Picking Through the Burritos

1,861 views

Back when Enron folded, I bought a shitload of bonds from other utilities and made a fortune. People assumed they were all frauds because of one bad customer. The situation with the ChinaScams is a little different because it’s in the Chinese culture to commit outright fraud, apparently. Perhaps it’s a page out of the Sun Tzu “Art of War” manuals when he tells his fellow Chinamen to “annoy and evade, then commit accounting fraud against white devils” when faced with an opportunity to “get rich as fuck.”

It’s also in human nature to overdo things, as is the case with many legitimate Chinese burritos right now. The problem lies in the jack in the box style fraud allegations published by websites like Citron and Muddy Waters. Over the long term, we will look back on this period of uncertainty as an opportunity to buy these companies at bargain basement values.

I’ve grouped names by BIG 4 auditor, in an effort to weed out the companies with fifth tier auditing representation. Here are the groupings and stocks that look interesting at face value.

PWC:

NTES, SNDA, PWRD, HMIN, LTON, SINA, NCTY, SOHU, CMED, CTRP, CYOU, CGA, HNP, ACH, PTR, MR, GSH, LFC, TOMO, CEA

DELOITTE:

SPRD, FMCN, WH, JRJC, KONG, CNTF, VIT, WX, NINE, EDU, EJ, SV, AMCN, NED, ASIA, ACTS, VISN, NTE, CISG, YZC

ERNST AND YOUNG:

GA, GRO, XIN, BIDU, CYD, SVA

KPMG:

CHA, SNP, CHL, NPD, GRRF, ZNH, YONG, FFHL, ATAI, SHI, GU, LONG, SCR, SSRX

Names of interest:

PWRD, SPRD, COGO, EJ, CMED, LFC, CEA, SHI, HMIN, SNDA, VIT, CISG, SCR

43 Responses to “Picking Through the Burritos”

  1. boo

  2. Have any of the Big 4 had a chicomritto go bust?

  3. Frankie Gamwell

    Well if the Big Five are vouching for them they have got to be worth something. Wait where’s Arthur Anderson?

  4. HalfBloodPope

    Where is BORN on that list?

  5. leftcoasttrader

    I am working under the assumption that we will look back at this period in time and say “if only I bought a basket of Chinese stocks and held them until either or double or zero.” True long term Chinese lottery.

  6. “Perhaps it’s a page out of the Sun Tzu “Art of War” manuals when he tells his fellow Chinamen to “annoy and evade, then commit accounting fraud against white devils” when faced with an opportunity to “get rich as fuck.””

    hahaha

  7. The Russell rebalancing isnt helping these things, something like 49 companies were dropped from the indexes this year for not meeting the capitalization requirements.

    • I see you noticed that here’re the ones they added

      Russell Microcap Additions (U.S. Companies)

      NEP – China North East Petroleum
      NEWN – New Energy Systems Group

      Russell Global Additions

      CNTF – China Techfaith Wireless Communication
      ZX – China Zenix Auto International
      DQ – Daqo New Energy
      LONG – eLong
      FTLK – Funtalk China Holdings
      QIHU – Qihoo 360 Technology
      RENN – Renren
      CTE – Sinotech Energy

  8. If Fly, or anyone else likes Fx, shorting the USD/MXN currency for about 3 weeks will also credit the account on carry interest payments. Quite a nice swing, no braining trade. Margin requirement is high and could be a barrier.

    CAVEAT: Trade this, America could go back to gold standard, thus eviscerating this idea and your Fx account goes to zero.

  9. It is a lottery because you have never been in China before. Spotting a legit business from the screen is really busy once you have been there regularly.

    In my opinion, the big four on the NYSE, BIDU, SINA, SOHU, and NTES, have zero chances of being a fraud. These boys face the same accusations in their early IPO days and have established credibility among investors.

  10. xxxHuggieBearxxx

    maybe i will buy 100 shares of each of these cos and see what happens

  11. Do any of these reports have buried discussion of discrepancies? I’ve written and read a lot of oil and gas reserves reports for a while now. In some competitor reports I’ve read, fishy assumptions/disclaimers are in the discussion (usually), and not the final numbers.

