A Close Look at Gulf Resources
posted by The Traveller on Sunday, July 24, 2011

Gulf Resources (GURE) is currently trading at $3.80, down 64.46% for the year. The Trading China Tracker Score is 19 (Strong Buy), the Trading China Safety Score is 36% (High Risk).

Let's have a detailed look at Gulf Resources, a producer of bromine, crude salt, and specialty chemicals in China. The company has two operating subsidiaries, one for the chemicals, and another for salt and bromine. The stock has lost two thirds of its value since the beginning of the year, despite record results for FY2010 and positive pricing developments for its core products. Is it worth putting some money at risk here? Let's start with a detailed timeline of the past 18 months to see what exactly has been going on with this stock.

Gulf Resources Timeline

2010, February 10: Gulf Resources dismisses Morison Cogen and engages BDO Limited as its new auditor.

2010, April 14: The company raises guidance for fiscal year 2010 to revenue between $146 million and $150 million and net income between $44 million and $46 million. It says that "in addition to strong demand, a shortage of bromine supply is supporting prices."

2010, May 11: Gulf Resources reiterates revenue and net income guidance for 2010 with the release of First Quarter earnings.

2010, June 8: GURE announces the acquisition of bromine and crude salt manufacturing assets for $13.9 million, paid in cash (95%) and stock.

2010, August 6: The company files a mixed securities shelf for $120 million with the SEC.

2010, August 16: Gulf Resources reiterates revenue and net income guidance for 2010 with the release of Second Quarter earnings.

2010, September 10: Deloitte Touche Tohmatsu is engaged to perform an independent assessment over the Company's internal controls.

2010, September 14: The company defends the shelf registration in a press release, but clarifies that while it plans to use its common stock as currency for acquisitions, it will only happen at levels that are accretive to existing shareholders."

2010, September 15: Due to its depressed stock price, management announces that it has decided not to raise capital during 2010. The shelf registration remains effective.

2010, September 15: The company raises guidance for fiscal year 2010 to revenue between $151 million and $155 million and net income between $48 million and $50 million, as a result of a further increase in bromine prices.

2010, September 27: A $10 million Share Repurchase Program is announced. "We are confident that this is an optimal opportunity to leverage our strong balance sheet and invest in Gulf Resources."

2010, November 6: Independent director Biagio Vignolo resigns without stating a reason. He is replaced with Mr. Nan Li who works as financial controller at Global Pharm Holdings Group (GPHG.OB).

2010, November 16: Gulf Resources reiterates revenue and net income guidance for 2010 with the release of Third Quarter earnings.

2010, December: The company is anonymously accused of falsifying its financial statements filed with the SEC. Allegedly, there are discrepancies between data filed with Chinese authorities (SAT) and the Securities and Exchange Commission.

2010, December 8: Xiaobin Liu, CEO of Gulf Resources, responds to those allegations, says they were completely without merit and that all financial statements are accurate.

2010, December 14: The company follows up with a detailed response, confirms that its 2009 Annual Report is consistent with its 2009 SAT filings, and provides proof in form of an official letter from the local SAT bureau, which is confirming that there are serious discrepancies between GURE's subsidiaries' actual tax filings and the figures provided in the anonymous report. CEO Liu reassures investors that "our financial statements are accurate and we do not expect any adjustments to them. Our business has maintained its momentum and we do not expect any changes in business conditions in the foreseeable future."

2011, January 4: Gulf Resources announces the acquisition of a crude salt field from a state-owned company for $10.6 million in cash.

2011, March 2: Independent director Richard Khaleel resigns from GURE's Board, as the company he recently joined has requested that he resigns as a director of any public company. Khaleel's replacement is Mr. Yang Zou, a senior accountant with a Beijing-based CPA firm.

2011, March 4: Deloitte has issued a final report regarding the internal control assessment performed. Management believes that the Company's internal control is improved after implementing the recommendations made by Deloitte.

2011, March 16: GURE files its Annual Report for 2010. Reported revenue of $158.3 million and net income of $51.3 million both exceed the high end of the company's official financial guidance, which had been raised twice in 2010. Gulf Resources provides a favourable outlook for 2011, without giving specific guidance at this time. Internal control over financial reporting, as audited by BDO Limited in the 10-K filing, is still ineffective due to a "material weakness regarding management's failure to maintain effective controls over the identification of related parties and the disclosure of related party transactions in the company's consolidated financial statements."

