1) Look for a low P/E in an industry you can understand. How simple is the business model? Can you understand exactly how the company is making money and growing revenue? Most of the RTO names have an implied chance of fraud already priced in and therefore trade at a very low P/E multiple when compared to better known Chinese stocks - think BIDU or recent IPOs like DANG and YOKU
3) Is there cash? You want to find a company that has positive cash flow from operations and a history of what we consider non-dilutive offerings. We look for prior offerings where capital is quickly put to work and results in a growth in fully diluted EPS. Along this line, you should question any offering done when, according to balance sheet, there is already plenty of cash on hand to handle any planned capital expenditures.
4)Watch the CFO. Ideally you never want to see a CFO leave. Realistically, these are growing companies and as with companies in the US going from start up to major exchange listing there will be turnover in key positions including the CFO. When they do replace a CFO, is it an upgrade and does the current CFO have credentials you would expect to find in a US publicly traded company.
6) Our last step is reviewing Research reports. If you do not subscribe to a service that disseminates analyst reports, many websites post research reports to the public, Geo Investing and Trading China to name two. Some of the companies issuing research have visited the company and spoken to clients in an attempt to further verify revenues. Keep in mind, some research companies are paid for their support and some have been underwriters for offerings and this will be noted on the research report. Others are just pure research reports, weigh each price target and basis for estimates appropriately.
None of the above steps will guarantee you have found a company which is immune to short speculation, nor will it guarantee the company has not created an elaborate web of fraud. What is does is allow you to assemble a portfolio of very cheap well capitalized companies doing business in one of the fastest growing markets in the world.