A Short History of Short Attacks, Part One

It all started with John Bird a.k.a. Waldo Mushman, one of the most vocal figures in the growing circle of short sellers targeting Chinese stocks. In early August of 2009 Bird proclaimed the TCM (Traditional Chinese Medicines) company China Sky One Medical (CSKI) a fraud: "Based on the massively inflated and inconsistent numbers, I have come to believe that China Sky One Medical is actively committing fraud." Over the next 12 months, Bird reiterated his call numerous times, on any platform or message board he found his way to.

The company responded with press releases and denied all allegations. In one of those attempts (July 23, 2010) "the management of China Sky One Medical reminded investors that Waldo Mushman was misleading investors by counterfeiting SAIC documents and posting them on its website and other blogs." It did not help them. The stock lost 81.63% of its value since John Bird's initial call, so we can safely assume that he made a good chunk of money with his short position.

Bird got help from other short sellers. On February 21, 2010, Manuel Asensio accused CSKI on Seeking Alpha of not disclosing material information: "The Chinese government order to stop selling eight of CSKI's products seems to be material to CSKI's operating condition, yet CSKI has provided no disclosure of the order to U.S. investors." In a similar vein, The Financial Investigator blogged on August 4, 2010, that "China Sky One did not disclose the receipt of its own subpoena in its filings nor did it reference that its auditors had received one." At that time the Securities and Exchange Commission had issued subpoenas to China Sky One Medical and its auditors, MSPC. And roughly one month later, The Street Sweeper published on its website that "MSPC is a past target of securities regulators that has since come under fire for allegedly approving flawed financial reports issued by CSKI itself."

China Sky One is still trading on Nasdaq at the time of writing. Yet the stock price is in a constant decline. From $22.75 at the end of 2009, the stock closed at $6.97 one year later, and now you can buy it for just $2.83. At Friday's close, CSKI is down 59.40% for the year.

The next target on our list of short attacks is L&L Energy (LLEN), a U.S.-based coal mining company with the majority of its operations in China. On January 11, 2010, The Street Sweeper portrayed LLEN as a "relatively new Chinese coal miner accused of misleading investors in the past, [that] has managed to become a stock-market winner by posting some of the most incredible numbers recorded in the entire industry."

The stock kept rising into summer until Herb Greenberg used his platform on CNBC to repeatedly attack the company and its Chief Executive Officer: "CEO and founder Dickson Lee was fined $65,000 by FINRA and banned from the securities industry for a year." Greenberg's attacks on live television sent the stock lower. From $11.05 at the time of the first broadcast (December 21, 2010), LLEN dropped 44.53% to close at $6.13 last Friday. The stock is down 43.25% for the year, but it has recovered some from its all-time lows, printed in early April at $4.29.

On January 26, 2010, a short-selling outfit named "Worthless Pennies" called out pharmaceutical company China Biologic Products (CBPO). "The urgent warning we have for investors today is that the background check and evidence we collected clearly prove direct ties between CBPO management/directors and convicted criminals who exercise control of the company, a criminal background of the CEO of its operating subsidiary and a history of laundering money stolen from investors, none of which the company disclosed in its filings." That call was initially very successful and sent CBPO 25.94% lower on the day of its release.

China Biologic reacted three weeks later by announcing a thorough internal investigation and stating that "the Company believes that this is an attempt to discredit the Company's management and disrupt the Company's business and operations." In December 2010 the company informed investors that "the Special Committee of its Board of Directors has completed its investigation of several allegations that appeared on certain financial websites in January 2010." CBPO's strategy was highly successful as the stock has more than doubled since the Special Committee was formed on February 17, 2010. It moved from $7.62 to $16.10 for a gain of 111.28%, and CBPO is one of the very few Chinese reverse mergers the market has not punished yet - the stock has gained 33.27% since the beginning of 2010, while most of its RTO peers have been thrown into the stock dumpster. The "Worthless Pennies" outfit seems to have closed its doors, and its website does no longer exist.

Citron Research's first target in the China small caps universe was newly uplisted SinoCoking Coal and Coke Chemical Industries (SCOK) on March 11, 2010. Citron called it "an ugly duckling Chinese coal deal with an utterly improbably rise and ridiculously unsustainable run-up." The stock was subsequently destroyed, dropping from $34.09 at the time of Citron's report to $5.93 last Friday, a loss of 82.61%.