2011, March 28: The company provides financial guidance for 2011. It expects revenue to range from $195 million to $198 million and net income to range from $64 million and $66 million. CEO Liu says he expects "the price of bromine to stabilize at a high level and possibly reach a new historical high price during 2011."

2011, April 26: Short-selling outfit Glaucus Research Group releases an extensive 29-page report on Gulf Resources. The group "initiates coverage" with a $0.00 price target, based on its belief that investors "are likely holding worthless paper in a shell company." Glaucus claims that "the two Chinese subsidiaries that own and operate the business are privately owned by a company controlled by the chairman."

2011, April 27: John Hempton of Bronte Capital, who is also short the stock, comes out in support of the Glaucus report. He argues that an inventory turnover of 169.5 times per year is not believable in the bromine industry.

2011, April 28: The company issues a detailed response to the Glaucus Report. Explains that it produces most of its bromine and chemical products on demand, therefore does not accumulate inventory. Provides 2009 SAIC filings for both its subsidiaries and concludes that reported SAIC financials are in line with SEC filings. Provides documents that should prove ownership of subsidiaries. Explains low shipping costs with customers directly picking up their products from facilities. Reiterates that Deloitte's internal control assessment did not find major issues in the Company's corporate governance and internal control system.

2011, May 2: Gulf Resources issues a second press release in response to the allegation in the Glaucus Report.

2011, May 11: Gulf Resources issues a third press release in response to the allegation in the Glaucus Report.

2011, May 16: The company reiterates revenue and net income guidance for 2011 with the release of First Quarter earnings. Says it expects bromine prices to remain at current levels for the remainder of the year.

2011, May 19: Another short-seller, Kerrisdale Capital publishes a hit piece, supporting the April 26 Glaucus report and adding its own claims, particularly that GURE's reported profit margins "are too good to be true." Kerrisdale concludes that Gulf Resources' "business claims are not within the realm of reason."

2011, June 7: GURE announces that it intends to register a subsidiary in Daying county, Sichuan province, in order to research possible resources for bromine and crude salt in Sichuan province.

2011, June 22: BDO Limited is reappointed as the company's auditor for the 2011 fiscal year.

2011, June 23: Gulf Resources announces that the share repurchase program, announced in September 2010, has been initiated, and the company has acquired 100,500 shares of its common stock through open market transactions.

2011, June 29: Independent director Yafei Ji resigns for "personal reasons." He is replaced by Mr. Tengfei Zhang, a CPA and Chairman of the Board of Supervisors of Shenzhen Kaili Industrial Co., a manufacturer of computer cables.

2011, June 30: Gulf Resources' ticker symbol changes from 'GFRE' to 'GURE'.

2011, July 13: Chairman Ming Yang, the company's largest shareholder (38.7%), declares that he will not pledge or sell any of his shares in the next three years. The company reiterates that it maintains 100% ownership in its subsidiaries, that its corporate structure remains linear and unchanged since February 2007, and that Gulf Resources maintains full control over its operating subsidiaries. Documentation for subsidiary ownership is attached to the 8-K Filing.

2011, July 20: The company withdraws its shelf registration that was originally filed on August 6, 2010. "We decided to withdraw our registration statement because we think our share price remains undervalued and do not intend to sell any securities under the registration statement."


Extremely Cheap Valuation - GURE has posted Earnings per Share of $1.48 for the fiscal year ended December 31, 2010. Official 2011 guidance calls for 24.8% to 28.7% net income growth, not taking into account any impact from potential acquisitions. During 2010, the company raised its guidance twice and managed to exceed the high end of its guidance range when it posted final numbers in March. At Friday's close ($3.80) the stock is trading at a forward P/E of 2.05, based on 2011e EPS of $1.85. That is about as cheap as it gets for a Nasdaq-listed growth stock.

No Shareholder Dilution - the company did not sell any stock in the past 18 months. The shelf registration that became effective in August of 2010 has been withdrawn earlier this month. GURE paid for all its recent acquisitions almost entirely in cash. Total dilution for existing shareholders over the past year was just 2.38%, which is among the lowest with U.S.-listed Chinese stocks. If GURE were a fraud then it is certainly not very clever with monetizing its stock.

