Glen Bradford offers some clarity on the JADA story, per conversations with the company:

In January 2008, the Company transferred its ownership in its woodcarving operations, which had been its sole business operation, and agreed to pay RMB 60 million (at that time, approximately $8.8 million) to XiKai Mining. In return, the Company received the Exclusive Jade Distribution Rights, which enable it to purchase 90 percent of the raw jade produced by XiKai’s SheTai mine at a fixed price for five years, subject to adjustment every five years thereafter. 

The company  poinst out that the referenced information used by the author of this article is from a personal blog where anyone can put anything on it without taking responsibility. The blog is not about them.

Thanks Value

Here is the link of the article dated November 2008 provided to me by an I-Hub member 

http://www.baidu.com/s?wd=%D2%BB%BF%E941%B6%D6%B5%C4%B4%F3%D3%F1%CA%AF%2C%D2%D48000%CD%F2%B5%C4%BC%DB%B8%F1%C2%F4%B8%F8%C1%CB%D2%BB%CC%A8%CD%E5%BF%CD%BB%A7

Yes, Maj, regarding that bit about the Taiwanese jade order, a full translation of the article he cited was made by Alexshiung at the InvestorsHub JADA board a few weeks ago. Here's the link to read Alex's more accurate translation:
http://investorshub.advfn.com/boards 

If the link doesn't work, it's post #3456 at the I-Hub JADA board.

Btw, that article fully translated by Alex shows other very promising developments for the large-scale "branding" of this SheTai Yu ("jade") that JADA distributes in that high-margin biz of theirs....

Hey Value,

You should be aware that some investors have questioned the accuracy of the timeline of the orders related to the Taiwan  contract.

Maj

Lanny, thanks for a well written, balanced (pro and con) and "tantalizing" article.

Do we know that JADA made the sale and will get the distribution revenues for this transaction with the Taiwanese party?  Remember that the Wulateqianqi XiKai Mining Co. (owned by Zhang Guoxi, founder of the original lacquerwood co. and former mentor/boss of JADA CEO Hua-cai Song when Song was chief operating officer for the wood co.) has the right to a certain amount (10%) of the SheTai jade producton each year to sell or refine on their own.

by Lanny Chiu

A prior version of this article contained reference to a sale to a Taiwanese buyer, which with the help of the social internet venue showed may be problematic.  I have asked Geoinvesting to look into this further for me.  I still find the company to be a compelling risk/reward proposition at this price and remain long the stock

Opportunity in Jade Art Group

The Jade Art Group (OOTC:JADA) is a micro-cap Chinese company that presents a compelling risk-reward opportunity with a seemingly large catalyst in a potential huge 4th quarter sale.

At 15 cents per share, the stock is incredibly cheap at under 2 times trailing earnings.  The company also has $16.3 million in cash (20 cents a share) in cash and no debt on its balance sheet.  Because the macro-environment surrounding all Chinese RTO stocks and a particularly poor Q3 2010 earnings report has depressed stock prices, there is an opportunity to purchase JADA shares at this very attractive price.

The firm is engaged in the distribution and sales of a particular brand of raw jade, SheTai Jade, in China.  SheTai Jade is harvested by the Wulateqianqi Mining Limited in Inner Mongolia and then sold by the Jade Art Group’s subsidiary, the JiangXi SheTai Jade Industrial Company Limited.

Who is Jade Art Group?

They got into the business by swapping out a woodcarving business the CEO Hui Cai Song previously operated with Zhang Guoxi (one of the richest guys in China) for the distribution rights to 90% of the output of the mine.  As the branding and distribution arm, they have very little overhead and a basic business model.  They simply find customers to purchase the jade, acquire it from the mine at a fixed price and pocket the spread.  They pay $2,000 RMB (about $301 USD) per ton for the raw jade which is subject to a price re-adjustment of no more than 10% every 5 years starting in 2013.  As inflation has hit China, the price of their wholesale jade has risen, increasing the profit potential of the firm.

2009        Q1         $3,323.54
2009        Q2         $3,419.00
2009        Q3         $3,472.00
2009        Q4         $3,473.78
2010        Q1         $3,491.61
2010        Q2         $3,518.00
2010        Q3         $3,559.00

Jade's overhead is extremely low, recording only $353,157 dollars in SG&A cost for the first nine months of 2010 with no other major fixed costs.

On the downside, although the firm still generated over $1.5 million in cash in Q3 2010, sales slipped by over 70% from Q3 2009, calling into question the firm’s long-term business plan.  This was also reflected in the company’s increase in bad debt expense of $767,791 for the quarter and suspended shipments to 2 customers. 

For downside protection you have the fact that the firm runs on extremely low overhead, and is sitting on over $16.3 million in cash.   While there are many great opportunities available in the market today JADA appears to be a particularly attractive investment for those interested in Chinese equities.

Note: Financial analyses contained herein were performed based on the SEC filings, not the SAIC or SAT filings.

Disclosure: At time of article, author was long JADA

Disclaimer:

You acknowledge that GeoInvesting is not registered as an exchange, broker-dealer or investment advisor under any federal or state securities laws, and that GeoInvesting has not provided you with any individualized investment advice or information. Nothing in the website should be construed to be an offer or sale of any security. You should consult your financial advisor before making any investment decision or engaging in any securities transaction as investing in any securities mentioned in the website may or may not be suitable to you or for your particular circumstances.  We have not expressed an opinion on the information provided to us in this article, nor have we verified the accuracy or existence of claims made by our "source."

Full Report: http://kerrisdalecap.com/wp-content/uploads/2010/11/CEU-Report-November-2010.pdf

We believe that China Education Alliance (CEU) is fabricating its SEC financial statements. We believe that the company’s revenue and profit are highly overstated in its SEC  filings and that the company is mostly a hoax.

We have put together a 30-page report on CEU and why we believe it is a fraud.

Our evidence includes:

• The company’s websites do not work, despite the fact that CEU is an online education provider and its websites are the company’s main revenue-generating assets. We have recorded three videos here, here and here which show that the main www.edu-chn.com and www.pk1234567.com websites have non-functioning payment methods and are full of broken links and HTML errors.

• The company’s websites receive a fraction of the visitor traffic generated by comparable sites such as those operated by China Distance Education Holdings (DL), which reports lower revenue and lower margins than CEU despite having functioning websites, a larger number of web assets, operational payment schemes and no broken links on their sites.

• We hired an investigator to visit the company’s training center in Harbin and found it to be barren of desks and teaching equipment. We provide a video where we present a slideshow of the empty building. We also explain why we are confident we visited the correct location.

• The company’s local filings to the Chinese government show that the online business generated less than $1 million in revenue in 2008. We provide SAIC filings from 2006, 2007 and 2008, including both original Chinese photocopies as well as English translations.

• The company’s financial figures are not believable when compared to publicly traded comparable companies. CEU reports higher margins and revenue growth when compared to DL, CEDU and CAST, despite having a non-functioning website and a vacant training center.

• The company has had 4 low-quality auditors in the past 6 years. In contrast, the comparable Chinese education providers DL, CEDU and CAST all have top-4 auditors.

• The company raised capital in 2009 at an irrationally low valuation without providing a sensible rationale for why the capital was needed. It already supposedly had $38 million of cash on its balance sheet prior to its unnecessary capital raise.

Thanks,

I am going to take a small position in this play and look if it works out.