  12. any site that IPOs rather than backdoors the IPO via reverse Merger is probably more likely to be safe than reverse merger. Attaching to shell company via reverse merger is an easier way to commit fraud as it’s less clear what you are getting when you buy the stock, and they don’t have to go through the same regulations when going public since they really don’t “go public” they just leach off a shell company that goes public. Then again Buffett’s Berkshire Hathaway was reverse merger, I suppose we should assume that to be a scam too? LOL.

    ctrp IPO, underwriter Merrill lynch, no auditor resignations, no management changes… looks legit

    fixyou.uk is a good site for finding out ipo vs reverse merger, underwriter, auditor, etc.

  13. One of the criterias is IPO vs. reverse merger.

    But, the most important criteria is the company main business. When you deal with Chinese companies, you should assume outright fraud on all of these dogs. So, your only research should only pertain to the main business.

    The questions you have to ask are:

    1) Do I understand their business?
    2) Does the profit sound feasible given the market, competitors, technology, and growth?
    3) Do I trust the management? If it is a fraud, what does management lose? Sometimes, when the management is made of tycoons in China, they have a hell lot more to lose if it is a fraud. After all, they are already rich as fuuck. Why would they commit fraud instead of a building a legit super business.

  14. I buy every blanket I find in flea markets, swap meets, and off the backs of the homeless. One of these days when the Roadshow is back, one of curators will inform me, on the air, it’s the authentic Indian chieftan’s personal effect. Better odds.

  15. I will speak my mind…

    Excellent analysis. Amidst the stink/stagnation of the recent tape, it’s crucial to force oneself to think outside the box, and push beyond the sturm und drang.

    Well done Senor Tropicana.

    Or should I say, bravo…..

  16. “Chinese culture to commit outright fraud”
    i laughed hard when i was talking with my gf about this. it is not really cheating. its just “profiting more”

    damn. thats the kind of culture chicoms have. “to profit more”

    what kind of ideology is that?

    • change pork into beef to “profit more”

      make fake egs and sell it “to profit more”

      to put lead in toys as filler “to profit more”

      milk fillers that makes them toxic “to profit more”

      i had a cousing who manufactured hospital equipment and true story. he had to check each of the stainless steel beds they made cause “to profit more” the chinese “partner” they had would “occasionaly” spike the hospital beds with non stainless steel metal.

      all this is a quest “to profit more”

      fucking ey. man the only communist in china is the govwerment all the others are greedy fucking opportunist skewed capitalists bent on “profiting more”

  17. “Chinamen”? Jesus, Fly, are you still living in the ’50’s?

  18. why would anyone look at Chinese crap… can you not find anything among the other 8000 stocks ??

  19. ABAT

    just let me put this here so I can reference back to it when I am rich as fuck

    I’m in at $1.18

  20. Colonel von Ryan

    HRBN up 60% today….

  21. What about Tencent. Get your head out of the burrito.

  22. Still waiting for the post on
    Taiwanese Chimichangas or Japanese Flautas

    Long SINA for the short term.

  23. I’ve been reading through 10-Ks for some of the Chinese dicktraps over the past few hours and all I can say is that it is APPALLING!

    Looking at some of the investment funds with capital allocated to these stocks makes you wonder who the fuck is doing any real work over there. CALPERS, AQR, Vanguard, WFC, and BAC all invested in TSTC. Other hot shot funds like Tiger were in LFT. SHAME ON YOU. Shame shall enter your asshole and ride all the way up your quantitative analysis addled spine to coil around the hemispheres in your head, constricting any activity and dying your useless grey matter communist red.

    Telestone (TSTC) started as a company that provided management advice to developing companies that bought another company that owned mortgage originating software, and started a subsidiary where they leased equipment. After that went bankrupt with all of their other ventures they created a company named Telestone (how fucking convenient of a name), re-incorporated and reverse merged with a Hong Kong based company named “Success Million Incorporated” that had its own subsidiary named Beijing Telestone, who nicely license all R&D to a third party.

    The best way to analyze these companies is to look at some of the 10-Ks. A growing telco with no debt is suspicious too.

    • Actually, good liability/equity ratio isnt a red flag. There are plenty of great companies in China operated with close to zero long term debt and tons of cash.

      Honestly, you should stick to Chinese IPOs that have traded for a min of 3 years. That is def enough time for the market to expose these clowns, if thay are fraudulent.

      Another requirement for me is to stay the hell away from Chinese small caps. The reason is that management of these companies tend to be poor fuckers off the street. The temption for these fuckers to cook the book is much higher against some rich fucker whose reputation is associated with mainland China.

