market gets regulated for some, the big boys take further advantage of it. Something to think about! In the mean time, more and more retail investors exit the market, and soon more and more ADRs will pick Hong Kong, perhaps!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.