Management Continuity - Unlike most other Chinese names, Gulf Resources has not been hit with a slew of management resignations. The Chairman of the Board, CFO and CEO are all with the company for a long time. There have been three director resignations in the past 18 months, but I believe it is credible that none of them were in disagreement. I also believe that it is part of good corporate governance if a company changes its independent directors every once in a while.

Strong Responses to Short Seller Attacks - Gulf Resources has been a short seller target for more than a year, the depressed stock price clearly reflects that now. Yet, the company has always been very quick, detailed and elaborate in its response to such attacks, unlike most other names in the China space. GURE does reliably provide documents to support its position and publicly files those with the SEC so all interested parties can review them easily.

Corporate History - This is the strongest negative aspect, and it is one that will never go away. Gulf Resources' public company life began with a China Finance (CHFI.PK) shell, in connection with reverse merger specialists like China US Bridge Capital, a subsidiary of CHFI. China Finance went dark in 2009, stopped filing anything with the SEC, and is now a 2-cent zombie stock. All of the other CHFI RTO's are either complete frauds or extremely questionable at least, including CNOA, JADA, BFAR and CHCG. It is a bit of a stretch to argue that Gulf Resources is the one exception in an otherwise smelly pit of dirt.

However, and here it comes, proclaiming guilt by association has never been a good or wise strategy. Gulf does surely wish - fraud or not - they would have never been associated with China Finance, but we should judge them by their actions after all. Maybe they have cut all the ties with CHFI, as they say they have, a long time ago already? The company's communication with investors in the past 18 months certainly doesn't bear any resemblance with other former CHFI clients.

Prime Short Seller Target - GURE has been attacked several times by multiple individuals and entities. Short interest in the stock sits at about 20% of the float and has been at a very high level for most of 2011. While the company has managed to stabilize the stock price since May, none of the recent announcements led to a meaningful recovery and investors are still sitting on a loss of 64% for the year.

Half-hearted Stock Buyback - There is no better investment for a company like Gulf Resources than investing in its own stock at just 2x forward earnings. But it took the company almost nine months to initiate its buyback program that was announced in September of last year. And the number of shares (~ 100k) that has been repurchased so far is very small for a company that supposedly has more than $80 million cash on the bank.

Ineffective Internal Controls - BDO attested that the company's internal controls are ineffective due to a "material weakness regarding management's failure to maintain effective controls over the identification of related parties and the disclosure of related party transactions." Gulf management hired Deloitte Touche Tohmatsu for an internal control assessment, and announced that DTT did not find major issues in the Company's corporate governance and internal control system. We don't know what issues Deloitte found, but we know that related party issues are one of the short sellers' most prominent claims.


Bottom line is, I don't have any conclusion - you have the choice between a "Yes, but..." and a "No, but..." approach. It is my belief that GURE's stock price will more likely appreciate from here than deteriorate, as the main reason for its low level is the general investing public's reluctance to put money in any name with a strong "but...", especially Chinese reverse mergers. We are now probably beyond the peak of "weeding out China frauds" and there are signs that investor appetite for the remaining Chinese names is slowly but steadily increasing from here.

There are compelling arguments for taking a position in GURE at the current level, however the arguments for staying away completely are also quite convincing. This is the prototype of a "high risk" stock which could easily double or even triple from here if/when market sentiment improves. But those risks are real and they are obvious to most market participants, so cautious investors should act accordingly.


China Stock Obituary 2011
posted by The Traveller on Saturday, July 23, 2011

China Agritech (CAGC.PK) is currently trading at $1.65, down 86.56% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 8% (Extreme Risk).

Fertilizer company China Agritech has been accused of many things, among them drastically overstating the scope of its business. Things turned fatal when CAGC did not file its annual report for 2010, and subsequently dismissed its Big Four auditor Ernst & Young with very questionable reasoning. CAGC has since engaged a new auditor, California-based Simon & Edward, and a new chairman for both the audit committee and the special committee that was formed in March to look into the matters that led to the initial Nasdaq trading halt. In late May the Chief Operating Officer of CAGC resigned. We haven't heard any details from the ongoing investigation for the past three months, and the company's stock is trading on the pink sheets since May 20, 2011.