Another attack on SCOK was launched by Sharesleuth on September 13, 2010. The author, Chris Carey, wrote "that no fewer than eight people who participated in [SinoCoking's share] placement have been the subject of Securities and Exchange Commission actions or criminal prosecutions." The stock is down 50.46% year-to-date and fails the Trading China Safety/Risk Model with an "Extreme Risk" score.

Lihua International (LIWA), a company that sells wire produced from refined scrap copper, was repeatedly a short seller target. On May 9, 2010, Seeking Alpha published a Steven R. Chapski article stating that "in order for the SEC financial statements to be correct, LIWA paid the Chinese government $4 million for income taxes in 2009, yet reported $0 in profit tax to the same Chinese government on their SAIC financial reports." The company responded two weeks later by providing its most recent SAIC documents on its website and "proving" that these results were consistent with those reported in the company's SEC filings.

Chapski didn't back off, though. In December he posted another article, insisting that in his belief "the SEC financial statements continue to be wrong." None of those reports had any permanent effect on LIWA's stock price. The stock closed 2010 with a 7.5% gain, and has only recently come under pressure, consistent with its Chinese reverse merger peers. For the year of 2011, LIWA is now down 33.9%, and the stock's short ratio has spiked to 25.65% of the float.

To be continued...

Delayed 10-K Filings

Here is a little summary of Chinese companies that ran into problems with their full-year audit. The deadline for non-accelerated filers ends on March 31, so I do expect many more companies to file for an extension in the next seven days.

China Agritech (CAGC) was last trading at $6.25, down 49.07% for the year, and down 62.35% from the November 9 high at $16.60. The Trading China Tracker Score is UNDER REVIEW.

CAGC fired its auditor (Ernst & Young) earlier this month, and without an auditor it is impossible that we will see a 10-K filing before the end of the extended deadline. The stock is currently halted and there is a good chance that it won't reopen on Nasdaq.

"The Company could not complete the filing of its Annual Report on Form 10-K for the year ended December 31, 2010 due to a delay in obtaining and compiling information required to be included in the Company's Form 10-K, which delay could not be eliminated by the Company without unreasonable effort and expense. In addition, the Company has dismissed its auditors and is in the process of finding a new independent registered public accounting firm to audit the financial statements for the year ended December 31, 2010."

China Automotive Systems (CAAS) is currently trading at $7.69, down 43.54% for the year, and down 57.24% from the October 13 high at $17.98. The Trading China Tracker Score is 10 (Buy).

The company engaged PricewaterhouseCoopers in December as their previous auditor, Schwartz Levitsky Feldman, resigned. Now the Annual Report is delayed, as the company has to make a bunch of restatements. According to the filing, China Automotive expects to complete the report "as soon as practicable", but not within the standard 15-day extension period.

"The Company announced that it expects to restate its previously issued financial statements for fiscal year 2009 and the first three quarters of fiscal year 2010 to reflect non-cash gains or losses related to the accounting treatment for the Company's convertible notes issued on February 15, 2008 based on the guidance outlined in Accounting Standard Codification (ASC) 815. The Company undertook a review to determine the total amount of the errors and the accounting periods in which the errors occurred. The Company's review was overseen by the audit committee of the board of directors of the Company. The Audit Committee concluded on March 12, 2011 that the Company's previously issued audited consolidated financial statements as of and for the fiscal year ended December 31, 2009 and unaudited interim consolidated financial statements as of and for the quarterly periods ended March 31, June 30 and September 30, 2010 should no longer be relied upon because of these errors in the financial statements. The Company's board of directors agreed with the Audit Committee's conclusions. The Company intends to restate these financial statements. Because of the nature and timing of the review, the Company is unable to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 with the SEC on March 16, 2011, the prescribed due date. The Company does not expect that such filing will be made within the extension period provided for under Rule 12b-25. The delay could not be eliminated without unreasonable effort or expense. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 will be filed as soon as practicable after the Company has completed the restatement process.

China Biologic Products (CBPO) is currently trading at $15.50, down 5.44% for the year, and down 17.25% from the October 6 high at $18.73. The Trading China Tracker Score is 4 (Hold).