Greetz,

Dutch Trader

By Ephraim Fields

China Clean Energy  (CCGY) is a small, rapidly growing, undervalued and poorly named Chinese manufacturer and distributer  of specialty chemical and biodiesel products located in Fujian Province.  The company is benefitting from increasing demand and improved pricing for its products as well as significantly increased production capacity that has already been funded and is already up and running (in other words, they don’t need to raise equity nor is there much execution risk regarding the new facility).  Based on the company’s current guidance of $8.2 mm of EBIT for 2010 (which we consider conservative), the company is trading at only 3.9x EBIT and 4.6x Adj. EPS (based on our derived Adjusted EPS of 23c, which excludes warrant and stock comp charges).  EBIT last quarter (q2) was $2.1mm up from $1.0 million in Q1.  More importantly, next year the company should experience significant growth in profitability as a result of increased revenue and improved margins.  The company has not yet provided 2011 guidance however they have stated that by the end of this year they expect to be running their new facility at full capacity, which based on last quarter’s selling prices (which have since increased) would imply $90.0mm of revenue for 2011, up 58% from 2010E.  Assuming $90mm of revenue and flat EBIT margins, that would imply 2011 EBIT of $12.9mm and an approximate 2.5x EBIT multiple.  While this basic math assumes flat margins, 2011 margins might increase due to increased demand and improved operating leverage.  On the other hand, if 2011 profitability does not reach those levels, the stock is still very cheap.  While no one likes “paying up”  we have done so because even at $2 per share (up 100% from here) the stock is only at 4.8x our 2011E EBIT.  We believe this stock should appeal to value, growth and momentum buyers.  Also note that all EBIT figures here are after about $400k of annual non-cash stock comp which some may exclude from their valuations.

For a small, Chinese company, CCGY has a well-written 10k and recent investor presentation available at http://www.chinacleanenergyinc.com/ .  These are very helpful in understanding the company (especially the new capacity expansion) so I won’t waste time describing the business in detail.

So why is the stock so cheap?

1)      The stock is small and illiquid.  Furthermore, the company’s IR efforts could be improved, although they are actively attempting to improve them.  Two easy things they could do would be to (1) begin giving adjusted eps guidance, rather than just ebit guidance and (2) change their name to better reflect their actual business.

2)      There has been some confusion regarding the company’s need to raise equity.  Our recent and repeated conversations with management (and their public statements) indicate CCGY does not need to raise equity for its current business but could raise equity (but only at significantly higher prices) to finance acquisitions of feedstock suppliers (that would enable the company to have greater control over its cogs).  

3)      The stock is currently traded on the OTCBB, but is actively working to uplist, which we expect will happen next year.  In the near term, however, we expect to see the announcement of new, independent board members necessary to qualify for the uplisting.

4)      In Jan 2008 the company did a PIPE, selling 10mm shares at $1.50 with 5mm warrants at $2.00.  The company failed to commence production of its facility on time and the CEO had to issue some of his personal shares to PIPE investors.  As a result, the company has a tarnished reputation among some investors.  We believe some of these PIPE investors are fatigued and thus are sellers of stock which creates an opportunity for new investors to buy this illiquid stock.

5)      The company records non-cash stock comp every quarter.  Also, although the warrants our out of the money ($2.00 strike price) the company still records a non-cash item on its income statement every quarter.  The company reports an “adjusted” eps figure though but gaap eps is often ugly and confusing.

6)      CFO is based in NYC and is very user friendly.  He has been responsive to all our questions although some investors have complained that his CV is not up to par.

7)      The stock has no analyst coverage and minimal institutional ownership, except for existing PIPE investors.

Catalysts:

1)      Improved quarterly results

2)      Issuance of 2011 guidance – likely when they report q4

3)      Signs of progress with uplisting

4)      Improved and increased IR

5)      Clarification of no equity raise message to investors

6)      Increased interest from investors as stock trades above $1 and at 52 week high

Frbiz reports that raw materials prices continue to rise, constantly squeezing production enterprise profit.

The data shows that for main production materials -- minerals, rubber, non-ferrous metal, chemical products, agricultural materials, energy, building materials, light industry raw material, steel material and so on -- prices are rising.

During the first three quarters, the importing and exporting of raw material prices have soared. The data also displays that crude oil, iron ore and copper prices even reached 40%.  Among them, the aluminum products prices have reached 87.3%.

Under the raw materials price increase situation, some medium-sized and small enterprises can't cut prices. Many corporate profits are slashed, and even some of the best in the industry face an unprofitable and awkward situation.

Recently, the triangle tire, aeolus tyre co. ltd and other domestic large tyre enterprises announced rising prices between 5% to 8%. So far this year, the tyre industry as a whole has increased prices exceeding 12%.

However, this is not offset by upstream rising prices.  Frbiz reports that since 2009, the natural rubber has increased 300%, and the downstream industry cannot be too passive with price increases.\

The tyre industry is not the only affected industry in the downstream.  Rubber sole of shoes production costs have greatly increased.  Therefore, downstream shoemaking enterprises cannot help but face the price pressure.

Tyre and shoes material are examples of raw material price increases, signaling that many companies are under raw materials price pressure.

Frbiz has pointed out that the purchased price index soar affects enterprises' profitability. In fact, Frbiz gets data from enterprises showing that raw material prices have largely affected corporate earnings -- some of the enterprises have even reported zero profit.

Almost 70 percent of exporters project a decrease in orders if the yuan strengthens;

Survey also reveals labor shortage still a persistent problem

HONG KONG, Oct. 25 /PRNewswire-Asia/ -- China suppliers believe the yuan's appreciation will affect exports negatively, if the currency appreciates by at least two percent against the US dollar, according to a survey of 239 exporters by Global Sources (Nasdaq: GSOL) (http://www.globalsources.com ).

Sixty percent of survey respondents expect some decrease in export orders, while eight percent believe sales will be hit significantly because of a stronger yuan.

More than one-third of suppliers said they expect overseas shipments to begin declining when the yuan strengthens by at least two percent. Another 32 percent believe a three percent rise will trigger a slide in sales.

Increasing export prices is the main measure suppliers said they will take to cope with a stronger yuan. A few companies have even started quoting prices based on a 6.6 exchange rate.

"Many companies, particularly those in labor-intensive industries, are running on paper-thin margins and have no room to absorb currency exchange losses. Such businesses are likely to raise prices once the yuan strengthens," said Craig Pepples, Global Sources' chief operating officer. "By working more closely with large buyers, some exporters are focused on adding new features to enhance the value of their products and justify a higher price point."

In addition, suppliers said they plan to take other measures to cope with the yuan's appreciation:

-- 30 percent intend to increase focus on the domestic market;
-- 15 percent of exporters plan to use more imported materials;
-- 10 percent believe focusing on high-end products may bring in higher profit;
-- 7 percent said they may use financial instruments such as foreign currency options or NDF; and
-- 3 percent of suppliers intend to use the yuan as a currency for trade.

Labor shortage still an issue

Sixty-four percent of suppliers said they continue to be in need of workers, even as monthly wages have been increased. The shortage is more prominent in areas outside the Pearl and Yangtze River Delta regions, as salaries there are lower than in the coastal provinces.

In fact, 75 percent of respondents said their employees have sought higher salaries or made other demands in the past three months.

In addition to raising monthly wages and overtime pay further, companies are improving the living conditions in factory dormitories to retain and attract workers. Some dormitory rooms now have individual beds and computers with Internet connection.

High material costs, price competition main challenges

Although there are concerns regarding the yuan's appreciation and the labor shortage, exporters are more worried about rising material costs and intensifying price competition. Suppliers in Guangdong are concerned most about price competition, with 26 percent of respondents based there indicating this as the main challenge.

Among surveyed suppliers:

-- 21 percent said higher material costs was their biggest concern;
-- 20 percent cited price competition as a critical issue;
-- For 18 percent, the labor shortage was the key challenge; and
-- 12 percent said the yuan's appreciation was their main concern.

Global Sources market analysts interviewed 239 China exporters from the telecom, home products, fashion accessories, garments, textiles, hardware, sports equipment and security products sectors in July and August 2010. Nearly half of the respondents are based in Guangdong province, 24 percent are from Zhejiang and 14 percent from Fujian.

 By David Stevenson

Published: September 24 2010 23:11 | Last updated: September 24 2010 23:11

China investment expert Clare Duan, who combs company accounts to spot pitfalls

It’s a warm day in northern China, but it’s cool inside our BMW limousine as it pulls out of the carpark at a new biodiesel plant in Tongchuan City, Shaanxi Province. My two companions clock up thousands of miles in these comfy cars on fact-finding trips around China, visiting dozens of small companies that might just be the next big growth story their investors are looking for.

Clare Duan and Tina Yu are American-educated investment professionals who work for Vision Opportunity China (VOC), a US-run, London-listed stock market fund. “We’re part of a large team of Chinese-born-and-bred researchers and analysts, all of whom are absolutely encouraged to get their hands dirty very early on. It’s a great place to learn,” Yu says.

