Fraudulent China Companies Exposed!

Muddy Waters Research is a research company based in US (I think) that unearths fraud companies in China and exposes them. Most of the time, the stock prices dive once Muddy Waters exposes it. Web link below:

http://www.muddywatersresearch.com/

It recently exposed a company called Fushin Copperweld Inc (FSIN) and Rino International Corp (RINO). The video link below tells us how the fraud was perpetuated. It makes an interesting lesson on fraud for investors.

http://vimeo.com/40098291

Rino is old news. Muddy Waters shot to fame after taking down Sino Forest, which was capitalized at US$6bn at its peak but filed for bankruptcy last month, on 30 Mar. John Paulson (of sub-prime CDO bet fame) lost a pile in it. I have read all of Muddy Waters' published research, I consider it pretty good. Muddy Waters is in HK. For obvious personal safety reasons, their contact details are unavailable.

Another similar firm is Glaucus, whose recent report on Shougang Fushan Resources (639 HK) is also pretty good IMHO. It focuses on some things I mentioned before, like productivity per employee (similar to how I analyzed Qingmei), tons of related party transactions between the promoter and the listco (similar to Lizhong Wheel), and unbelievably high margins for commodity products (S-chip chemical fibre companies e.g. Hongwei, China Gaoxian, Fibrechem, Sino Techfibre etc).

Anonymous Analytics published a report on Chaoda Modern (682 HK) which uncovered tons of circumstantial evidence that all but proved Chaoda to be a fraud. Chaoda has been suspended for quite a while now.

Moveday published a report on Winsway Coking Coal (1733 HK) which found that a key transportation agent was a shell funded and controlled by the company (and described by its staff as a subsidiary).

Investing can be dangerous to your wealth. Do not try this at home. Etc.

As usual, YMMV.

(15-04-2012, 02:43 PM)d.o.g. Wrote: tons of related party transactions between the promoter and the listco (similar to Lizhong Wheel),

I am vested in Lizhong. Can you advise what I should be looking for when analyzing such transaction? Lizhong seems to have real business with a plant in Thailand, unlike many of the frauds which only operate inside China. I once googled for its brand in Chinese and I was pleasantly surprised that it was not an unknown among the many manufacturer in China.

I hope to attend their AGM at the end of the month, I might ask them about these transactions. Btw, their AGM normally has very low attendance. Last year there were only 3-4 of us.

touzi Wrote:I am vested in Lizhong. Can you advise what I should be looking for when analyzing such transaction?

The IPO prospectus describes the related party transactions in great detail. The listed company transacts with entities that are 90-100% owned by various members of the Zang family for the supply of aluminum ingots, molten aluminum, auxiliary raw materials, the lease of land, factory, facilities and equipment, the supply of water and electricity, sale and processing of scraps, recycling of scraps and rejects, and even the distribution of wheels.

With such a multitude of transactions, it is depressingly easy for the family to siphon cash out of the listed company. It is equally easy to use these transactions to inflate revenues or deflate costs to boost the share price in preparation for a placement.

In Feb 2010 Lizhong bought back its convertible bonds at a US$10m discount, but it has to pay up to US$3m more if the company's shares trade above a certain range within 2 years of the buy-back. Given that the Zang family can tweak so many transactions, it would be no surprise if Lizhong's profits (and thus share price) are weak during this 2-year period.

touzi Wrote:Lizhong seems to have real business with a plant in Thailand, unlike many of the frauds which only operate inside China. I once googled for its brand in Chinese and I was pleasantly surprised that it was not an unknown among the many manufacturer in China.

I know people who have dealt them on a business level before. They seem to be legitimate operators as far as having real operations is concerned.

But just because a company is real does not make its stock a good investment. The price paid for the stock as well as the behaviour of the management, to name just two factors, will greatly influence the outcome for the passive minority investor.

(15-04-2012, 03:42 PM)d.o.g. Wrote: The IPO prospectus describes the related party transactions in great detail. The listed company transacts with entities that are 90-100% owned by various members of the Zang family for the supply of aluminum ingots, molten aluminum, auxiliary raw materials, the lease of land, factory, facilities and equipment, the supply of water and electricity, sale and processing of scraps, recycling of scraps and rejects, and even the distribution of wheels.