CBPO is one of those companies that upgraded auditors in December, from tainted (RINO, CHME) firm Frazer Frost to Big Four firm KPMG. The delay is not surprising, given that most former Frazer Frost clients came under heavy pressure, and KMPG hasn't done any audit work on CBPO before. The stock held up very well in the recent China small caps turmoil, but the short interest in CBPO is very high, many people seem to bet on KMPG not signing off on the report. I would definitely wait for the 10-K - which should be filed by the end of March - and check if it comes out clean (internal controls).

"The Registrant is unable to file its Form 10-K within the prescribed time period without unreasonable effort or expense due to the fact that it has not completed the process of preparing and integrating its operating and financial information into statements for the fiscal year ended December 31, 2010. The Registrant anticipates that it will file its Form 10-K no later than the fifteenth calendar day following the prescribed due date, as permitted by Exchange Act Rule 12b-25."

China MediaExpress (CCME) was last trading at $11.88, down 25.01% for the year, and down 50.44% from the January 28 high at $23.97. The Trading China Tracker Score is UNDER REVIEW.

The CCME story is well-known. The company's auditor resigned, and an internal investigation has commenced. The allegations are very serious and a best-case scenario would be a set of restatements that leaves the company with a meaningful cash position and a sizable business. It is unlikely that CCME will be able to engage a new auditor before the investigation has concluded, therefore a 10-K filing should probably not be expected before summer. We will see if Nasdaq allows a months-long trading halt, or if the stock will re-open for trading on the pink sheets.

"The Company cannot at this time estimate when the internal investigation of the relevant issues will conclude. The Company intends to file the Form 10-K as soon as reasonably practicable."

China Medicine (CHME) was last trading at $1.16, down 33.34% for the year, and down 56.23% from the November 10 high at $2.65. The Trading China Tracker Score is -1 (Sell).

CHME announced last night that "certain accounting and reporting errors were identified with respect to improper activities by certain employees." This will result in numerous restatements, and the upcoming form 10-K will be delayed for probably a very long time. I would avoid this name at all cost until we know more about what's going on there.

"As previously disclosed in the Current Report on Form 8-K filed by China Medicine Corporation with the Securities and Exchange Commission (SEC) on March 23, 2011, the Company announced that it expects to restate its previously issued financial statements for fiscal years 2008 and 2009, and the quarters within the fiscal years 2008, 2009 and 2010 in order to correct certain accounting and reporting errors that impact the accuracy of the previously issued financial statements (as defined below). The Board of Directors of the Company, after consultation with and upon recommendation of the management of the Company and its Audit Committee, concluded that the Company's previously issued financial statements contained in its Annual Report on Form 10-K for the fiscal years 2008 and 2009, and the Quarterly Reports on Form 10-Q for the periods within the fiscal years 2008, 2009 and 2010 should no longer be relied upon. The Company intends to restate the previously issued financial statements. Because of the nature and timing of the review, the Company will be unable to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 with the SEC by March 31, 2011, the prescribed due date. The Company does not expect that such filing will be made within the extension period provided for under Rule 12b-25 of the Securities Exchange Act of 1934, as amended. The delay could not be eliminated without unreasonable effort or expense. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 will be filed as soon as practicable after the Company has completed the restatement process."

Feihe International (ADY) is currently trading at $9.63, down 9.50% for the year, and down 30.72% from the November 8 high at $13.90. The Trading China Tracker Score is -2 (Sell).

Feihe has already announced full-year numbers in a press release, but the 10-K filing is still missing. The company expects to file its annual report by the end of the 15-day extension, or by March 31, 2011.

"The registrant is unable to file its Annual Report on Form 10-K for the year ended December 31, 2010, within the prescribed time period because the information required for an accurate and full completion of the report, including but not limited to the financial statements that form a part thereof, could not be provided within the prescribed time period without unreasonable effort or expense. The registrant expects to file its Annual Report on Form 10-K as soon as practicable, and in no event later than the fifteenth calendar day following the prescribed due date."

Fuqi International (FUQI) is currently trading at $3.29, down 48.44% for the year, and down 61.16% from the October 11 high at $8.47. The Trading China Tracker Score is UNDER REVIEW.