On the road, they meet China’s next generation of entrepreneurs, many of whom receive backing from VOC. “All of the entrepreneurs are unique in their own walk of life and are all great people we want to learn from,” says Yu, 34. “Although most of them do not speak English and they sometimes have difficulties communicating with western investors they’ve all had legendary life experiences.”

Her colleague Duan, 25, is an intense, boundlessly energetic investment analyst whose job is to spot the financial pitfalls that can trip up investors in China. She combs through the company account books and investigates the underlying business operation.

Yu is old enough to remember the privations of the post-Mao years. She remembers visiting her grandparents in Shanghai and falling ill with a fever. Told to go down and wait in the ration line for a watermelon to cool her fever, the girl started to feel dizzy. “I asked my grandparents if I could go back home and have lunch and then come back again to the queue. But my grandparents were telling me, ‘Don’t wash your hands because I don’t want you to erase that stamp on your palm.’” With no queue stamp there would be no watermelon.

Tina Yu, who searches for investment opportunities in China

Rationing is long gone. Yu’s fund invests in a supermarket chain in the northern Manchurian province where hundreds of watermelons are now sold every hour. Business is brisk in China’s consumer sector and every street corner seems to boast a convenience chain store.

Picking winners in China requires perseverance and luck, but also nerves of steel and very close attention to detail. On the road, these challenges become immediately obvious.

As we talk about the company we’ve just seen in Tongchuan City, we hit a vast traffic jam. Hundreds of grubby lorries are stuck on the road. Two miles and an hour later, we pass the problem: a road crew trying to plug a hole that is the size of a small building. Our rented limo, which has been specially lengthened to appeal to bling-loving Chinese tastes, just manages to skirt around the chaos and on to the sleek Xitong Expressway which goes to the tourist-magnet city of Xi’an (famous for its terracotta warriors). We speed south, but then come to a near-halt in the outskirts of the town, and creep past a giant building site where hundreds of new offices, apartment blocks and hotels are shooting up. Some of this is to service the tourists visiting what was once a capital of Imperial China, but Xi’an is also an industrial powerhouse, home of outfits such as the electric car pioneer BYD Auto – which has attracted investment from Warren Buffett.

BYD is big, but the role-model for a Chinese “shooting star” is ­Baidu. This Chinese rival to Google is now quoted, like many of VOC’s ­investments, on the US markets and is worth $29bn. China has attracted Anthony Bolton, the UK’s most famous investment fund manager, who has now relocated to Hong Kong. His Fidelity China Special Situations Trust launched with £460m of new money in April 2010.

Much of the new investment money is going into consumer sectors, tempted by growing Asian demand for luxury goods. Chris Ruffle is a British fund manager who has worked in China for decades and manages successful funds for ­Martin Currie. As consumer credit levels start to rise, Ruffle reckons China is set for a consumer boom. “You ain’t seen nothing yet!” he tells me.

Despite the optimism, many western institutional investors have already been badly burnt in China. Back in 2005, along with other analysts and newspaper journalists I attended a presentation about investing in China run by London Asia Capital, a London stock-market-listed outfit run by a group of London bankers and Chinese entrepreneurs. They promised access to a series of fast-growing companies that were themselves in the process of listing on the London markets.

We saw lots of graphs forecasting profits. Suddenly London seemed to be the place to be if you were a Chinese entrepreneur (advised by London Asia, of course). Like many journalists in the room, I was impressed by these eager young entrepreneurs, with their talk of educating the Chinese masses or building wind turbines in Inner Mongolia. But by December 2008 the show was over. London Asia’s stock market listing was cancelled.

When new managers were brought in they discovered that no formal accounts had been prepared since 2006. There was no cash in the UK bank account – not enough even to pay for the new CEO’s airfare to Hong Kong – and many of those exciting small companies listed in London had vanished without trace.

Since then the new management has been working hard to untangle the web of investments it inherited.

It’s a cautionary tale, but not an isolated one. Such is our enthusiasm for investing in China that it’s easy to get carried away and invest in companies about which we know, and understand, next to nothing. The VOC fund invests in fewer than 5 per cent of the proposals put to it. Most companies fall by the wayside because they are in a low margin sector where competition is intense. The team is also cautious of investments in real estate and banks or in larger companies where state interference is more blatant.

. . .

Dr Randolph Cohen, a fund manager and academic, David Benway, director of VOC, Clare Duan and the writer at Shengkai Innovations, Tianjin

Most of Yu and Duan’s best deals come via a network of friendly financial advisers and venture capitalists – who are themselves approached by companies eager to list on the western stock markets. But that approach is only the first stage of the “courting” – the Vision team moves through a detailed three-stage investigation process that can take many, many months.

“The first stage would be operational due diligence,” says Yu. “We do a top-down model, looking at the industry sector the company is in, looking for fast-growing sectors. Has the company got an interesting business model? The second stage is financial due diligence – we look at the company’s income statement and balance sheet on a line to line basis. The third stage is the legal due diligence.” This last stage includes extensive use of local investigators. This detailed process sounds dreary but Duan and Yu thrive on it.

Yu gained a PhD in chemistry from Princeton before switching into Wall Street as a biotech analyst. Duan also went to American universities: at school she was gifted at maths and her aptitude for numbers comes in handy as she spends weeks on the road, often on her own, talking to managers and checking accounts. Tax fraud is a problem. Underpaying Chinese taxes can land the guilty party in prison – yet Duan tells me many entrepreneurs are well-versed in using multiple companies and accounts to hide systematic underpayment.

In one recent case she’d had to visit 12 different banks with company managers in tow. Duan had asked to check a company’s account summaries against banks’ own internal records. “We wanted to know if the company had historically underpaid or overpaid tax. Had they committed a tax fraud?” Matters had been complicated by the fact that the chairman used his personal bank account to make the company tax payments – something that’s not uncommon in China. Determined to get to the bottom of the web of transfers, Duan suggested to the company managers: “Let’s go to the bank all together. Let’s physically walk bank to bank. Let’s read through all these bank statements. If those freshly printed bank statements in front of my eyes match perfectly with the records presented to us by the company, then that definitely increases our confidence level.”

One company, fabulously profitable, had attracted international attention. On paper it looked a surefire bet. Yuan noticed it seemed to be producing margins way above the average. The books looked fine, the business seemed promising but the private investigators found out why the company was so special. “The supposedly successful company was using prison labour. That’s why the company was able to have a high operating margin. Through your financial due diligence process, you know the labour costs are low but you don’t know what kind of labour they use. Even if you go on site, they’re not going to take you to the prison! That’s when those private background checks come in.”

Yu tells me about a piano-manufacturing business that had been winning rave reviews from its customers. The numbers looked good and the company appeared to have the potential to grow into a top player in this specialised market. The icing on the cake seemed to be the wondrous customer testimonials. But “some of the customers were not real customers ... probably their families and friends, faking as customers. And then through our local connections we talk to the real customers who actually told us about the [inferior] quality of this manufacturing company,” Yu says.

Xingcheng Gao at his company China Integrated Energy

We’ve arrived at another outpost of the oil distribution and biodiesel refining company we visited in Tongchuan City. China Integrated Energy, listed on the US markets in 2007, is now worth $250m – making the founder, Xincheng Gao, with his 64 per cent stake, worth $160m. Duan and Yu have briefed me that the energy infrastructure of China needs a complete overhaul – and entrepreneurs such as Gao are ideally placed to benefit. That’s not bad for a civil servant who only started in business in 1999. When Gao started out, China’s local banks would not lend without a promise of real estate as collateral. So China Integrated Energy turned to equity investors in the west.

In 2006 sales were $54m and within three years revenues had hit $280m, with compound annual growth rates of around 70 per cent for profits. Gao’s company is now one of the largest biodiesel manufacturers in China and his new refinery in Tongchuan City should increase capacity by another 50 per cent in the next few years. Duan and Yu’s boss, VOC director David Benway, reckons there are probably 40,000 small to mid cap companies like CBEH in China, most of which are growing at equally astonishing rates.