      Taking a page from Warren Buffet, the last requirement for me is to find companies with a great competitive durable advantage. That means either strong pricing power or dominant market share. The chances of these companies being fraudent are close to nil, assuming that you have done your homework on their core business.

      In China, frauds and scams are routine. That is why Chinese natives or foreigners living in China can spot these bs from a mile away. Foreigners who have never been to China should be cautious about Chinese stocks though.

      • The_Real_Hmmm

        I never said no debt was a red flag in itself, it’s just that utilities and telcos usually are very capital intensive and necessitate debt.

        Did you know Chinese companies get money from the PRC govt for launching an IPO in America? I got this from PWRD’s 10-k:

        The Group applied for government grants for game software development and has received government grants in cash in the amount of RMB1,000,000 in 2006 and 2,600,000 in 2007. In addition, the Group received RMB2,000,000 government grants in relation to the successful completion of IPO in NASDAQ in 2007. A total amount of RMB4,500,000 was recognized as “Other income” in the statement of operations for the year ended December 31, 2007. The remaining balance of RMB1,100,000 was included in Deferred government grants.

        • This is nothing new. The Chinese government has been subsidizing small businesses in China in order to spur domestic innovation, development, and research for a while now.

  24. perilouspustule

    Had my eye on chl for a while now. Over 300 million real customers and around 80% of the entire Chinese telecom market. Billions in cash and a nice dividend to boot.

  25. FMCN is solid. As I own a advertising/media company in the U.S., we have discussed multiple partnering opportunities and they are extremely professional and their customer base and physical assets are substantial. The only downside is, as in the U.S. over the past 4+ years, the first budgets which take a significant cut during a downturn with minimal growth is marketing/advertising budgets.

  26. […] At some point the market will cull the real companies from the frauds in China.  (The Fly) […]

  27. […] At some point the market will cull the real companies from the frauds in China.  (The Fly) […]

  28. I invest ed in Duoyuan Printing (DYP) because it was both audited by Deloitte and covered by Roth Capital. Big deal. It was still a scam.

Comments are closed.
Previous Posts by The Fly

Picking Through the Burritos

1,861 views

Back when Enron folded, I bought a shitload of bonds from other utilities and made a fortune. People assumed they were all frauds because of one bad customer. The situation with the ChinaScams is a little different because it’s in the Chinese culture to commit outright fraud, apparently. Perhaps it’s a page out of the Sun Tzu “Art of War” manuals when he tells his fellow Chinamen to “annoy and evade, then commit accounting fraud against white devils” when faced with an opportunity to “get rich as fuck.”

It’s also in human nature to overdo things, as is the case with many legitimate Chinese burritos right now. The problem lies in the jack in the box style fraud allegations published by websites like Citron and Muddy Waters. Over the long term, we will look back on this period of uncertainty as an opportunity to buy these companies at bargain basement values.

I’ve grouped names by BIG 4 auditor, in an effort to weed out the companies with fifth tier auditing representation. Here are the groupings and stocks that look interesting at face value.

PWC:

NTES, SNDA, PWRD, HMIN, LTON, SINA, NCTY, SOHU, CMED, CTRP, CYOU, CGA, HNP, ACH, PTR, MR, GSH, LFC, TOMO, CEA

DELOITTE:

SPRD, FMCN, WH, JRJC, KONG, CNTF, VIT, WX, NINE, EDU, EJ, SV, AMCN, NED, ASIA, ACTS, VISN, NTE, CISG, YZC

ERNST AND YOUNG:

GA, GRO, XIN, BIDU, CYD, SVA

KPMG:

CHA, SNP, CHL, NPD, GRRF, ZNH, YONG, FFHL, ATAI, SHI, GU, LONG, SCR, SSRX

Names of interest:

PWRD, SPRD, COGO, EJ, CMED, LFC, CEA, SHI, HMIN, SNDA, VIT, CISG, SCR

43 Responses to “Picking Through the Burritos”

  1. boo

  2. Have any of the Big 4 had a chicomritto go bust?

  3. Frankie Gamwell

    Well if the Big Five are vouching for them they have got to be worth something. Wait where’s Arthur Anderson?

  4. HalfBloodPope

    Where is BORN on that list?