The last quarterly or annual report that we have seen from FUQI was filed on November 9, 2009. Nasdaq has granted the company several extensions, the last of which expires on March 28, 2011. By that date the Company must file with the SEC all delayed reports and any required restatements. It seems very unlikely that FUQI can comply with this request, which means that the stock might face a delisting from Nasdaq as early as next week.

"The Registrant has also been unable to complete and file its Annual Report on Form 10-K for the year ended December 31, 2009 due to the time and effort required by the Registrant to conduct a review and analysis of the accounting errors, the impact of the accounting errors on its condensed consolidated financial statements, and preparation of the amended Quarterly Reports on Form 10-Q/A to present the Restatements, in addition to the time and effort required to complete the audit for the year ended December 31, 2009. In addition, due to the foregoing, the Registrant has been unable to prepare and file its Quarterly Report on Form 10-Q for the three months ended March 31, 2010, its Quarterly Report on Form 10-Q for the three and six months ended June 30, 2010, and its Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2010, by their respective due dates. Due to additional time and efforts expended in an attempt to complete the Restatements and prepare and file the annual report for the year ended December 31, 2009 and quarterly reports for March 31, 2010, June 30, 2010, and September 30, 2010, the Registrant is unable to file its Annual Report on Form 10-K for the year ended December 31, 2010. The Registrant will file its Annual Report on Form 10-K for the year ended December 31, 2010 as soon as it is able; however, the Registrant is not able to provide a reasonable estimate as to such filing at this time, which will not occur within the fifteenth calendar day after the prescribed due date for such report."

Fushi Copperweld (FSIN) is currently trading at $8.73, down 1.69% for the year, and down 22.47% from the November 3 high at $8.47. The Trading China Tracker Score is 13 (Strong Buy).

Similar to CBPO, Fushi Copperweld is also a former Frazer Frost client which changed auditors to KPMG (January 24), and now has to file for a delayed Annual Report. Short interest is high and as the stock is still trading at January levels, it has room to the downside if the 10-K doesn't come out clean or if the delay is longer than currently expected. The company announced preliminary results on March 11, but it is prudent to wait for the audited numbers with the Annual Report.

"In the process of preparing our financial statements for the year ended December 31, 2010, management reevaluated the application of GAAP in certain past accounting treatments, which are non-cash and non-operating items. While it is unfortunate that these reconsiderations are causing a delay in our filing, we stress the fact that these are all non-cash adjustments related to various corporate-level account treatments and will not materially affect our non-GAAP, core operating results such as revenue, gross profit and operating income. The Company plans to file its Form 10-K for the year ended December 31, 2010 and publish financial fourth quarter and full year results as soon as practicable following the completion of this reevaluation. However, due to the time needed, we are not in a position to file our 10-K within the required time period."

Home System Group (HSYT) is currently trading at $0.14, down 94.40% for the year, and down 96.00% from the October 18 high at $3.50. The Trading China Tracker Score is 9 (Buy).

HSYT filed for a 10-K extension a whole two weeks before the due date, which is unusual at best. The company gave only the standard explanation without going into detail: "Certain financial and other information necessary for an accurate and full completion of the Form 10-K could not be provided within the prescribed time period without unreasonable effort or expense." With all these uncertainties, HSYT is for gamblers only at this point.

HQ Sustainable Maritime (HQS) is currently trading at $3.20, down 32.92% for the year, and down 36.89% from the January 7 high at $5.07. The Trading China Tracker Score is 6 (Hold).

"HQ Sustainable Maritime Industries is unable to file its Report on Form 10-K for the year ended December 31, 2010 within the prescribed time period due to delays in compiling the information for the preparation of the financial statements. The Registrant fully expects to be able to file within the additional time allowed by this form."

Kingold Jewelry (KGJI) is currently trading at $2.55, down 37.50% for the year, and down 75.00% from the October 6 high at $10.00. The Trading China Tracker Score is 9 (Buy).