Gao’s company isn’t even VOC’s most successful investment to date – that is Shengkai Innovations, which will be our next stop. VOC’s stake in the industrial valve business is up by 479 per cent. China Integrated Energy by contrast is up a meagre 254 per cent (in just over two years). Not all of its investments grow – China Gerui Advanced Materials is down by 97 per cent.

Overall, VOC has managed to produce a growth of 141 per cent in the value of assets under management in just over two years. With returns like these it’s little wonder that Duan, Yu and their American colleagues, David Benway and Dr Randolph Cohen (a fund manager who is also an academic at MIT in Boston) are in ebullient mood later that evening as we head for dinner with Gao at one of Xi’ans finest dining rooms – we’re to celebrate the opening of the new refinery.

Endless courses spin around the revolving table – my favourite is roast chicken hidden in a wooden pig, with a key to unlock the tasty contents. There is also lots of alcohol – something that is common at key business dinners in China. One China hand tells me later that if you aren’t good at drinking, “it would be a significant impediment to your career in China.”

It’s hard to believe that Gao has only been in business for 11 years. He spent most of his life working for the government – not uncommon among entrepreneurs. Local army railway lines ship his oil, while local government partnerships make sure feedstock prices are pegged and agreements signed with peppercorn farming co-operatives. Many western commentators like to draw a dividing line between the private sector and the state-owned large companies and SOEs (state-owned enterprises). But the reality is that very little gets done in China without state approval and support.

What China cynics worry most about is not the growth potential of this vast country. That’s not in question. The problem is corporate governance. At its core sits the (mis-) alignment of three core groups – the party, the entrepreneur and the investor.

The Asian Corporate Governance Association (ACGA) issues regular surveys on corporate governance and fights the corner for outside shareholders. Its research ranks China constantly in the bottom three for corporate governance, just above the Philippines and Indonesia. The ACGA says that China’s record is improving but it’s clear that progress will be from a very low base. Ruffle at Martin Currie says corporate governance is improving: “I’ve been reading Chinese accounts now for about 20 years and certainly we’re on an improving trend.” But there are worrying practices in supposedly mature stock markets such as Hong Kong, where many growing Chinese companies list their shares. “These Hong Kong companies vote themselves a general mandate: they can do whatever they want ... They give themselves a right to issue 20 per cent of stock without reverting to share holders. Five weeks after they have done it, you discover they’ve raised money to invest in half an airline or some property development.”

Duan and Yu also look for patterns of family ties. Often, senior management have financial links to external, family-controlled companies. Duan says this is a “very common phenomenon ... there are so many, it’s beyond our imagination!” Many of these “third party” structures involve the chairman owning real estate which is “draining cash out of the company you want to invest in to a different business which is completely unrelated.”

Michael Pettis, a finance professor at Guanghua School of Management at Peking University, is a critic of many of China’s economic and financial policies. He says there’s a profound structural problem with Chinese financial reporting. “Well, I wouldn’t want to use the word ‘lie’, but I think there are a lot of discrepancies in accounting numbers especially and there’s also just a physical problem,” he suggests. There just aren’t enough people to do the jobs. “A couple of years ago, it was estimated that China needed about 250,000 accountants a year and it was producing 50,000.”

 

Shengkai Innovations, Tianjin

Companies such as China Integrated Energy represent the vanguard of a corporate governance revolution. Gao, who chose to list in New York, has three independent directors on the board and employs top-rate auditors.

 

Next day, on the road again, we head to Tianjin in the north-west, a vibrant old port city surrounded by new building sites. We’re here to visit Shengkai Innovations in the enormous Tianjin Airport Economic Area. Once this new facility is complete, Shengkai expects capacity to more than treble. Its long-lasting valves are exported to oil and energy customers around the world.

. . .

I give up counting the cranes towering over building sites here. it looks impressive but Pettis believes this extraordinary expansion across China will eventually destroy investors’ returns. He thinks the Chinese development model is a Communist party version of the Asian model of expansion perfected by Taiwan and Japan in the postwar years, but that these countries have both been black holes for investors during the past few decades. In this model, the priority for development is output growth in export sectors, using subsidised local capital from local citizens’ savings accounts and a controlled currency regime. A policy of output growth at all costs means that investors in growth stocks are “not sure why these companies are making money,” Pettis says. He worries that if you lose the implicit subsidies – by increasing interest rates or revaluing the local currency – these fabulous profit margins will vanish.

More encouragingly, Chris Ruffle believes that despite all the governance issues, China’s share of the world stock markets simply has to increase, if only because of the growth of its economy. He estimates that local stock markets currently make up, by value, a measly 1 per cent of the combined value of the world’s equities (as measured by the MSCI Index) yet China already comprises 6.9 per cent of global GDP.

And how do my companions Duan and Yu feel about China’s future? Hugely optimistic. Yu says that the “next 30 years will be even more spectacular ... I still think most western investors may potentially underappreciate the growth potential.” As we rush past the numberless cranes looming over the motorways of China, I can’t help but agree.

David Stevenson is FT Money’s Adventurous Investor columnist

By MICHAEL KAHN, Barrons

A COUNTRY'S STOCK MARKET can be a window into its economic soul. In China, that soul is as happy as ever as the Shanghai Composite index has rallied strongly so far in October.

While there has been talk of some of the same economic problems plaguing the West, such as bubbly real-estate prices, cropping up in the Far East, investors continue to pour money into Asian stock markets via mutual funds and exchange-traded funds at the expense of domestic markets ("Buying the Asian Tigers One by One," Sept. 27).

After a week long holiday break, the Chinese market soared over 11% in seven days before ending its winning streak on Monday (see Chart 1). It was a decisive technical breakout from a two-month trading range and was accompanied by a significantly heavier volume.

Chart 1

 

Charts show technical resistance now in the area, not from the round number of 3000 on the Shanghai composite, but from an area of overhead supply dating back to April. At that time, the market scored a serious breakdown to kick off a steep decline into June. This often prompts investors to sell as they think back to what happened the last time prices were this high.

The popular iShares Trust FTSE/Xinhua China 25 Index Fund (FXI) sports a different look than the Chinese benchmark index but it, too, has reached an area that has brought out the sellers in the past. Specifically, it has reached the 46 level, which was the major peak set in November of last year.

Just as liquidity continues to drive the domestic market, the inflow of investment capital to Chinese stocks serves to provide an underpinning for the rally. Therefore, the bulls still have a strong argument to make.

Current conditions are not lost on Chinese companies as the new-issue market there has been hot. For example, China View Borun (BORN), a producer of alcohol used in beverages, came to market in June and after floundering for a month, it tripled in price.

More established companies such as Internet giant Baidu (BIDU) can boast a full year of strong gains. Baidu in particular broke out from a short-term consolidation pattern Monday (see Chart 2). American peer Google (GOOG) soared on earnings Friday, so there may be more here than simple demand for Chinese stocks. However, the technicals are favorable nonetheless.

Chart 2

 

Several sectors are also quite strong in China. Airlines such as China Southern (ZNH) saw powerful advances this month to date. And while crude-oil prices remain locked in a range, companies such as CNOOC (CEO) are trading near all-time high levels last seen when crude changed hands at $140 per barrel in 2008.

A chart of China Petroleum and Chemicals (SNP) sports an important breakout from a long-term base, or trading range, dating back to last year (see Chart 3). Not only did its price leap up above previous chart resistance, but it did so on a "gap"—an explosive move in price caused by a marked imbalance between buyers and sellers. In this case, buyers were so excited to take action that the market could not accommodate a smooth increase in price.

Chart 3

 

To be sure, Chinese stocks are not immune to profit-taking and corrective declines. But with capital flowing into Asian markets led by China, there are good technical reasons for investors to investigate their favorite Chinese market stories for the long haul.

By Dan France GeoTeam Contributor

A Tale of Two Recent Chinese Small Cap IPO's

The performance of two recent Chinese small cap IPO's last summer peaked my interest. The companies' stocks, both with strong fundamentals and outstanding growth prospects, initially declined following the IPO and then churned sideways for extended periods before finally coming to life. The first of the two to go public in June was China New Borun Adr (NYSE:BORN), a producer of edible alcohol that is used in China's national drink, baijiu. BORN was priced in a volatile market at $7.00, well below its original targeted price range of $12 to $14. BORN frustrated its IPO investors by trading on low volume and with little price movement after the offering. I researched BORN and published an article on GeoInvesting.com ("Raise a Glass to BORN") just as the stock was starting to stir at the end of July. Since then the stock has been 'discovered' by Investor's Business Daily, among others, and has rallied strongly recently reaching $18 in active trading.