  5. leftcoasttrader

    I am working under the assumption that we will look back at this period in time and say “if only I bought a basket of Chinese stocks and held them until either or double or zero.” True long term Chinese lottery.

  6. “Perhaps it’s a page out of the Sun Tzu “Art of War” manuals when he tells his fellow Chinamen to “annoy and evade, then commit accounting fraud against white devils” when faced with an opportunity to “get rich as fuck.””

    hahaha

  7. The Russell rebalancing isnt helping these things, something like 49 companies were dropped from the indexes this year for not meeting the capitalization requirements.

    • I see you noticed that here’re the ones they added

      Russell Microcap Additions (U.S. Companies)

      NEP – China North East Petroleum
      NEWN – New Energy Systems Group

      Russell Global Additions

      CNTF – China Techfaith Wireless Communication
      ZX – China Zenix Auto International
      DQ – Daqo New Energy
      LONG – eLong
      FTLK – Funtalk China Holdings
      QIHU – Qihoo 360 Technology
      RENN – Renren
      CTE – Sinotech Energy

  8. If Fly, or anyone else likes Fx, shorting the USD/MXN currency for about 3 weeks will also credit the account on carry interest payments. Quite a nice swing, no braining trade. Margin requirement is high and could be a barrier.

    CAVEAT: Trade this, America could go back to gold standard, thus eviscerating this idea and your Fx account goes to zero.

  9. It is a lottery because you have never been in China before. Spotting a legit business from the screen is really busy once you have been there regularly.

    In my opinion, the big four on the NYSE, BIDU, SINA, SOHU, and NTES, have zero chances of being a fraud. These boys face the same accusations in their early IPO days and have established credibility among investors.

  10. xxxHuggieBearxxx

    maybe i will buy 100 shares of each of these cos and see what happens

  11. Do any of these reports have buried discussion of discrepancies? I’ve written and read a lot of oil and gas reserves reports for a while now. In some competitor reports I’ve read, fishy assumptions/disclaimers are in the discussion (usually), and not the final numbers.

  12. any site that IPOs rather than backdoors the IPO via reverse Merger is probably more likely to be safe than reverse merger. Attaching to shell company via reverse merger is an easier way to commit fraud as it’s less clear what you are getting when you buy the stock, and they don’t have to go through the same regulations when going public since they really don’t “go public” they just leach off a shell company that goes public. Then again Buffett’s Berkshire Hathaway was reverse merger, I suppose we should assume that to be a scam too? LOL.

    ctrp IPO, underwriter Merrill lynch, no auditor resignations, no management changes… looks legit

    fixyou.uk is a good site for finding out ipo vs reverse merger, underwriter, auditor, etc.

  13. One of the criterias is IPO vs. reverse merger.

    But, the most important criteria is the company main business. When you deal with Chinese companies, you should assume outright fraud on all of these dogs. So, your only research should only pertain to the main business.

    The questions you have to ask are:

    1) Do I understand their business?
    2) Does the profit sound feasible given the market, competitors, technology, and growth?
    3) Do I trust the management? If it is a fraud, what does management lose? Sometimes, when the management is made of tycoons in China, they have a hell lot more to lose if it is a fraud. After all, they are already rich as fuuck. Why would they commit fraud instead of a building a legit super business.

  14. I buy every blanket I find in flea markets, swap meets, and off the backs of the homeless. One of these days when the Roadshow is back, one of curators will inform me, on the air, it’s the authentic Indian chieftan’s personal effect. Better odds.

  15. I will speak my mind…

    Excellent analysis. Amidst the stink/stagnation of the recent tape, it’s crucial to force oneself to think outside the box, and push beyond the sturm und drang.

    Well done Senor Tropicana.

    Or should I say, bravo…..

  16. “Chinese culture to commit outright fraud”
    i laughed hard when i was talking with my gf about this. it is not really cheating. its just “profiting more”

    damn. thats the kind of culture chicoms have. “to profit more”

    what kind of ideology is that?

    • change pork into beef to “profit more”

      make fake egs and sell it “to profit more”

      to put lead in toys as filler “to profit more”

      milk fillers that makes them toxic “to profit more”

      i had a cousing who manufactured hospital equipment and true story. he had to check each of the stainless steel beds they made cause “to profit more” the chinese “partner” they had would “occasionaly” spike the hospital beds with non stainless steel metal.

      all this is a quest “to profit more”

      fucking ey. man the only communist in china is the govwerment all the others are greedy fucking opportunist skewed capitalists bent on “profiting more”

  17. “Chinamen”? Jesus, Fly, are you still living in the ’50’s?