China-Biotics (CHBT.PK) is currently trading at $1.73, down 88.27% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 7% (Extreme Risk).

Probiotics company CHBT has been under attack for more than a year until on June 22, BDO Limited, the company's auditor for more than five years, resigned. The firm found several "irregularities" that "likely constitute illegal acts", including fake documentation and being directed by the Company to access a suspected fake website for the company's bank account. One day later, the company's CFO and the Chairman of the Audit Committee resigned as well. The stock was delisted from Nasdaq on July 1 and finds itself now on the pink sheets.

China Century Dragon Media (CCDM.PK) is currently trading at $0.30, down 94.29% from it's IPO price of $5.25 (February 8, 2011). The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 7% (Extreme Risk).

On March 22, just six weeks after CCDM's IPO on NYSE Amex, its auditor found "an indication that the accounting records have been falsified, which would constitute an illegal act." The company was unwilling to let its auditor obtain official bank records directly from the bank, and MaloneBailey resigned its engagement with the company. Similar to all the other cases, the stock was halted by the exchange, delisted, and is now quoted on the pink sheets since June 21, where it is now a "zombie stock" with not a single share having changed owners in the past four weeks.

China Electric Motors (CELM.PK) is currently trading at $0.33, down 92.73% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 0% (Extreme Risk).

CELM was destined to share the fate of the other WestPark deals NIVS, CILE and CCDM (for details please see: "WestPark Capital's RTO Deals"). The auditor (MaloneBailey) found discrepancies in the bank statements, a Special Committee was formed on March 31 to investigate those issues, and an SEC investigation was launched on April 7. On May 24, all of the members of the Special Committee resigned, the company terminated the forensic audit by PricewaterhouseCoopers, and at least one independent director resigned as well. MaloneBailey finally resigned as the company's auditor on May 31, stating "management’s unwillingness to take appropriate actions" and "an unwillingness to cooperate with the Securities & Exchange Commission and Nasdaq." The Chief Financial Officer left the company on the same day, and the Chairman of the Audit Committee followed on June 3. CELM was subsequently delisted from NYSE Amex and is trading on the pink sheets since June 14, 2011.

China Integrated Energy (CBEH.PK) is currently trading at $0.69, down 90.59% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 6% (Extreme Risk).

Biodiesel maker China Integrated has been accused of significantly overstating its revenue and profits. The company's auditor, KMPG, first signed off on CBEH's annual report for 2010, then shortly after withdrew its opinion and resigned on April 26, stating that it is no longer able to "rely on management’s representations in connection with its 2010 audits of the consolidated financial statements and the effectiveness of internal control over financial reporting of the company." China Integrated launched an investigation into these matters, but on April 28 its CFO resigned and shortly after, on May 3, a member of the audit committee left the company, saying that "recent events, including but not limited to the inconsistencies between representations made by CBEH’s management to the Board of Directors, have eroded my confidence." The company has since hired a new director and CFO and says it "remains committed to identifying and engaging a new auditor as soon as possible." The stock has been delisted from Nasdaq on June 15 and is now quoted on the pink sheets.

China Intelligent Lighting (CILE.PK) is currently trading at $0.11, down 95.85% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 6% (Extreme Risk).

When CILE's auditor (MaloneBailey) resigned on March 24, it gave to protocol that it found "accounting fraud involving forging of the Company's accounting records and forging bank statements, in addition to other discrepancies identified during its testing of the Company’s accounts receivable." The Chairman of the Audit Committee resigned on the same day. China Lighting's stock was delisted from NYSE Amex on June 20 and is currently quoted on the pink sheets. It should be noted that the company hired Friedman LLP as its new auditor shortly after MaloneBailey's resignation (see also NIVS).

China MediaExpress (CCME.PK) is currently trading at $1.60, down 89.90% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 0% (Extreme Risk).

The CCME story is well-documented and I don't have to go into details again. The company lost its auditor, CFO, Chairman of the Audit Committee and independent directors through resignations in March and April, and has not hired any replacements since. It is unclear if the special committee that was formed on March 17 is still working on the internal investigation into the accounting matters, as the company has not updated the investment community in the past four months. CCME has been delisted from Nasdaq on May 19, 2011.