Since BORN's saga unfolded ,Tianli Agritech (NASDAQ:OINK) completed its IPO on July 21 at $6.00 and the share price initially plunged to below $4.00 during the first week of trading. The trading pattern since then has been eerily similar to BORN's. Volume until recently has been almost nonexistent and the share price churned sideways just under $4.00. One curiosity I noted with both OINK and BORN was that during the darkest days of low volume and investor indifference it seemed both stocks consistently had bids with size below the market and few shares offered at the ask price. It appears both stocks were quietly and patiently accumulated as discouraged IPO players gave up the ghost and sold at deep discounts to true value. Now the pigs in OINK's pen are stirring and the shares have rallied from around $3.70 to its recent price of near $5.00. Could OINK be the next BORN?

OINK's Business

OINK is in the business of breeding, raising and selling hogs for meat and as breeders for its own use and for other hog farmers in the PRC. The company entered the hog breeding and production business in 2005 when it built its first hog farm. OINK currently operates nine hog farms with annual production capacity of approximately 110,000 hogs. Capacity will increase to 130,000 hogs once the ninth farm reaches capacity by the end of calendar 2010.

The Company also invests in research and development activities focusing on animal nutrition and health. One of the greatest challenges to the hog production industry is the growing variety and variability of swine diseases. Many hog farmers manage these diseases with antibiotics including the use of such drugs in their premix feed without regard to whether a particular hog requires treatment.

OINK has set itself apart from the competition by developing a proprietary non-antibiotic premix feed for use in its hogs. OINK adds live microbes to its swine feed that results in better absorption of the feed and a generally healthier intestinal system than would exist without the use of beneficial bacteria. Greater absorption reduces waste and feed costs by 10%-12%. The industry's typical feed cost per hog is $117 for meat hogs and $51 for breeders. OINK's costs are around $104 for meat hogs and $45 for breeders, giving the Company a competitive costing advantage. Additionally, drug free hogs are preferred and valued by OINK's customers, government regulators and informed consumers.

China's Demand for Pork

China is the world's largest hog producing and pork consuming country. China accounted for nearly half of the world's pork production and consumption for the past five years. Chinese per capita pork consumption is among the highest in the world and pork is China's most popular meat accounting for 65% of Chinese meat consumption. The Chinese consume over 600 million pigs a year.

China's Hog Industry in Transition

China's hog industry is transitioning from a large number of small farms to larger, more commercial farms. Hog production in China has historically been dominated by backyard farms that sell 5-10 hogs per year to small farms that sell less than 100 hogs annually. In fact, farms that sell less than 100 hogs per year account for 75% of the hog farms operating and produce approximately 33% of the hogs sold annually in China. Farms that produce 100 to 500 and 500 to 1,000 hogs per year account for 33% and 19%, respectively, of the hogs sold in China each year. Larger farms that sell more than 3,000 hogs per year account for the remaining 15% of annual hog sales.

The Chinese hog industry is ripe for consolidation and the Chinese government is 'encouraging', or more appropriately stated, pushing the move to larger and more sophisticated commercial farms. In 2009, the Chinese government gave over $750 million in subsidies to invest in larger farms and the use of high-quality breeding swine, as well as incentives for large hog-producing counties. Such subsidies are accelerating the shift toward larger farms such as OINK's that benefit disproportionately from the incentives.

OINK's Growth Opportunities

The transition of the hog industry in China from smaller independent farms to larger commercial producers together with government incentives puts the wind at OINK's back as it moves to deploy the $10 million net proceeds raised in its recent IPO. Opportunities for growth include:

• Build New or Expand Existing Farms: To date OINK has built its own capacity.

• Acquire Other Producers: OINK can acquire the assets of other producers and upgrade the facilities and operations to its standards. The government is pressing less sophisticated commercial producers to either sell their operations to larger producers or shut down. The Company estimates it can acquire other producers at bargain prices and intends to do so in the future. For example, a 20,000 hog farm can be acquired for around $2.5 million. It would take around six months and $500,000 cap ex to upgrade and transition the acquired farm to OINK's standards. A 20,000 hog farm would generate annual revenues of around $4.2 million with 45% gross margins based on current market prices for hogs.

• Grow Production Organically: OINK's management has been very prudent with respect to the hog population at the Company's farms. Currently, management considers 20,000 hogs to be the optimal population at the average farm compared to as many as 40,000 hogs at maximum capacity. The lesser hog population avoids overcrowding and promotes healthier (and happier?) stock. As management gains operating experience and the business matures there is potential to increase the hog population at existing farms and grow the business organically.

Meat and Breeder Hogs - These Little Piggies Went to Market

OINK sells meat hogs and breeder hogs. 28% of sales for the six months ended June 30, 2010, were breeder hogs and 72% meat hogs. When possible the Company prefers to sell breeder hogs. That's because the margin generated from the sale of breeder hogs is higher than meat hogs. The average selling price ('ASP') of breeder hogs in QII 2010 was $325 with a 57% gross margin. In contrast, the ASP for meat hogs in QII was $168 generating a 34% margin. Breeder hogs cost less to produce because they weigh 110 lbs. when sold vs. 220 lbs. for meat hogs. The breeders therefore consume less resources than meat hogs.

Breeder Hogs for OINK's Own Use - These Little Piggies Stayed Home

OINK retains some breeders for their own stock. Breeder hogs consist of purebreds and certain crossbreeds that display favorable genetic breeding traits. A sow is able to have a litter every seven months and produce around 22 piglets a year. Around 5,000 breeders are therefore required to maintain current annual production levels at 110,000 hogs. The productive life of a sow ranges from three to four years. The Company capitalizes the cost of raising the hog to maturity and carries it as biological assets on the balance sheet. The costs are amortized over three years.

OINK Trading at 5X Likely 2010 EPS

Using OINK's most recent trailing quarters as my guide I expect the Company's calendar year 2010 EPS to be around $0.95 vs. guidance of $0.74 ($0.47 achieved as of June 30, 2010). Further, I think $1.30 in 2011 is a reasonable estimate. If my projections are in line with actual performance, OINK is currently trading at around 5X likely 2010 EPS and less than 4X what we can reasonably expect EPS to be in 2011. Factors that could materially impact 2010 and 2011 earnings include:

• The actual market price for OINK's meat and breeder hogs. In the last four quarters the ASP range for breeder hogs was $229 to $325 ($325 in QII) and $157 to $203 ($168 in QII) for meat hogs. We know from recent industry press information that meat hog prices have recovered from the lows in July to around $185 during the second half of September. We also know that quality breeding sows are in short supply. Pork prices should reach their seasonal peaks during QIV 2010 and maintain those levels in QI 2011.
• How and how quickly management deploys proceeds from OINK's IPO.
• The mix of breeder and meat hogs sold.
• Organic growth at existing farms.
• Possible secondary offering to raise additional capital. Management has shown a prudent and methodical approach to expanding operations. I believe the proceeds from the recent IPO will be deployed sequentially rather than all at once so I don't think an equity raise is likely until at least the middle of 2011 when the share price should be significantly higher, mitigating possible dilution for existing shareholders. Keep in mind that the Company does have access to bank credit and cash flows from operations are strong. Both of those factors should grow over time so an equity raise may or may not be necessary depending on the opportunities available and circumstances in the future.

A Make Good Agreement with Teeth

Investors should take note of and be comforted by management's commitment to growing shareholder value. The Company's Chairman/CEO and CFO have committed personal shares in a make good agreement. Under the agreement if the Company does not generate after tax earnings of at least $0.74 per share for 2010 the executives will cause to have canceled a sufficient number of their shares necessary to ensure the EPS target is attained. Based on my research the executives have nothing to worry about, but nevertheless it displays a firm commitment by management to protect the interests of all shareholders.