  18. why would anyone look at Chinese crap… can you not find anything among the other 8000 stocks ??

  19. ABAT

    just let me put this here so I can reference back to it when I am rich as fuck

    I’m in at $1.18

  20. Colonel von Ryan

    HRBN up 60% today….

  21. What about Tencent. Get your head out of the burrito.

  22. Still waiting for the post on
    Taiwanese Chimichangas or Japanese Flautas

    Long SINA for the short term.

  23. I’ve been reading through 10-Ks for some of the Chinese dicktraps over the past few hours and all I can say is that it is APPALLING!

    Looking at some of the investment funds with capital allocated to these stocks makes you wonder who the fuck is doing any real work over there. CALPERS, AQR, Vanguard, WFC, and BAC all invested in TSTC. Other hot shot funds like Tiger were in LFT. SHAME ON YOU. Shame shall enter your asshole and ride all the way up your quantitative analysis addled spine to coil around the hemispheres in your head, constricting any activity and dying your useless grey matter communist red.

    Telestone (TSTC) started as a company that provided management advice to developing companies that bought another company that owned mortgage originating software, and started a subsidiary where they leased equipment. After that went bankrupt with all of their other ventures they created a company named Telestone (how fucking convenient of a name), re-incorporated and reverse merged with a Hong Kong based company named “Success Million Incorporated” that had its own subsidiary named Beijing Telestone, who nicely license all R&D to a third party.

    The best way to analyze these companies is to look at some of the 10-Ks. A growing telco with no debt is suspicious too.

    • Actually, good liability/equity ratio isnt a red flag. There are plenty of great companies in China operated with close to zero long term debt and tons of cash.

      Honestly, you should stick to Chinese IPOs that have traded for a min of 3 years. That is def enough time for the market to expose these clowns, if thay are fraudulent.

      Another requirement for me is to stay the hell away from Chinese small caps. The reason is that management of these companies tend to be poor fuckers off the street. The temption for these fuckers to cook the book is much higher against some rich fucker whose reputation is associated with mainland China.

      Taking a page from Warren Buffet, the last requirement for me is to find companies with a great competitive durable advantage. That means either strong pricing power or dominant market share. The chances of these companies being fraudent are close to nil, assuming that you have done your homework on their core business.

      In China, frauds and scams are routine. That is why Chinese natives or foreigners living in China can spot these bs from a mile away. Foreigners who have never been to China should be cautious about Chinese stocks though.

      • The_Real_Hmmm

        I never said no debt was a red flag in itself, it’s just that utilities and telcos usually are very capital intensive and necessitate debt.

        Did you know Chinese companies get money from the PRC govt for launching an IPO in America? I got this from PWRD’s 10-k:

        The Group applied for government grants for game software development and has received government grants in cash in the amount of RMB1,000,000 in 2006 and 2,600,000 in 2007. In addition, the Group received RMB2,000,000 government grants in relation to the successful completion of IPO in NASDAQ in 2007. A total amount of RMB4,500,000 was recognized as “Other income” in the statement of operations for the year ended December 31, 2007. The remaining balance of RMB1,100,000 was included in Deferred government grants.

        • This is nothing new. The Chinese government has been subsidizing small businesses in China in order to spur domestic innovation, development, and research for a while now.

  24. perilouspustule

    Had my eye on chl for a while now. Over 300 million real customers and around 80% of the entire Chinese telecom market. Billions in cash and a nice dividend to boot.

  25. FMCN is solid. As I own a advertising/media company in the U.S., we have discussed multiple partnering opportunities and they are extremely professional and their customer base and physical assets are substantial. The only downside is, as in the U.S. over the past 4+ years, the first budgets which take a significant cut during a downturn with minimal growth is marketing/advertising budgets.

  26. […] At some point the market will cull the real companies from the frauds in China.  (The Fly) […]

  27. […] At some point the market will cull the real companies from the frauds in China.  (The Fly) […]

  28. I invest ed in Duoyuan Printing (DYP) because it was both audited by Deloitte and covered by Roth Capital. Big deal. It was still a scam.

Comments are closed.