HQ Sustainable Maritime Industries (HQSM.PK) is currently trading at $0.24, down 94.97% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 9% (Extreme Risk).

HQSM's auditor could not confirm the cash balances in the company's bank accounts nor verify the existence of customers in China. In its resignation letter dated May 26, the auditor claimed HQSM's management resisted its efforts to address these issues and became "increasingly non-responsive, uncooperative and non-communicative." The company's account of what happened paints a different picture. As of July 1 the company has only one independent director left, all the others resigned, including the Chairman of the Audit Committee. The SEC has initiated a formal investigation into HQSM. On July 11 the stock was delisted from NYSE Amex to the pink sheets after having been halted since April.

NIVS IntelliMedia Technology (NIVS.PK) is currently trading at $0.35, down 84.52% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 0% (Extreme Risk).

In its resignation letter on March 24, the company's auditor, MaloneBailey, said it found "illegal acts involving the Company’s accounting records and bank statements and discrepancies in accounts receivable." NIVS managed to engage BDO China as its new auditor shortly after, but on May 14 they resigned as well, stating the company's inability to provide "certain critical financial related documents and records." Since May 19, Friedman is the company's independent auditor, we will see how long that lasts... The special committee that was formed to look into the accounting issues broke apart on July 11 when two directors, incl. the committee's chairman, the legal counsel, and the accounting advisors (Deloitte) all resigned or terminated their engagements. The company has since hired new directors and said it "intends to engage new counsel and forensic auditors to continue its work." The stock has been delisted from NYSE Amex on June 24 and is since trading on the pinks.

Puda Coal (PUDA) is halted since April 11. Last reported trade was at $6.00, but the stock will likely open significantly lower when trading resumes. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 6% (Extreme Risk).

Apparently, the chairman of Puda Coal stole almost the entire company from U.S. shareholders, sold half of it to Chinese investors, and pledged the other half as security for a loan at 14.5%(!). The company has basically admitted fraud by stating that "although the investigation is in its preliminary stages, evidence supports the allegation that there were transfers by Mr. Zhao in subsidiary ownership that were inconsistent with disclosure made by the Company in its public securities filings." The stock has been halted since April 11 and the company completely ignored the due date for its first quarterly report of 2011. PUDA's independent auditor for six years, Moore Stephens Hong Kong, resigned on July 7, which makes it very unlikely that the stock will reopen again on NYSE Amex.

ShengdaTech (SDTH.PK) is currently trading at $0.53, down 89.19% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 13% (Extreme Risk).

When ShengdaTech failed to timely file its annual report for 2010 the stock was halted by Nasdaq. Shortly after it came to light that SDTH's auditor, KPMG, found "serious accounting and operational issues," and informed the exchange of "deliberate and ongoing efforts of the company’s Chief Executive Officer and Acting Chief Financial Officer to obstruct an internal investigation into these matters." The Acting CFO resigned on April 21, followed by the auditor on April 29. KMPG was replaced by Marcum Bernstein & Pinchuk on June 9, however a final engagement is still pending satisfactory completion of Marcum's new client acceptance procedures. For the past six weeks no new developments regarding the status of investigation and auditor have been filed, and the stock has been delisted and is trading on the pink sheets since June 10, 2011.

Subaye (SBAY.PK) is currently trading at $0.49, down 95.02% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 0% (Extreme Risk).

In my opinion this is the most outrageous of all the Chinese frauds, it is almost comical. If you are interested in a bit of cheerful entertainment you really should dig into the Subaye story - it claimed to be an entertainment company after all. Subaye is currently at its third CFO since March, its CEO resigned in May, its auditor in April and hasn't been replaced since. The stock has been delisted on June 24, and is now trading on the pink sheets.

Just one snippet to illustrate all this craziness: Subaye's last official guidance, presented in December 2010, called for earnings per share of exactly $3.12 in FY2011. If the company were not blatantly lying, a P/E of 5 were justified and the stock would be worth at least $15, a level it reached briefly in January of the current year. Now the employment agreement with SBAY's newest CFO, Jacqueline Ng, dated June 1, guarantees her the following compensation: an annual salary of $60,000, a sign-on bonus of 150,000 shares, and a minimum annual bonus of 100,000 shares of common stock. That means CFO No.3 Miss Ng would receive stock worth at least $3.75 million additionally to her annual salary as compensation for her CFO duties, if the company's representation of its net profits and prospects would have any credibility. Even at the current stock price her compensation is outrageously high. She's not alone, though. In the same filing it was revealed that SBAY's new CEO, a German national who seems to be in the IR business and doing side-jobs like serving as honorary consul for the Republic of Belize in Germany, will receive the same 250,000 shares plus $80,000 annual salary.