On-the-Ground Due Diligence

Geo Investing is working with OINK's US representative to schedule an on-site visit with management in China. That meeting should take place within the next month. Geo will report the results of their on-the-ground due diligence after that meeting takes place.

Where Do OINK's Shares Go Next?

Nobody has a crystal ball or the ability to predict share prices in the short run especially for a stock with a small public float. OINK does, however, display the fundamentals, financial performance and has the operating assets, cash resources and management needed to capitalize on the business opportunity it has in the largest pork producing and consuming country in the world. Given the government's commitment to consolidating the pork producing industry by pushing production more and more toward larger commercial producers and the concerns about the adequacy and safety of the country's food supplies, OINK is well positioned to do extremely well and the price of its shares should follow. Recent activity in OINK's shares just might indicate it is on its way to becoming the next BORN. We could all drink to that!

Positions: At time of article, Dan was long OINK and BORN

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 By MARILYN ALVA, INVESTOR'S BUSINESS DAILY 

The potent white liquor known as baijiu is as popular in China as sake in Japan or vodka in Russia.

And as disposable incomes rise, demand for the grain-based national drink keeps growing, more than 16% a year, higher than supply growth.

The supply-demand imbalance gives China New Borun Corp. (BORN) reason to cheer.

 View Enlarged Image

It's the third largest producer and distributor of corn-based edible alcohol, used by distillers to make baijiu.

As it expands plant capacity while many older and smaller producers are being shut down by the government, Borun aims to be the No. 1 supplier.

The company, which went public in June, is the only pure-play edible alcohol supplier in China that's publicly listed. Though it priced under guidance at $7 a share, the stock has nearly doubled since.

A Leisure Play

"It's a way to play leisure entertainment spending in China," said Jeff Papp, senior analyst with Oberweis Asset Management, which owns 360,000 shares in the company. "Think about it: Its product is used in the production of baijiu, which is super popular and has the same kind of growth trajectory beer had here ."

The company raised $35 million in its initial public offering, after expenses. A lot of it is earmarked for expansion of its plant in Daqing, a big corn-producing region in the northeast. The region is also home to many baijiu distillers, Borun's customers.

At the Daqing plant, 120,000 tons of additional capacity is expected to be added by the end of December to the current 100,000-ton maximum.

Borun also operates facilities in the east-central coastal province of Shandong, another fertile corn belt.

The region is home to the company's headquarters in Shouguang.

The two regions bring total production capacity to 260,000 tons of corn-based edible alcohol per year, not counting upcoming capacity.

In both regions, Borun has secured favorable corn-supply contracts with local growers.

The recent global wheat shortage won't have much effect on the company's corn supply due to the abundance of local suppliers, the company's chief financial officer said in an August conference call. And any hikes in corn prices can be passed on, the CFO said.

"As alcohol spot prices are trending up in China, we believe this would create room for cost pass-on, even if corn cost rises higher than expected," wrote Piper Jaffray analyst Anson Chan in a Sept. 21 client note.

Pricing trends bode well for Borun now, says analyst Katherine Lu of Oppenheimer & Co. Prices of edible alcohol have risen 40% year to date while the price of corn, the main raw ingredient, has gone up 20% during the same time, she said Wednesday.

Facilities in both regions have already completed expansion begun earlier, driving much of the company's recent revenue and net income growth.

In the second quarter, revenue rose 154.5% from the year-ago period to $63.7 million, the company reported. Net income rose around the same percentage amount to $9.9 million. In its first quarter as a public company, Borun earned 46 cents a share.

Papp says the government has granted Borun "one of the last licenses to increase production of edible alcohol," which gives it a leg up on the competition.

 

"Most of the factories for this stuff are somewhat polluting, and the government is trying to limit polluting industries," he said. "This is one (industry) being targeted by the government."

Borun says its proprietary wet-process production method consumes less energy and water than the typical dry-milling process used by other edible alcohol producers in China. It also results in higher yields and generates added revenue streams from byproducts.

If Borun wants to expand volume by an additional 110,000 metric tons next year under its last remaining government license, it will likely need to raise more funds through a follow-on offering, Lu says.

"They are putting everything into expanding their capacity now," she said.

About 70% of revenue comes from edible alcohol. The rest comes from byproducts, such as dried grains with solubles used as feed for livestock, poultry and fish, and corn germ used to make corn oil.

At its Shouguang facility, Borun recently began converting waste carbon dioxide to liquid form for sale to third parties. The operation started generating output in July.

After Borun expands to the fullest extent allowed by the government, future expansion would likely come through acquisitions, management has said. Lu doesn't see that happening before 2012.

Meanwhile, the company is expanding its customer base in other provinces, including brand-new regions such as Sichuan Province, where demand for edible alcohol is strong.

Higher Margins

Borun is shifting production away from grade C edible alcohol to higher-margin, higher-quality grade B product.

Analysts surveyed by Thomson Reuters estimate Borun's per-share earnings next year will grow 23% over this year to $2 a share and go up 17% in 2012.

Piper Jaffray's Chan sees more.

"We expect Borun to stay on a fast growth track" of 31% compounded annual EPS growth from fiscal 2010 through 2012, he wrote in his recent note. Piper Jaffray was an underwriter in Borun's IPO, as was Oppenheimer.

Despite stock volatility, Chan said plant utilization was over 95% in August, corn costs in July and August were stable due to long-term procurement agreements, and expansion in Daqing "is well on track." New commercial production there, he notes, will start in early 2011.

The company itself forecasts that 2010 revenue should range from $243 million to $245.9 million for a gain of 55.7% to 57.5% over 2009. It didn't give guidance beyond that

“Strength...Innovation...Value”

I would like to start with market commentary by Byron Wien from Blackstone Group. I found it to be insightful as it provides a look into how an influential group of very intelligent and very wealthy investors (including over 10 billionaires) and business executives view our world. They are representative of those who drive our economy, run large companies, make decisions, invest in the stock and bond market, hire people, and weigh heavily on who is elected. This summary covers a lot of things that keep me and you up at night. While we focus on China, what happens in the US market and the mindset of US investors have a lot to do with how Chinese stocks in the US trade, and that’s not going to change. Until investors regain confidence, small‐cap stocks will languish as they are the farthest out on the risk spectrum. What I hope you find interesting is this group’s views on China, which mirrors ours in that it will be the place to invest for the coming decade.

Despite stronger fundamentals for the vast majority of China‐based companies, the mounting short attacks and company follies have put multiples back where they were 2 years ago. It is not necessarily fair but in the stock market perception is reality. The good will survive, emerge stronger, and at some point get back to reasonable multiples. In the interim, while bonds continue to rally and money continues to flow out of equities, this bear market and bottoming phase will continue. With negativity at its highest point and the short interest in many of these
names rising precipitously, a rally seems close at hand.

The Roth Best Idea Fall Conference in beautiful Maui provided a brief and much needed respite from the recent market woes. With a view like this during meetings, every presentation sounded great. Since the first quarter when real gross domestic product expanded at a 3.7% rate, almost every measure of economic progress in the United States has
deteriorated. Unemployment has remained stuck at about 9.5%; the second quarter gross domestic product growth was
recently revised down to 1.6% from a preliminary estimate of 2.4%; home sales have retrenched after tax incentives
expired; retail sales are lacklustre and capital spending is uneven. Instead of gaining momentum the economy appears to be sputtering, and the mood of investors is
apprehensive at best.

In general, investors at Mr. Wien’s events were gloomy. They saw the United States in a longterm
slow growth environment with the near‐term risk of a double‐dip recession quite real. The Obama administration was viewed as hostile to business and its policies inhibiting both hiring and investment. Companies and entrepreneurs were reluctant to add workers because they didn’t know what their healthcare costs or taxes were going to be. Financial service firms were confused about how the rules emanating from the new financial service regulatory reform legislation would affect their businesses. Almost three‐quarters of Americans polled think the country is headed in the wrong direction and Obama’s approval rating is in the lamentable low 40’s. One participant said that the top 5% of the income ladder accounts for 30% of consumer spending and that is the group Obama seems to be attacking. The already high level of debt currently on the books of the federal government makes additional stimulus spending controversial and the political climate for more stimulus makes it unlikely that a major program could be passed. Finally, there are many who question the effectiveness of the first stimulus program.