"During the process of evaluating its internal control over financial reporting and completing the preparation of its consolidated financial statements, the Company plans to amend and restate its third quarter 2010 financials to reflect solely a non-cash stock compensation expense resulting from the issuance of 100,000 shares of restricted common stock in December 2010 pursuant to the terms of a pre-existing consulting contract. In connection with this adjustment, the Company has engaged a third party valuation firm to assist the Company and its auditors in properly valuing the compensation expense. It is expected that the final results of the valuation report will be available no later than March 25, 2011. The impact of this non-cash adjustment on the Company's net income is expected to be not more than $0.02 per share for the three and nine months ended September 30, 2010. As a result, the Company is unable to finalize its financial statements for the year ended December 31, 2010 until such results have been obtained. In connection with the Company's evaluation of its internal control over financial reporting, the Company has identified some control issues that it is analyzing to determine if they rise to the level of material weaknesses that would require disclosure in its Form 10-K for the year ended December 31, 2010."

ShengdaTech (SDTH) was last trading at $3.55, down 27.54% for the year, and down 44.95% from the November 8 high at $6.45. The Trading China Tracker Score is UNDER REVIEW.

SDTH announced an investigation into "potentially serious" issues with its financials on March 15, and trading has been halted by Nasdaq shortly after. It could take months for SDTH to complete this investigation, and the wording of the announcement suggests that restatements are necessary.

"On March 15, 2011, Shengdatech announced that it had appointed a special committee of the Board of Directors to investigate potentially serious discrepancies and unexplained issues relating to the Company and its subsidiaries' financial records identified by the Company's auditors in the course of their audit of the consolidated financial statements for the fiscal year ended December 31, 2010. The special committee is composed of the independent directors comprising the Company's audit committee. The audit committee retained O'Melveny & Myers LLP as independent outside counsel, which has initiated an internal investigation. The outside counsel to the committee has notified the Staff of the Securities and Exchange Commission of the commencement of the internal investigation. Given that the investigation only recently commenced, the Company cannot predict at this time whether that investigation will require any adjustments to its financial statements, and if so whether such adjustments will be material. Due to the pendency of the internal investigation, the Company will not be able to file its Annual Report on Form 10-K in a timely manner. The Company cannot at this time estimate when the internal investigation of the relevant issues will conclude. The Company intends to file the Form 10-K as soon as reasonably practicable."

Wonder Auto Technology (WATG) is currently trading at $5.79, down 23.21% for the year, and down 49.66% from the November 9 high at $11.50. The Trading China Tracker Score is UNDER REVIEW.

And another company that upgraded auditors to Big Four (PricewaterhouseCoopers) recently, and now faces a possibly long delay with their 10-K filing. Restatements for its financial statements all the way back to 2008 are to be expected, and WATG already said that they most likely won't make the extended deadline at the end of this month.

"As previously announced on February 23, 2011, in connection with the preparation of its consolidated financial statements for the fiscal year ended December 31, 2010, Wonder Auto Technology concluded, that its financial statements as of and for the years ended December 31, 2008 and 2009, included in its Annual Report on Form 10-K for the year ended December 31, 2009, as well as the financial statements included in its Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30 during each of the years 2008 and 2009 should no longer be relied upon due to a cutoff error regarding timing of revenue in such periods. Additionally, the Company is still evaluating the impact of the cutoff-errors on its financial results for the year ended December 31, 2010 and on its internal control over financial reporting as of December 31, 2010. As a result, the Company is unable to complete its Form 10-K within the prescribed time period. The Company remains committed to completing its Form 10-K at the earliest possible time, but does not currently anticipate its completion within the fifteen calendars following the prescribed due date."

SEC, Congress and Chinese-company Accounting

The big story this week comes from The Wall Street Journal's Dennis Berman, who first wrote about an upcoming SEC probe into Chinese reverse merger and auditing practices.

"The Securities and Exchange Commission has begun a crackdown on the practices of the "reverse takeover" market for Chinese listings, according to people with knowledge of the probe. Specifically, the SEC's enforcement and corporation-finance divisions have begun a wide-scale investigation into how networks of U.S. accountants, lawyers, and bankers have helped bring scores of Chinese companies onto the U.S. stock markets, these people say. The SEC has also begun homing in on individual Chinese companies for accounting violations and lax auditing practices, these people say, beyond a number of previously announced investigations."