Wonder Auto Technology (WATG) is halted since May 9. Last reported trade was at $5.42, but the stock will likely open significantly lower when trading resumes. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 26% (Extreme Risk).

When WATG failed to file its 2010 annual report, the company announced an internal investigation into reported accounting matters, incl. that it had engaged in several transactions without properly disclosing their related-party nature. Intermediate results led to announced restatements for fiscal years 2008, 2009 and 2010, and for the quarters ended March 31, June 30 and September 30, 2009 and 2010. This investigation was originally expected to conclude by the end of July, but that is now a very unlikely outcome. On July 12, both the CEO and CFO resigned from their positions without giving a reason. Wonder Auto's auditor, Big Four firm PricewaterhouseCoopers, is apparently still with the company. Trading in the Nasdaq-listed stock has been halted for ten weeks now, and at this point it is very unlikely that it will reopen on the big boards again.

Yuhe International (YUII.PK) is currently trading at $0.97, down 89.17% for the year. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 0% (Extreme Risk).

Chicken breeder Yuhe International claimed to have acquired 13 breeder farms from a competing business in 2009, but an investigatory report from Geoinvesting proved those claims wrong and the company was lying to investors. YUII's auditor resigned on June 17 due to "management’s misrepresentation and failure to disclose material facts surrounding certain acquisition transactions and off-balance sheet related party transactions." The stock was delisted from Nasdaq on July 21, and is since trading on the pink sheets.

Jiangbo Pharmaceuticals (JGBO) is halted since May 31. Last reported trade was at $3.08, but the stock will likely open significantly lower when trading resumes. The Trading China Tracker Score is UNDER REVIEW, the Trading China Safety Score is 14% (Extreme Risk).

The Securities and Exchange Commission subpoenaed the company on March 26 and Jiangbo's audit committee started an internal investigation of the issues raised by the SEC. Elsa Sung, Jiangbo's CFO, resigned on March 31. On June 6, the independent members of the Audit Committee jointly resigned, stating that JGBO's "chairman and members of his management team have exhibited repeatedly their unwillingness to cooperate in even the most basic requests," and - among other things - the investigation "raised serious concerns regarding the veracity or correctness of banking information provided by the company."

Michael Marks, former independent director and Chairman of JGBO's Audit Committee filed a very long (22 pages) and detailed account of the internal investigation with the SEC. If you are interested in the troubles of U.S.-listed Chinese companies, you should take the time to read the full letter. You will find real gems in there, such as the manager of Jiangbo's materials department refused to leave the employee wash room in order to avoid answering Ernst & Young's questions. Or that the law firm's fee was paid from a personal account of an individual who turned out to be Jiangbo's cashier - via internet banking - when Jiangbo previously told Ernst & Young that the company did not use and did not have access to internet banking.

The stock remains halted on Nasdaq and will likely get delisted soon. Anyone out there who still believes this company has almost $150 million cash on the bank?

This was a very long account of (likely) fraudulent Chinese stocks which blew up in the first half of 2011. But it is far from complete! I did not mention several other cases, including Longtop Financial (LFT), Duoyuan Global Water (DGW), or A-Power Energy (APWR), and there are many stocks with similar problems that never made it to the big boards and are still quoted on the bulletin boards or pink sheets.

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Second Quarter Summary
posted by The Traveller on Saturday, July 02, 2011

The Second Quarter performance of small cap U.S.-listed Chinese stocks was even worse than the already terrible performance in the First Quarter. The sectorwide sell-off spread from reverse merger stocks and bulletin board quoted names to established Chinese companies and recent tier one IPOs. Only very few stocks managed to counter this trend and ended the quarter in green territory, mostly driven by company-specific news like going private initiatives (CSR, FTLK) or large investments as Tencent and Expedia buying a stake in eLong (LONG).