State and local governmen ts are running hundreds of billions of deficits annually so they are more likely to be cutting back on expendituresadding to unemployment and slowing economic growth. Consumers are in the process of reducing the debt built up during the free‐spending era prior to 2008, so their role in contributing to growth (the consumer represents 70% of gross domestic product) is likely to be diminished. Current administration policies have not been effective in helping the middle class in America. Even if the Federal Reserve engages in a vigorous program of quantitative easing, the economy is unlikely to pick up much speed. There is a mismatch between the jobs that are
available and the people who have the skills needed to fill them. American labor costs are high and there are an increasing number of competitors around the world making products comparable to ours in quality at lower prices, so it is proving hard to expand our exports while our craving for foreign manufactured goods and oil keep our imports high.

Moreover, these are not problems that are likely to be solved any time soon; over the short term they may actually get worse. We seem tobe condemned to a long period of slow growth and high unemployment, and the current attitude of investors at the lunch and elsewhere seems to reflect those conditions. A substantial minority feared we were headed back into recession. Only a few investors thought the S&P 500 could reach 1200 in the next year.

I asked the group if there was a bullish case to be made since periods of profoundly negative sentiment usually created major investment opportunities. Several pointed out that money supply was likely to expand, which was generally good for stocks. Both interest rates and price earnings ratios were low and usually those two don’t go together; multiples could rise. Corporate earnings are terrific, corporate balance sheets are in great shape with plenty of cash available for investment or acquisitions. Currently depreciation is running higher than investment, which shows a lack of confidence in the future, but that could change. Merger activity is picking up, reflecting business confidence in strategic deals.

Boards of directors are pushing managements to do something constructive with their cash. The public is selling stock mutual funds and buying bond funds, reflecting their disenchantment with equities, and almost invariably they make this shift at the wrong time. Young investors got burned in the technology bubble and older investors are shifting their portfolios into conservative assets, resulting in a paucity of equity buyers. You can buy high‐quality stocks providing reasonable yields, which means the market is not devoid of opportunity. Larger
companies are especially attractive. Nobody has made money investing in the indexes for 12 years. A quarter of the stocks in the Standard & Poor’s 500 yield more that the 10‐year U.S. Treasury. There are plenty of companies out there with a lot of cash waiting for someone to bid for them. You can buy companies with reasonable growth prospects at 12 times earnings while Treasuries with no growth prospects are selling at 40 times the coupon.

The problems we are facing have been coming for a long time and they will not be solved quickly because so many of them are structural. Our political system is broken, our education system is falling behind and slow to respond to constructive ideas, and our infrastructure is pathetic. The teachers unions stand in the way of educational reforms; the Republicans only care about getting control of Congress and the White House and they lack a convincing program likely to turn the economy around. Tax cuts alone won’t do it. Not enough good people are going into government and those who want to are daunted by the screening process and the exposure. Negative campaigns are showing up everywhere and they seem to work, which is discouraging. The infrastructure in Europe and Asia is better than ours and we’re slow to make improvements here and lack the serious money to do it.

We debated whether the Chinese miracle would continue. Most believed the government there has proven its ability to regenerate itself with competent leaders and was very effective in both producing growth when it slowed too much and restraining growth when it reached a level likely to produce inflation. The usual concerns about demographic problems, pollution, human rights, the legal system and corruption were mentioned but were not yet considered troubling enough to slow China down. Recent data showing growth at only 7% was not viewed as indicative of a prolonged downtrend. There was a feeling that the air pollution problems and the lack of safe drinking water were likely to become serious issues in the future.

China is doing more about its environment than most countries, but it is starting from a very low base. The Chinese are major manufacturers of wind turbines and solar panels but that is primarily for export. China passed Japan this year as the second largest economy in the world and it appears likely to continue to grow in economic importance. Somewhere in the future it will surely run into difficulties but the bubble that everyone has been expecting in real estate doesn’t seem to be about to burst. There are excesses at the high end, but they don’t appear to be system threatening. A healthy crop of new engineers is coming out of its universities every year and we can expect to see examples of Chinese technological innovation in addition to the production of quality manufactured goods at attractive prices. A country with this much economic power is likely to want more of a role in geopolitics and this will be a challenge to the established countries in the West.

Overall there was a feeling that to bring about the profound changes that are needed a major crisis would have to occur. Another recession could create severe problems in commercial real estate as well as residential mortgages and the banking system, and that might bring on serious reforms. In terms of where to invest if the current slow growth economy continued, vacant office buildings and farmland looked good to some. Few were enthusiastic on gold. Many liked Brazil and some favored India. Nobody had anything good to say about Japan. In reaction to the current craze of the banks and others to borrow short term and invest in longer‐term bonds of various quality, one participant asked plaintively, “Has there ever been a carry trade that hasn’t ended badly?”

As always we welcome your feedback and support.
Regards,
Matthew Hayden
Feng Peng
Ted Haberfield
John Mattio
Scott Powell
Mark Flather
Johnny Lai
Ling Zhang
Jennifer Heady
Mark Henshaw

China's August PMI for non-manufacturing sector steady at 60.1%; manufacturing sector rises to 51.7%: The Purchasing Managers' Index (PMI) for China's non-manufacturing sector in August remained the same as in July - 60.1%, and PMI for manufacturing sector rose to 51.7% in August, up 0.5 percentage points from July - theChina Federation of Logistics and Purchasing (CFLP) said here Friday in a statement posted on its website.

Combined profits of China's listed companies surge in first half: Most of China's listed companies posted strong growth in profits amid market fluctuations in the first half, according to figures in reports released by those companies. Of the 1,947 companies listed on the Shanghai and Shenzhen stock exchanges, 1,700 made profits while 247 firms posted losses, according to the markets' half-year report disclosures, which ended Tuesday. The combined net profits of listed companies totaled 784.99 BB yuan (115.26 BB USD) in the January-June period, up 41.17% from the same period last year. Blue chip companies contributed most of the profits despite a 26.82% fall of the benchmark Shanghai Composite Index. The combined profits of 50 constituent companies of the benchmark Shanghai Composite Index amounted to 554.61 BB yuan (81.43 BB USD), or 70.65% of the markets' total. Components of the broader Hushen 300 Index reported combined net profits of 691.26 BB yuan (101.50 BB USD), accounting for 88% of total profits in the two markets. The index tracks the performance of 300 major companies listed on the Shanghai and Shenzhen stock exchanges. Average earnings per share for the listed companies was 0.255 yuan in the first half.

New trading system rules to be outlined as early as October: China may soon take a major step forward to expand the country's over-the-counter (OTC) securities market, a move that experts said is a key to establish a multi-layer capital market, as companies traded in the market are believed to have entered a healthy stage of development. Companies traded on the OTC securities market saw a surge in both revenues and profits for the first half of the year with 69 companies reporting a 75% increase in net profits to 359 MM yuan Y-o-Y, according to the Securities Association of China. The better-than-expected performance of OTC companies and the rapid growth of the OTC market have prompted the country's securities regulator to mull gradually expanding the pilot program of the OTC trading system to more cities across the country. Shanghai and Wuhan, the capital of Hubei province are expected to launch an OTC trading system soon and detailed regulations may be revealed as early as October, according to Chinese media reports. China established the first OTC stock trading pilot program in Beijing's Zhongguancun Science Park in 2006, known as the Zhongguancun Stocks Quotation and Transfer System. Similar to the Over-the-Counter Bulletin Board (OTCBB) in the United States, the trading system provides an electronic financing platform for non-listed start-up companies to raise funds. By far there are 70 high-tech start-up companies traded in China's OTC market.



This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

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(Translated):

The argument for Fraud by Foreign-Listed domestic Firms (source: 21st Century Financial, Aug 31 2010)

 (source: 21st Century Financial, Aug 31 2010)

Xu Jie is already 46 years old. After many years of keeping a low profile, this man with a name very common among Chinese males, assumed the name “Dr. Kit Tsui” across the Pacific. It is this man that controls the growth and decline of nearly 10 billion RMB in market cap in US-Listed Chinese stocks.