With such a multitude of transactions, it is depressingly easy for the family to siphon cash out of the listed company. It is equally easy to use these transactions to inflate revenues or deflate costs to boost the share price in preparation for a placement.

Thanks for the explanation. In many Asian companies, including Japanese, various business relationship are weaved into a tangle of web. If it not family members, it will be friends that one feel obligated to help or prosper together. The Zang bros seemed to be value relationship -they bought and gave away shares to old employees recently. Hopefully they will see minority shareholders as an extension of their business family. At the end of the day, I guess it all boils down to the integrity of the controlling shareholder. I know this is cold comfort, but at least transaction among family members are made known. Transaction among business cronies, we may never know until it is too late.

just wondering... would MAS/CAD ask you to lim kopi if you actually do your homework, take a (short) position and issue an amatuer research piece that factually and accurately identifies a fruadulent (as)S chip?

off hand, i'm thinking ch*n* p*p*r

valuenewb Wrote:would MAS/CAD ask you to lim kopi if you actually do your homework, take a (short) position and issue an amatuer research piece that factually and accurately identifies a fruadulent (as)S chip?

1. If you are dumb enough to identify yourself in your research piece, then you should be worrying about your personal safety rather than MAS/CAD. Singapore may be a safe place, but low crime does not mean no crime. When millions of dollars are at stake, paying a few tens (or hundreds) of thousands to silence a nosy busybody is a no-brainer. Especially when the mastermind is overseas and not subject to extradition.

2. Many of the S-chips are extremely cheap if the numbers are to be believed. Even if they are truly fraudulent their stocks could easily double or triple before eventually going back down to zero. If you cannot survive a margin call or two then you still lose even if you are eventually proven right. According to Bloomberg, China Paper trades at a PE of 2 and a P/B of 0.12.

3. Whether or not you have your facts straight, you may still be sued in court for defamation etc. It is up to you to prove to the judge that what you stated is true. If you cannot afford a lawyer you will have to fight on your own against a highly paid lawyer on the other side. But if you pay for a lawyer and win, you may not be able to recover your costs even if the court awards you costs, since the company is overseas and there are no local assets to seize. So it is a lose-lose situation.

Short-selling against frauds incurs particular hazards. Be careful.

As usual, YMMV.

(16-04-2012, 01:34 AM)d.o.g. Wrote:

valuenewb Wrote:would MAS/CAD ask you to lim kopi if you actually do your homework, take a (short) position and issue an amatuer research piece that factually and accurately identifies a fruadulent (as)S chip?

1. If you are dumb enough to identify yourself in your research piece, then you should be worrying about your personal safety rather than MAS/CAD. Singapore may be a safe place, but low crime does not mean no crime. When millions of dollars are at stake, paying a few tens (or hundreds) of thousands to silence a nosy busybody is a no-brainer. Especially when the mastermind is overseas and not subject to extradition.

2. Many of the S-chips are extremely cheap if the numbers are to be believed. Even if they are truly fraudulent their stocks could easily double or triple before eventually going back down to zero. If you cannot survive a margin call or two then you still lose even if you are eventually proven right. According to Bloomberg, China Paper trades at a PE of 2 and a P/B of 0.12.

3. Whether or not you have your facts straight, you may still be sued in court for defamation etc. It is up to you to prove to the judge that what you stated is true. If you cannot afford a lawyer you will have to fight on your own against a highly paid lawyer on the other side. But if you pay for a lawyer and win, you may not be able to recover your costs even if the court awards you costs, since the company is overseas and there are no local assets to seize. So it is a lose-lose situation.

Short-selling against frauds incurs particular hazards. Be careful.

As usual, YMMV.

If I remember correctly, Carson Block from Muddy Waters received death threats during the midst of his Sino Forest shorting

It's not just threats.

When I was in Shanghai, there was a big case where a lady reporter was killed. The only difference this time was that the perpetrators were caught. And then the real shocker was the murderers admitted they have killed 5 other journalists at other cities in China over the past 2 years!!!

All because these reporters had published investigative reports on the "suspected" shenanigans of the Chinese company involved.

A reporter in China is a high risk profession. Offend the "white" - go to jail. Offend the "black" - met with "accident".

If investment actually jeopardises personal safety, then I'd rather sit out. No amount of money will persuade me to put my life at risk.

Hence, for those who wish to write a report on financial shenanigans, do take note of the possible risks as highlighted in this thread!