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3:49 pm
September 26, 2011
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Jae Jun
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ok it seems like this thread has gone from an honest discussion to a debate and now needless arguing.
Let's just remember that everyone has different skill levels, opinions and analytical skills and keep it respectable. I'm here to learn from you guys as well but no one learns from arguing.
We gotta show that we're better than the yahoo boards right? :)
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2:53 pm
September 26, 2011
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john_allen
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Ok, one more then I am done as this is clearly a waste of everyone's time.
I originally posed the question whether there is any value in a beaten down group of stocks. well reasoned contrarianism is a tried and true value investor tactic. Sure, I think if value investors you respect because they have a good record, and where you have been able to follow their reasoning thorough write ups / summaries from value conferences or thier quarterly letters, etc. are interested in the space, it could be an interesting place to look for ideas and a sign there is potentially value there. Does that mean you should buy blindly becuase someone else did, no.
This forum is supposed to be about sharing and learning, but I could roast marshmellows with the flames from your posts.
- John
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7:46 am
September 26, 2011
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valueinvestortoday
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Post edited 12:55 am – September 26, 2011 by valueinvestortoday
All I responded to was a statement you made which was:
"Also, I wouldn't say well respected fundamental shops like Stephen Mandel's lone pine are crazy to be buying in the space."
I think your statement is self-explanatory. You then stated the following:
"I was saying it could be one more positive indicator."
I also believe that this statement you made is self-explanatory. So, to summarize – you stated:
1. If you're a "well respected" fundamental business, you wouldn't consider such a business as being crazy for buying up Chinese RTO's.
2. Any such "well respected" shop that is buying in this space should/could be viewed as a positive "indicator" (a word few value investors use).
Therefore, I don't see where I misinterpreted anything YOU'VE stated. If you made a mistake, then simply admit you made a mistake and move on. Don't be a polititian and try to hide around corners. You stated what you stated and what you stated means what you stated. The English language isn't that difficult to understand.
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8:47 pm
September 25, 2011
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john_allen
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valueinvestortoday said:
In other words, who gives a shit how many shares of XYZ Mr. Stephen's purchased. It's not an indicator of anything to anyone. Use your own mind.
So it's clear you think there are no opportunities in the space, that's fine and you've given reasons for your opinion.
However your implication that I'm endorsing buying something becuase someone else did is incorrect.
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11:42 am
September 25, 2011
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valueinvestortoday
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"I would like to hear your thoughts about CCCL….Would you consider it being legitimate?"
I don't know and for that reason I'm not investing in it.
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6:18 am
September 25, 2011
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apijaq
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VIT,
I would like to hear your thoughts about CCCL following the posts you've made on the yahoo boards. Would you consider it being legitimate?
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2:22 am
September 25, 2011
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valueinvestortoday
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"@valueinvestortoday: yes, the PCAOB's inability to access China and directly police auditors is very disturbing, as is the bank complicity, at least the regional/local branches where it seems to have occurred. Still I would think affiliates of big four firms would have heightened caution due to the business threat to their reputation, at least moreso than before, in general."
"Some" big four firms only care about their franchise value. When you get so big, regardless of industry, there will always be uncontrollable downside risk. Sometimes it's overlooked, sometimes is encouraged, sometimes it's ignored. The mighty dollar is awful dam mighty at times.
"Also, I never said that if Stephen bought it, it must be good. I was saying it could be one more positive indicator."
You certainly alluded to it though. It is important to remember the lessons that have been passed down to this generation by more intelligent and successful men; it would be foolish not to.
Myself, personally, will ALWAYS follow this fundamental value tenet that was stated by the gentleman who created value investing – and, there's a reason WHY he said it. Things weren't all that much different back then as they are today in terms of how people try to rationalize (lie) to themselves. Pay close attention to these immortal words and you may find new life in them.
"You’re neither right nor wrong because other people agree with you.
You’re right because your facts are right and your reasoning is
right—and that’s the only thing that makes you right. And if your facts
and reasoning are right, you don’t have to worry about anybody else." – Benjamin Graham 1936
In other words, who gives a shit how many shares of XYZ Mr. Stephen's purchased. It's not an indicator of anything to anyone. Use your own mind.
