The China Syndrome
Apr 10, 2011
Posted by Jody Eisenman | Filed under Uncategorized
The People’s Republic of China (PRC) has attracted a lot of investor attention over the past few years. A combination of a huge untapped population, a move from communism to (some form of) capitalism, and very low price/earnings ratios as compared to the United States has led billions of dollars in investment capital to China in the search of attractive investments. Generally speaking, investors rely on publicly available accounting procedures to do analysis. It is assumed that reports that have been prepared by generally accepted accounting principles (also known as GAAP), verified by an independent auditor and filed with the Security and Exchange Commission (SEC) should be accurate. Unfortunately, it seems that many times this has not been the case.
Here are a few recent examples:
1. China Electric Motor (CELM) has been sued in a class action lawsuit based on alleged accounting discrepancies. The stock has now dropped from around 9 to below 3.
2. China Media Express (CCME) was high flying stock that provided advertising on inter-city busses. The stock traded jumped from 8 to over 22 early this year. When questions arose regarding possible overstatement of earnings, the stock plunged to $11.88 when it was halted by the SEC on March 11. Where this stock trades when it is finally cleared to trade again is anyone’s guess.
3. RINO International (RINO) rocketed from 3 to 35 by late 2010. Rumors began spreading about the validity of their accounting statements. On November 18, the company stunned Wall Street by announcing that they were restating their earnings for 2008 and 2009. The company eventually got delisted, and now trades at $1.75 on the pink sheets.
4. Gerova Financial (GFC) was a company that was acquired via a reverse merger with a SPAC. The stock traded over $7/share before initiating a reverse split of 1/5 on November 23 of last year. The stock proceeded to collapse from 31 to 5.28 on February 23 of this year. Since then, The New York Stock Exchange halted trading of shares of Gerova Financial Group Ltd, saying it was evaluating the need for further disclosures and the suitability of the reinsurer’s continued listing. There is no timetable for when this company’s stock trades again.
So what is it with Chinese accounting practices? I think some of the problem is that China is still merging from a closed repressive communist society, where there was very little disclosure. However, this cannot explain why some companies are involved in deception. As a result, confidence in China has been severely challenged and it will take a lot of rectifying to build that confidence back up again. This is especially true in light of the general stock market’s huge run in the last two years. As one of my sales managers at Lehman Brothers told me about 20 years ago, “Aren’t there enough companies in the US to invest in”? It remains to be seen how this all plays out.
May 24th, 2011 at 12:09 am
[...] a related story, China Media Express,(CCME.PK), which was mentioned on this blog last month, reopened last week on the pink sheets. While prior to the halt in March, they were [...]