A couple hours later, TheStreet.com's Scott Eden followed up with a more detailed look into this issue. Eden said that in early September the U.S. House Financial Services Committee wrote letters to both the SEC Chairwoman Mary Schapiro and the PCAOB (Public Company Accounting Oversight Board), asking how those authorities planned to tackle the problem of sub-par auditing of Chinese companies. The letter demanded that "all market participants can trust the accuracy of the audit work for U.S. publicly-traded companies," including Chinese companies listed in the U.S. and especially also reverse mergers.

This is certainly a valid demand, and the SEC has already launched investigations into three Chinese RTO companies earlier this year: China Sky One Medical (CSKI), Fuqi International (FUQI) and Rino International (RINO). Especially the drama around RINO was a game-changer, and as I wrote here on this blog about one month ago, the fall-out from RINO was expected to be significant. It is very likely that there are more than those three companies with severe accounting "problems," and while the RINO disaster might have sped up an SEC investigation into the whole sector, we all knew that something like this would eventually have to happen. Scott Eden wrote in his article that the SEC "has shown interest in at least six additional companies," but concluded that the probe will not just be focused on individual companies, instead looking into a "systemic problem" that might exist in the Chinese RTO space.

If you are a long investor in China stocks, don't make the mistake to view this new development as a bad thing for the sector. It is entirely positive. The RINO's of the world have to be found, and as long as that doesn't happen the whole sector has to live with negative, often unsubstantiated allegations. It will also put pressure on Chinese management teams who, in many cases, still fail to understand their responsibilities as a public company, fail to take appropriate action to improve corporate governance and strengthen investor confidence. The majority of U.S.-listed Chinese stocks, also reverse mergers, is not deserving of the fraud allegations, but many of them apparently need this kind of pressure to differentiate themselves from RINO and co. - I expect many positive developments in this space next year.

Back to accounting, we have seen many Chinese companies upgrading their auditors this month:

- December 16: China Integrated Energy (CBEH) appoints KPMG
- December 15: Skystar Bio-Pharmaceutical (SKBI) Appoints Crowe Horwath
- December 13: China Automotive Systems (CAAS) appoints PricewaterhouseCoopers
- December 6: Wonder Auto (WATG) appoints PricewaterhouseCoopers

But this can just be a start. There are many Chinese companies still using auditors that don't seem appropriate for their size and level of maturity. All of them will have to upgrade their auditors in 2011, and if they don't then healthy skepticism should be in place. Any company with several hundred of millions in annual revenue can easily afford a top tier accounting firm, and if they don't choose to go that way, we should ask the question: "why not?" Is it that they are afraid of too much scrutiny? Is is that they don't get accepted as clients by one of the Big Four?

The new Trading China Custom Screen Tool makes it easy to identify companies with sub-par auditors. Filtering for Chinese stocks with a senior exchange listing and no Top10-ranked accounting firm, then sorting the results by market capitalization, gives you a good idea of companies that will have to take action. We might even find some of the six additional names, Scott Eden says the SEC has shown interest in, on that list.

Most striking is the large number of Frazer Frost-audited companies on that list. Frazer Frost, the auditor of RINO International, was a business combination of Moore Stephens Wurth Frazer Torbet, LLP (MSWFT) and Frost, PLLC, that broke apart after the RINO scandal. Since December 1st, both MSWFT and Frost resume operations as separate entities again. MSWFT has a history of problems and has been fined this week by the SEC to pay $129,500 in relation to allegations of professional misconduct stemming from the material overstatement of the financial results by a Chinese company back in 2004 and 2005. MSWFT also agreed not to accept any new clients from China, Hong Kong, or Taiwan until an independent evaluation of the firm has satisfied the SEC, and Frazer regains compliance with SEC standards.

In light of these developments all of Frazer Frost's current Chinese clients should feel forced to upgrade auditors as soon as possible, definitely in time for the 2010 annual report, usually due by the end of March. Those companies that don't take appropriate steps should be treated with extreme caution. The list of current Frazer clients is long, including Harbin Electric (HRBN), China Biologic Products (CBPO), China Valves Technology (CVVT), China Fire & Security (CFSG), and SinoCoking Coal (SCOK).