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9:15 pm
September 24, 2011
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john_allen
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Post edited 2:28 pm – September 24, 2011 by Jae Jun
@somrh: perhaps I should have said "I wouldn't say well respected fundamental shops like Stephen Mandel's lone pine are necessarily crazy to be buying in the space." They recently added significantly to VIT, a Chinese IT outsourcing company, it's down -75% YTD so I would say it is distressed. I did like Hempton's post and his blog.
@valueinvestortoday: yes, the PCAOB's inability to access China and directly police auditors is very disturbing, as is the bank complicity, at least the regional/local branches where it seems to have occurred. Still I would think affiliates of big four firms would have heightened caution due to the business threat to their reputation, at least moreso than before, in general.
Also, I never said that if Stephen bought it, it must be good. I was saying it could be one more positive indicator.
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6:08 am
September 24, 2011
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valueinvestortoday
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you would think the auditor would be pretty careful after all the blowups in the space by now.
I wouldn't think that at all especially given the fact that in July the SEC and PCAOB met with Chinesse counterparts to negotiate a cross-border cooperation to jointly regulate these RTO's. China refused to allow the U.S. agencies access to Chinese companies because it would threaten China's sovereignty. Furthermore, in some of these RTO frauds, the banks, whom the auditors receive their information from, are the cause of the faulty filings the auditors did; not the auditors fault. When a bank gives you a ledger and later it is found out that the ledger is false and the bank is the culprit to falsifying it, I fail to see how that's the auditor's problem.
Also, I wouldn't say well respected fundamental shops like Stephen Mandel's lone pine are crazy to be buying in the space.
That's a Circular Reasoning argument (because Stephen invested, it must be good). That dog will never hunt.
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4:28 am
September 24, 2011
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somrh
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john_allen said:
Also, I wouldn't say well respected fundamental shops like Stephen Mandel's lone pine are crazy to be buying in the space.
John Paulson bought Sino Forest. Hank Greenburg bought CCME. People make mistakes. Plus you have to consider how much research they did; what was their investment process?
For an interesting discussion of John Paulson and fund investment process, John Hempton provides an interesting read: The Paulson Sino Forest Loss
The other factor is that it's not clear that Mandel's positions are these completely distressed Chinese companies. I did a quick look at a few of his holdings as of June and most have P/E ratios above 15. This doesn't mean that they aren't good values (perhaps they are) but they don't look like the typical China RTO's selling with P/E's around 5 or what have you.
Maybe there are some good ideas on that list; I don't know. But I'm not sure that those fit what you initially had in mind. Does he have more recent purchases?
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8:39 pm
September 23, 2011
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john_allen
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Gentlemen, thank you for the comments.
@Hester, I wasn't careful with my terminology, but I referred to screening out RTOs in favor of IPOs in my original post. Obviously that alone isn't sufficient. And certainly the difficulty of doing due diligence on the ground goes without saying. Also, CSR, China Security & Surveillance was an RTO that just successfully went private, so maybe only 99.9% are frauds :)
I am wondering if reported insider buying can be faked by filing false returns – does anyone know if the actual trading record has to be filed with the SEC? Also, in rare cases the RTO or SPAC (another method of gaining a listing used by these companies) have upgraded to a big 4 auditor and are current with their Q's — you would think the auditor would be pretty careful after all the blowups in the space by now. Also, I wouldn't say well respected fundamental shops like Stephen Mandel's lone pine are crazy to be buying in the space.
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12:15 am
September 23, 2011
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valueinvestortoday
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Post edited 5:36 pm – September 22, 2011 by valueinvestortoday
Hester,
Absolutely agree with "just" about everything you stated. The things I didn't agree with were very minute such as how an RTO merges. They actually merge with "Private" companies rather than "Public" companies. Obviously, if you're already Public, you've had an IPO. Therefore, if you're Privave, you haven't. A shell company doing a reverse merger with a private company is the entire premise of how to avoid doing an IPO…for a private company. To make sense of this and clarity, you've never seen a merger transpire between two public companies in which either party had to pay an IPO fee obviously because both companies are public to begin with. All that is required is a shareholder vote and in some instances, a governmental approval. In any event, you seem to have a firm grasp on the subject and see the result the same as myself. One distinction I will make that is worth noting however is that I don't believe "value investors" keep falling for these RTO scams. I do, however, believe that those that hold themselves out to be "value investors" DO. There's a huge discrempancy between the two as many would like to be considered a value investor but few are – even when they think they are.
