Comments on The Trading Day: On SAIC and SEC Filings

Dear Rames: Good article. However, this article ...

2011-04-06T05:51:46.351+01:00

Dear Rames:

Good article. However, this article came out yesterday:

http://www.thestreet.com/_yahoo/story/11069771/1/investing-in-china-just-got-a-whole-lot-riskier.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

They say that SAIC and SAT filings do matter.

What is wrong with their argument?

I have had vivid email discussions with John Bird ...

2010-08-15T12:37:33.850+01:00

I have had vivid email discussions with John Bird about the SAIC/SEC matter and we could not agree on a mutual position. But I do believe that wildly opposing opinions are part of this all and discussing them can be very productive as long as this is done in a respectful way. There are many risks associated with investing in U.S.-listed Chinese small caps and my article was not meant to defend any company in particular, especially not ONP, CSKI, FUQI or NEP. I can not make a judgment on any of those companies, I would only repeat second-hand information and at best make an educated guess.

I was stating that generalizing and automatic conclusions of possible fraud based on mismatching SAIC filings are wrong and unfounded, but that does not mean that there is no fraud to be found within this sector. There certainly is. Looking at the auditors is probably the best idea for international investors when in doubt.

There is tremendous value hidden in U.S.-listed China stocks and many of the best names are being punished for no other reason than them being Chinese and transparency and credibility issues from some 'problem companies' spreading over to the whole sector. There is always a chance of a new NEP-type of bomb going off somewhere, it is your skills in stock picking that will bring in the best returns.

John Bird (Waldo_Mushman) has worked hand in hand ...

2010-08-09T03:24:15.076+01:00

John Bird (Waldo_Mushman) has worked hand in hand with Muddy Waters
Research, LLC to "Short and Distort" Orient Paper (ONP) since late
June 2010! POST YOUR ARTICLE IMMEDIATELY on Seeking Alpha. Your article
along with the guest post by Edward Hoots on the Ironfire Capital, LLC from
July 23, 2010 are the two most informative posts I have seen on doing
business in China and dealing with US listed Chinese stocks! Unfortunately,
Waldo,the knowledgeable scum bag, uses these discrepancies in accounting
which you explain very well to MOUNT "SHORT and DISTORT" attacks on US
Listed Chinese securities - FOR PERSONAL GAIN! In the case of ONP he has
followed the MW report almost intact. The publication of that report
cut the value of the ONP share by 50% in one day. The report is bogus
and on Friday, Muddy Waters, LLC 'moved on' and John (Waldo) Bird made
a post stating that ONP was going to $10+ and how he was a 'Liar and a
Cheat' and a master of the art of "Short and Distort"!

I did see you visit the ONP message board once and CERTAINLY HOPE YOU
WILL POST THIS ARTICLE on Seeking Alpha. ONP have engaged Loeb & Loeb,
as well as, Deloitte & Touche to give an independent third party
opinion on the charges brought by Muddy Waters. The company did give
excellent PRELIMS and will post second quarter results on August 16.
I do hope you will NOT be frightened off from posting this wonderful
article by the likes of John (Waldo_Mushmanz, Mushman, Mushman, Plantation, pleasant)Bird.

Narrow view by Birdman..typical uneducated short. ...

2010-07-30T11:03:17.761+01:00

Narrow view by Birdman..typical uneducated short. The Traveller provides insight into how the likes of Birdman fraudulantly manipulate information. Good information Traveller!

And they never have been allowed to file unaudited...

2010-07-30T03:51:46.779+01:00

And they never have been allowed to file unaudited reports since the creation of the SAIC regulations on FIE's in 71 or 81.

The rollout of the computer filing is possibly a 10 year project (Target is Dec 2014 which won't happen) with different provinces working under different schedules and different stages for the size of the companies effected.

The diservice I refer to is repeating the company line that excuses variations rather than using the very clear point made in the last post " A number of Chinese companies we interviewed, both public and private, have been submitting the same audited financial reports for both AIC and tax filings" And the obvious question when a company chooses not to take that path of least resistance is ask ," Why not?". Long experience has painfully taught me that if you are wise enough to avoid the losers the winners will find you. Two sets of books warns me of a likely loser.

John

John, I haven't disguised anything, instead ur...

2010-07-29T22:39:22.447+01:00

John, I haven't disguised anything, instead urged everyone to look at the companys' auditors before making an investment decision. The auditors are responsible for the SEC filings which matter here, to correct any mistakes that might have been made with the Chinese filings in the past or present - for whatever reason. This is not a judgment on any individual company and the accuracy of their reporting. The article just points out that non-matching numbers in SAIC/SEC filings can not and should not automatically be associated with fraud.