10 years ago, Xu was the owner of a Shenzhen-based wireless phone giant “Wandelai”. This company, which had the encouragement from the government to list on the GEM (Growth Enterprises Market )board, was once famous for its capital operations. But in 2003, the company went under because of a 600 million RMB debt case.

Xu Jie left for America, and kept a low-profile listing Chinese companies overseas. He became a promoter of RTO’s. But this low-profile “shell owner”was beginning to face a credibility crisis.

“These stock’s short term success has nearly nothing to do with individual investors” On Aug 26th, the well-known financial magazine Barron’s wrote. “There are many problems during the listing of Chinese RTO’s.”. USX China Index showed, from 2003 to now, there has been 349 Chinese companies listed in US thru RTO. But their market cap decreased by an average of 75% compared to 150 days after the RTO.

After we published the fraud investigation of Oriental Paper (ONP) in July (For details see our Jul 22nd report), our journalist received many accusation data from institutions and individual investors.

Being the organization that was behind ONP’s listing, Xu and his group began to show their presence. Our investigation shows, Xu and his “family-like” group were involved in the listing of nearly 10 companies. They helped Chinese firms buy shell companies, manufacture financial data, and use many off-shore companies to create a mirage of beautified financial results.

Listed companies which are in controversies due to Xu’s group include JADA, UTA, CHCG, CNOA, BFAR, and HSYT.

To millionaire Xu Jie, or today’s Kit Tsui, “Wandelai” is the tomb of all secrets.

Kit Tsui’s faint trace in the US capital markets mainly can be found in the documents of his 2003 OTCBB-listed company Industries International Inc (INDI).

In 2003 Feb, Kit Tsui, along with his brother Xu Zhiyong and brother-in-law Yu Weijiang, bought INDI.

Just before and after 2003, INDI’s Chinese subsidiary Wandelai Communication Technology Ltd, burdened with heavy debt, faced the threat of bankruptcy. According to a training material from Shenzhen Stock Exchange, from Wandelai’s founding in 1993 to 1998, the company had a leading position in China’s wireless phone market. But when Xu took over, he took advantage of the government’s certification of Wandelai as hi-tech company and its encouragement of GEM listing, to “encircle money” (translator’s note: “encircle money” is a term commonly used in Chinese to describe, mostly in capital markets, thru seemingly legitimate ways (i.e. gray areas in financial or legal system) to funnel other people’s money into one’s own pocket.)

The capital market captured Xu’s heart very early. In 1998 he became majority owner in ST Jinuoer, and the company’s bottom line went from red to black in only 1 year. However, few years later, the bankruptcy liquidation annoucement from Shenzhen Mid-Level Court was “As of 2004 Mar 31, Wandelai’s total debt was 610 million RMB, net book asset was 67.43 million RMB, actual loss was 543 million RMB.

At that point, Xu Jie’s “strategy” has revealed its flaws. In the early years he was employed in Hubei province’s Development and Planning Committee, specifically searching for many hi-tech projects for companies and obtaining accreditation from the government for these companies. Haitong Securities, Southwest Securities, and other institutions had reasons to provide him large amount of bridge loans; banks were also not alerted by his frequent debts.

Xu also attracted attention when he appointed well-known economists and legal experts to become independent board of directors in his company.

On the other hand, Wandelai’s core has been for a long time consisted of people from Xu’s network from his home-town - Huangshi city in Hubei province, and of his family members, among which the backbone of Xu Zhiyong, Yu Weijiang, etc are still in Wandelai’s board of directors even years after.

Not until 2004 when the liquidation begins did Xu’s American operation of INDI catch the public’s attention. Years before, he had many BVI companies under his name in order to trade shells in the US stock market.

“Before the bankruptcy, he went to the US, afterwards he travelled back and forth to take care of his investment business” a Wandelai-era high management told us.

Xu is in the US but his capital operating center is still in Shenzhen.

It is a company with the registered name “Shenzhen Huayin Guaranty Investment Ltd”.

The most updated info from Industrial and Commercial Bureau shows, the company’s registered capital was 100 million RMB, its legal representative is Xu Xiyou. From Oct 2009 until now, the legal representative changed 4 times. The prior legal representatives were Yu Guoqiong and Xu Zhiyong. Yu held the position for 4 years.

Although in the registered information Shenzhen Huayin’s shareholders constantly changed (mostly some off-shore companies), one OTCBB-listed company China Finance (CHFI) claims in its SEC filings that CHFI wholly owns Shenzhen Huayin.

CHFI, a US registered asset investment and management company, was a former shell with the name Kubla Khan, Inc. Xu’s group purchased it in 2004.

From 2003, according to our findings, there have been 12 Chinese companies which Xu’s group was involved in listing them on the US exchange. After the RTO, CHFI always had a certain percentage of shares – a reward for the success of the RTO.

The earliest board of directors of CHFI includes Xu Zhongnan, Wan Xuemei, Wang Zhongping, Xu Zuhong, etc. Wan Xuemei, Wang Zhongping and Xu Zuhong were mid-management during the Wandelai era. Xu Zuhong was even in Shenzhen Huayin’s board of supervisors for many years. In 2004 Nov, Xu Zhiyong became a shareholder in CHFI, afterwards, Yu Guoqiong (Ann Yu) also became CHFI shareholder thru her off-shore company China US Bridge Capital. She became a long-term CEO for CHFI afterwards.

We discovered that the websites of China US Bridge Capital, CHFI, and Shenzhen Huayin are extremely similar. Also, another company, China US Strategy Capital Group, was very similar to the above in their main clients, address, and contact info.

In reality, neither Shenzhen Huayin nor CHFI directly involves in shell trading. Nearly all of Xu group’s shell trading were thru off-shore companies. For example, thru Value Global and Top Interest.

In 2007 an off-shore company called Max Time Enterprise Ltd (MTE) purchased ONP’s predecessor, a shell company called Carz, Inc., then MTE sold it to the Chinese company Baoding Oriental Paper company Ltd.

Also, a construction company from Hangzhou, bought from MTE, shares of My Quote Zone Inc. (translator’s note: My Quote Zone Inc is assumed another shell owned by MTE), then changed its name to China 9D Construction Group (CNAG) and got listed. CHFI got 3.63% of CNAG shares from this deal.

JADA, BFAR, Sino-Bon Entertainment Inc. (former named Sunnyside Acres Mobile Estates), and HYST also got listed thru similar deals with MTE.

The stock price of some of these companies, after a short term burst upward, has been lingering at a low level. They will be facing more suspicions. “Xu Jie’s group, thru off-shore companies, manufactured some false financial projections and marketed them to institutional investors” A US hedge fund representative told us.

“This type of RTO model has existed for a long time, the key is institutional investors accept and approve these Chinese companies.”

According to the service brochure of Shenzhen Huayin, Xu Jie’s group does not charge any listing fees. The key to profiting for them is to lift the client’s stock price, then sell at high prices.

“Obviously this needs some kind of support from investment intermediary institutions and auditors.”A New York-based lawyer involved in ONP’s class action lawsuit said.

The cost for fraud is not high. SEC does not have the means to check the Chinese companies’ daily operation. US judiciary also cannot summon to court Chinese company representatives. “But if one case of fraud is successful, it’s enough money to spend for half your life.” said a Canadian-based hedge fund representative who has in the past reveal many fraud cases on the Web.

Back in 2004, Xu’s INDI had already caught the attention of the SEC. But this only prevented Xu’s name to appear in SEC’s record again. This did not slow down “the people beside him” to expand their investment.

“Some investment banks are funny, seems they specifically underwrite for these problem companies” the above hedge fund rep said.

Xu and his group only need to search for more Chinese companies.

But the core people in Xu’s group must keep a low-profile.

At a most recent public event, Xu’s brother-in-law Yu Weijiang, thru his company’s name, appeared in a “Upgrade from the Copycat Industries”forum.

Hello Christina,

Just to let you know, this article is from Benjamin Wey's  website, so it's not unbiased.  I am not too familiar with the BBCZ story, but the company seems to have not been able to put it together. Were the shorts eventually correct with thier allegations or is the lack of financial performance unrelated?

Found this too. http://securities.stanford.edu/1036/BBC_01/20061129_o01c_Zhou.pdf

 Maj