Take for example, someone who only invests with a fundamental aspect. He performs valuations based on multiples and picking them out of thin air. He doesn't read all 220 pages and especially the footnotes to EVERY 10-k, 10-Q, Proxies, & 8K in the last 10 years. That, in my opinion, is not a value investor. He is a speculator. In any event, that is a subject matter for another time. Ben Graham said "upon thorough analysis" NOT "upon thorough numbers crunching" makes a value investor. Therefore, I disagree that very many TRUE value investors were caught up in the RTO scams of 2010-2011.
You are, however, correct in that all of them, or nearly all of them, are frauds; and for good reason.
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11:52 pm
September 22, 2011
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Hester
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First we have to define things. ADR's are American Depository Reciepts. They are synthetic shares created by banks for American investors, and they are derived of Chinese companies that are listed in China (Chinese ADR's are). Chinese RTO's are reverse takeovers, where stocks merge with a shell company to, in part skirt the scrutiny that happens during the IPO process. HUUUUUUGE difference.
China is infamously fast and loose with the death penalty. If a company is listed in China and operates in China and commits fraud, the execs face unlimited punishment. If a company is ONLY listed in America and operates in China and commits fraud (defrauding North American investors) they face ZERO punishment so long as they stay in China. China doesn't care if American people are hurt. There is no extradition treaty between the two nations and American investors have zero recourse to Chinese execs and assets. This has some effect on incentives. 
So I'd say 0% of Chinese ADR's are frauds and 100% of RTO's are frauds.
Let me say this very clearly and slowly. All Chinese RTO's are frauds. ALL. Every single one.
I'm not being irrational or throwing the baby out with the bath water. I've looked at hundreds of Chinese RTO's and there is something fishy with literally all of them. Some are more egregious than others , but all I think have at least some fraud. If someone knows of one that is not a fraud let me know. I'll research it and prove you wrong, if I haven't already. Even the huge ones with brand name investors and auditors and a long history are frauds (Sino Forest, Silvercorp Mines). The reason is there is no rational reason to go a US RTO route for good companies except fraud. The US IPO market and the Chinese market are easy enough markets for companies to go public in. Especially during the last decade as China was popular. The backdoor RTO route has little to no positives for legitamite companies over the IPO route. Plus, when a system has a built in mechanism for crooks, where they don't have to face any penalties or jail if they commit fraud, it wil bring in the fraudsters like you wouldn't believe.
Value investors keep falling for this China RTO trap. Extreme negative sentiment, usually important for value investors, is irrelevant here because it doesn't stop fraud. Negative sentiment doesn't matter if a stock is worth zero.
And by the way HRBN is definitely a fraud. I would bet my entire net worth that they are a fraud. One of their supposedly biggest customers has independantly verified that they do not do nearly as much business with Harbin as harbin claims. Check out Roddy Boyd's latest Seeking Alpha article on HRBN. The customer makes much less revenue than the revenue Harbin claims to derive from them. They aren't even big enough to supply harbin with the revenue it claims to recieve. Their March audit will be the death date for them at the latest, unless something happens sooner. And the buyout will never go through. China Development Bank isn't going to fund it and fall for the fraud. Besides that would bring the crime into Asia and submit the execs to possible punishment. Don't waste your money on calls and definitely don't buy the stock.
http://seekingalpha.com/articl…..s-of-fraud
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2:10 pm
September 22, 2011
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valueinvestortoday
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Post edited 7:13 am – September 22, 2011 by valueinvestortoday
John,
I would stay away from all Chinese RTO stocks. I was one of the originals that spotted the problems in CCME, for exampe, and know a lot about this sector. In my research it boils down to these two factors:
1. All Chinese RTO's are frauds
2. Any Chinese company with the name "China" in the company's name is a fraud
China does not have the accounting standars that U.S., UK, & Canadian companies do. Chinese companies can even avoid being prosecuted due to a few governmental loopholes that China has put into place. For example: The SEC can not force an audit on any Chinese company because the government of China considered such an investigation as a compromise to national security. Therefore, the SEC is powerless in China.