Here are the highlights of the two indices we are tracking for China stocks. The Main Index holds the 40 largest exchange traded stocks with a market capitalization under $1 billion, while the China OTC Index tracks the 40 largest stocks on OTC Markets with reasonably liquid trading patterns; stocks like Tsingyuan Brewery (BEER) which traded under $500 for the last week of June are not eligible for the OTC Index.

Trading China Main Index
- 571.36 (down 24.74% for the Second Quarter)
- 8 stocks are up, 32 are down

Top Five
  • eLong (LONG) +68.81%
  • China Kanghui Holdings (KH) +33.63%
  • Charm Communications (CHRM) +19.98%
  • SouFun Holdings (SFUN) +16.18%
  • China Security & Surveillance (CSR) +14.25%
Bottom Five
  • China New Borun (BORN) -51.66%
  • Puda Coal (PUDA) -51.03%
  • SinoTech Energy (CTE) -49.50%
  • ChinaCache International (CCIH) -44.77%
  • Mecox Lane (MCOX) -44.39%
Trading China OTC Index
- 350.76 (down 41.23% for the Second Quarter)
- 4 stocks are up, 35 are down, 1 unchanged

Top Five
  • China Health Industries (CHHE.OB) +209.80%
  • Fuqi International (FUQI.PK) +38.59%
  • Deyu Agriculture (DEYU.OB) +6.33%
  • Asia Pacific Wire & Cable (APWC) +1.46%
  • AgriSolar Solutions (AGSO.OB) +0.00%
Bottom Five
  • China Executive Education (CECX.OB) -77.56%
  • Sen Yu International (CSWG.OB) -75.00%
  • China Shandong Industries (CSNHD.OB) -65.00%
  • Lotus Pharmaceuticals (LTUS.OB) -52.78%
  • China Energy Corporation (CHGY.OB) -52.13%
But there is hope!

While the OTC Index seems to be bottoming here, the Trading China Main Index has made a significant move in the past two weeks and gained 17.5% from the lows printed in mid-June.

Quarterly Revision (Second Quarter)

Both China indexes are revised at the beginning of each quarter. Stocks that do no longer meet the requirements are being removed. Reasons could be posting a loss in the most recent quarter, uplisting to a higher exchange or just a huge decline in share price. Following is a list of all changes for both indexes.

Trading China Main Index

  • 21Vianet Group (VNET)
  • Asia Entertainment & Resources (AERL)
  • ATA Inc. (ATAI)
  • China Dangdang (DANG)
  • China Ming Yang Wind Power (MY)
  • China Real Estate Information (CRIC)
  • China Yuchai (CYD)
  • China Zenix Auto (ZX)
  • E-House (China) Holdings (EJ)
  • iSoftStone Holdings (ISS)
  • Jiayuan.com International (DATE)
  • NetQin Mobile (NQ)
  • Phoenix New Media (FENG)
  • Taomee Holdings (TAOM)
  • Xinyuan Real Estate (XIN)
  • AirMedia Group (AMCN)
  • Bona Film Group (BONA)
  • China Hydroelectric (CHC)
  • China New Borun (BORN)
  • China TechFaith Wireless (CNTF)
  • China XD Plastics (CXDC)
  • China Xiniya Fashion (XNY)
  • Cogo Group (COGO)
  • eLong (LONG)
  • Fushi Copperweld (FSIN)
  • Lihua International (LIWA)
  • Mecox Lane (MCOX)
  • Puda Coal (PUDA)
  • Sky-mobi Limited (MOBI)
  • VisionChina Media (VISN)
Trading China OTC Index

  • China Agritech (CAGC.PK)
  • China Bilingual Technology (CBLY.OB)
  • China Integrated Energy (CBEH.PK)
  • China MediaExpress (CCME.PK)
  • ShengdaTech (SDTH.PK)
  • Yayi International (YYIN.OB)
  • Asia Pacific Wire & Cable (APWC, uplisted)
  • China Pharmaceuticals (CFMID.OB)
  • China Shandong Industries (CSNHD.OB)
  • Eastern Environment Solutions (EESC.PK)
  • GC China Turbine (GCHT.OB)
  • Lotus Pharmaceuticals (LTUS.OB)

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