The problem of independent filings with different agencies in China is apparently being addressed by the government now, according to Roth Capital:

"Realizing the weakness of the financial statements submitted with the AIC filings, China has recently raised the standards of its AIC filing requirements. All Foreign-owned enterprises are required to file annual reports through a unified annual inspection website at www.lhnj.gov.cn with a single set of audited financials. The filings are shared among AIC, tax bureaus, customs, foreign exchange bureau (SAFE), and the financial branch of local governments. Although the filing only provides basic summary information, it does deter wide discrepancies. A number of Chinese companies we interviewed, both public and private, have been submitting the same audited financial reports for both AIC and tax filings."

So it seems that U.S.-listed Chinese companies will no longer be able to submit unaudited financials to the SAIC with their annual reports.

Your overlook the obvious. The tax documentation i...

2010-07-29T21:21:17.429+01:00

Your overlook the obvious. The tax documentation is reviewed and approved and chopped by the SAT and forwarded to the SAIC. You are suggesting that the numbers between the SAT and SAIC are independently filed which is totally incorrect. You might improve your understanding of what an SAIC Annual looks like if you actually looked at a couple dozen of them.

You would not post such ridiculous drivel if you had actually seen full copies 30- 50 pages each of a filing. I will be happy to provide you with copies of 20 I currently have.

Roth is basically saying if you are so incompetent not to understand Chinese accounting laws preclude consolidation you might mistakenly consider an SAIC filing for a non active FIE as the only revenue source. A very rookie mistake and not made by any but the most casual observer.

The excuse of hiring agents is an outright lie. The filings are chopped with the single existing chop in existence for that company and signed by the legal representative of that company. An agent can be hired to assist in the formation of a registered entity but the company is 100% responsible for all filings submitted to the SAT and the SAIC. If you are told otherwise you are being lied to.

Even assuming you are comfortable with your company being tax cheats, there is virtually no economic upside for income tax cheating in China. They have a tax system driven by VAT, essentially a sales tax on every transaction conducted in the PRC. ~ 80% of all corporate taxes are collected through VAT. The VAT system is self auditing. If you pay the added fees for VAT to your purchase you can deduct those taxes in full when you resell the product itself (wholesale to retail) or items you have made from raw materials (manufacturing and assembly). The government has a national data collection system and each sales transaction has a unique identifying number. Dependent on the size of the company the sales are required to be reported daily and paid as frequently as every three days. You can't get a credit against your taxes due unless you have that matching transaction number to prove you paid the vendor the VAT and the vendor has reported it to the SAT.

In other words tax avoidance is a lame excuse that only works in convincing American neophytes.

And the overriding issue is basic character of a company that would feel that they could recklessly risk the entire operation by violating the clearly understandable laws of the land.

The logic question no one ever answers is why would a company go to the time, expense, and risk of preparing mismatched financials when it would be free, easy and honest to provide the same data to all regulatory bodies?

John

You do a genuine diservice by disguising the clear and present dangers to investors and you should restrict firm opinion to issues you have some personal knowledge of. Everyone has already heard the dozens of BS responses and you merely repeat your personal favorites.

assume what you say is true. one of the bull case...

2010-07-29T11:51:49.768+01:00

assume what you say is true. one of the bull cases is that the multiple for onp or cmfo is way undervalued compared to us companies. if one has to accept that chinese numbers may not match why should one pay us multiples for these stocks? they should be heavily discounted

yours' is the best china stock site, bar none....

2010-07-28T03:10:15.373+01:00

yours' is the best china stock site, bar none.

great article, the word needs to get out.

2010-07-28T01:42:40.480+01:00

great article, the word needs to get out.

Great article. Shorts have really exploited the la...

2010-07-27T16:10:53.912+01:00

Great article. Shorts have really exploited the lack of knowledge among many China investors about the differences in function and purpose of SAIC and SEC, 2 totally different governmental agencies. This has helped them make big money on stocks like ONP, TXIC, CHBT... This article will help debunk one their favorire tools.

I second the motion... Succinct, yet very thorough...

2010-07-27T15:01:48.743+01:00

I second the motion...
Succinct, yet very thorough.
It's really important that this info get out to a much wider readership of investors and institutions. S.Alpha would be one venue; perhaps TheStreet.com would also publish it.

Fantastic article if I was you I would publish it ...

2010-07-27T14:08:26.835+01:00

Fantastic article if I was you I would publish it on Seeking Alpha.