Not all Chinese companies that trade on the U.S. markets are frauds, but I would say 9 out of 10 of them are and with those odds, it's best to stay away completely.
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8:24 am
September 22, 2011
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somrh
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nell, MPEL looks like an interesting idea. I may have to take a look at their filings.
john_allen wrote:
My point is that some of these names are at truly insane valuations if
they are not frauds, and surely not all of them are frauds.
It would be nice, no?
The sort of investigative ground work that some of the shorts are doing on these companies is way out of my league. So you have to factor in what available information you are capable of gathering and whether or not that will be sufficient to mitigate enough risk with a basket of these firms. I'm not inclined to think it's worth it but that's my own take.
If it is more akin to speculating as nell suggested then options are probably a better avenue for allocating funds here. This allows you to reduce the amount of capital required to get an adequate return and if the gamble pays off, it's a leveraged bet. For example, if you wanted to bet on the HRBN buyout, you could buy Jan '12 $23 strike price calls. Last sale was for $.70. If the deal goes through you make a 43% return instead of the sub 20% return you'll get if you simply buy the stock.
One way to quickly look at the stocks is to see how they got financing. With the amount of capital in China and Hong Kong, why do many of these companies need to raise capital in the US? It is easy to see why companies that are either cooking the books and/or are of poor quality might not be able to obtain funds in China so they turn to the US for the needed cash. Many of these firms also finance by issuing stock at what are relatively low valuations. This is an expensive means of financing and a good indicator that it might not be the best investment.
That simple criteria would eliminate a number of firms from the list of ones to look at and I'm guessing it would probably eliminate mostly bad investments. I'm not sure what the resulting pool would look like but at least that's one criteria I would use.
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11:40 pm
September 21, 2011
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nell
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@john:
"Apart from the sec filings, there is little information out there I can access, so I was looking for opinions."
I dont think that "opinions" will help you to avoid fraud. You need clear principles when you invest and why you invest.
There is a fine line between investing and speculation. This sounds more like speculation to me.
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7:38 pm
September 21, 2011
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john_allen
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Hi guys,
Well I suppose I should have said gotten killed in the 7% or so of my portfolio dedicated the the China ADR basket. Unfortunately (for now, at least) I've been extremely heavy in financials that I see as undervalued, so the pain comes both ways. From the dark days of '08 – '09, LVS was one of the best stock returns I've ever generated, but I don't own any casino names right now.
My point is that some of these names are at truly insane valuations if they are not frauds, and surely not all of them are frauds. IPO, big four auditor, buybacks/dividend/insider buying, institutional ownership — none of these have proven sufficient for investor protection. But perhaps the basket approach using those factors to improve your odds makes sense, especially now that everyone is on high alert. Apart from the sec filings, there is little information out there I can access, so I was looking for opinions. One would think the auditors are being pretty careful before signing off on filings now.
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3:01 pm
September 21, 2011
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nell
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@john:
I would suggest as longterm plays on chinas growth.. CHL and GSH..
CHL:
China Mobile Limited, an investment holding company, provides mobile telecommunications and related services primarily in the Mainland China. It offers various services comprising local calls, domestic long distance calls, international long distance calls, domestic roaming, and international roaming. The company also provides voice value-added services, including caller identity display, caller restrictions, call waiting, call forwarding, call holding, voice mail, and conference calls; customer-to-customer messages and corporate short message services; and mobile Internet access services. In addition, it engages in other data businesses, which primarily include multimedia messaging services; color ring services that enable users to customize the answer ring tone from various selection of songs, melodies, sound effects, or voice recordings; and mobile reading, mobile gaming, mobile video, mobile payment/wallet, mobile TV, mobile market, and Internet data center services. Further, the company offers telecommunications network planning, design, and consulting services; roaming clearance services; technology platform development and maintenance services; and mobile data solutions, and system integration and development services, as well as operates a network and business coordination center. Additionally, China Mobile Limited sells mobile phone handsets and devices. As of March 31, 2011, it served approximately 600.8 million customers. The company was formerly known as China Mobile (Hong Kong) Limited and changed its name to China Mobile Limited in May 2006. China Mobile was founded in 1997. The company is based in Central, Hong Kong, and is considered a Red Chip company due to its listing on the Hong Kong Stock Exchange. China Mobile Limited is a subsidiary of China Mobile Hong Kong (BVI) Limited.
GSH:
Guangshen Railway Company Limited, together with its subsidiaries, primarily provides passenger and freight transportation services on the Shenzhen-Guangzhou-Pingshi railway in the People's Republic of China. The companys freight services include the transportation of full load and single load cargo, containers, bulky and overweight cargo, dangerous cargo, fresh and live cargo, and oversized cargo. It also offers long distance passenger transportation services. In addition, the company engages in the sale of food, beverages, and merchandise on board the trains and in railway stations. Further, it engages in the operation of a travel agency, as well as provision of services relating to warehousing, hotel management, cargo loading and unloading, catering management and services, advertising, and freight transportation and package agency services. Additionally, the company provides property management services, as well as involves in the supervision of construction projects. As of December 31, 2009, it operated 218 pairs of passenger trains, including 100 pairs of inter-city high-speed passenger trains between Guangzhou and Shenzhen; 13 pairs of Hong Kong Through Trains; and 105 pairs of long-distance passenger trains. The company was founded in 1996 and is based in Shenzhen, the People's Republic of China.
@somrh:
>>"He did say that he was long Macau casinos. I'm not sure how he's playing that exactly."
I checked his hedge fund data, but there was no indication he is playing this with client money. Anyway,
there are some stocks with properties in macau like WYNN or MGM. But these are not pure plays and thats why
MPEL looks interesting to me.
Quick calculation for MPEL:
FY2012 EPS: 0.55
FY2017 EPS Multiple: 10
EPS Growth: 60%
ROI: 10%
Current Price: $10.31
IV = (0.55*10*1.6^5)/(1.1^5) = $35.8
Reverse calcualtion for implied eps growth:
x10: 24.73%
x15: 15.01%
x20: 8.58%
In five years it is rather unrealistic that these wonderful cash maschines with support of an exclusive (just 6 concessions issued) concession from macau state authority will sell for an eps multiple below 15.
So we get with a 25% eps growth rate and a 15x eps multiple:
IV = (0.55*15*1.25^5)/(1.1^5) = $15.63
Current price: 10.31
P/IV = 0.659
Summary:
- Economic moat -> Yes, due to first mover advantage and exclusive concession
- Margin of Safety -> Yes, but maybe not big enough for everyone
Any thoughts?
Reference:
http://www.forbes.com/sites/ro…..r=yahootix
Best wishes,
Nell
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11:15 am
September 21, 2011
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somrh
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I think James Chanos is probably right about China. There is good indication that there is a real estate bubble. Plus a lot of China's growth is investment and it's not necessarily all that profitable investment. So there could be a huge real estate collapse.That all could have an effect on China's economy and the stocks related to them. I think India might be a better emerging market to look at.
He did say that he was long Macau casinos. I'm not sure how he's playing that exactly. See here for video:
http://www.zerohedge.com/news/…..ite-knight
I have put options on HRBN. It doesn't look like a risk arbitrage play. It's more like a risk hope the stars align play. In spite of that, the deal might go through even if it is a fraud. I personally don't think the risk is worth it (obviously) but to each his own.
Both Citron and the Financial Investigator have some materials worthwhile to read before considering it. The latter blog is written by Roddy Boyd who wrote an excellent book on AIG's involvement in the financial crisis: Fatal Risk.
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9:49 am
September 21, 2011
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nell
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>>"But I've still gotten killed."
Im not an expert in chinese companies, but im wondering why you "got killed". How much
of your portfolio was invested in chinese companies?
If i would play this sector and i dont have an edge in due diligence in comparison to
short sellers maybe a basket bet would work. Lets say 5-10% of your portfolio invested
in chinese companies. Every single company with a 1% wheight.
best wishes,
nell
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