California-based Kabani & Company Inc. is another small firm with a large number of Chinese clients. Most of Kabani's clients are small, OTC-quoted companies, but there are two striking exceptions: L&L Energy (LLEN) and China Green Agriculture (CGA). Kabani has been singled out as a sub-par choice in several articles this year, most notably by Barron's influential "Beware This Chinese Export" piece in August.

With a market capitalization of more than $300 million, and a U.S.-based (Seattle) management team, LLEN must know that Kabani is no longer an appropriate choice for the company, and that the reputation of the auditor is being questioned by U.S. media. Yet the company reappointed Kabani for their 2011 fiscal year in September, continuing to be the (by a wide margin) largest Chinese client of the firm. In an obvious attempt to strengthen management credibility LLEN decided to hire or appoint several retired White House officials. In August, Norman Mineta (former U.S. Secretary of Transportation) was hired for an annual salary of $250,000. This week LLEN hired Edmund Moy, former Director of the U.S. Mint and special advisor to President George W. Bush, for an undisclosed salary.

Kabani's second largest Chinese client is China Green Agriculture (CGA), a company that has already come under pressure by short sellers this year. In late November, China Green retained Ernst & Young to assist the company with strengthening internal controls, and said they were continuing "discussions on the hiring of a new independent auditor." CGA seems to on the right track, however we'll have to wait if words are followed by actions anytime soon.

There are several other small U.S. accounting firms with a bunch of Chinese clients. Child, Van Wagoner & Bradshaw is a Utah-based firm with six partners and an office in Hong Kong. The 2009 PCAOB inspection of Child found several significant deficiencies. Among their clients are Longwei Petroleum (LPH, $265 million market cap) and Yuhe International (YUII, $175 million). Both these companies are growing fast, expanding their business rapidly, and I would expect them to be mature enough already to upgrade their auditors to at least a Top 10 firm.

And the last accounting firm I want to mention here is Sherb & Co., another small U.S. firm with many reverse merger clients. Almost periodically there are issues with Sherb clients, most recently China Education Alliance (CEU) came under severe pressure with fraud allegations that found their way to mainstream financial media and led to the stock being halted twice this month. The largest of Sherb's Chinese clients, China Integrated Energy (CBEH), took immediate action and upgraded to a Big4 auditor. This is what you want to see as a long investor, let's hope many others will follow suit.

Troubled Frazer Frost

As we all know, Frazer Frost LLC, a rather small accounting firm with many U.S.-listed Chinese clients, has come under severe pressure since the RINO fraud story unfolded. I came across the wonderful China Accounting Blog by Paul Gillis from Beijing University - a must read for anyone interested in Chinese accounting - where Mr. Gillis had some more details on how things work at Frazer Frost.

"Frazer Frost audited 15 Chinese companies, 1 on the NYSE, 12 on NASDAQ and 2 OTCBB, earning fees of $6.1 million. According to partner Susan Woo, she is the engagement partner on all of this work, a sizable portfolio for a single partner. According to her firm resume, Woo has more than 13 years of accounting and auditing experience and specializes in providing financial and international tax consulting for multinational businesses. The tax work makes sense, since she has a Master of Science in International Taxation from Golden Gate University. She was licensed as a CPA in California in 1999. International tax practice is a pretty tough field by itself, so it is remarkable that she had the time to also develop the skills to audit public companies." (Source: Audit Scandals in China, Paul Gillis)

Mr. Gillis further explained that Frazer Frost does not have an office in China, though they have staff working there all year round, assigned from FF's California office. Let's have a look at recent developments with two other clients of the firm:

China Biologic Products (CBPO) intends to reaffirm Frazer Frost for the fiscal year ending December 31, 2010 and the interim periods through 2011, later this month on their Annual Meeting of Stockholders. The company has been accused of fraud in January and subsequently formed a special committee to conduct an independent investigation into the allegations.

Last Friday, December 3rd, CBPO filed the findings of this special committee in a Form 8-K with the SEC. The committee "reported that the investigation had been constrained by substantial limitations on access to relevant official records from Chinese military and governmental authorities and the availability of other relevant information in China," but while it found no evidence for some of the allegations, others could be confirmed or the results were inconclusive. It was filed that with respect to the allegation that Mr. Tung Lam, CEO of China Biologic's primary operating subsidiary, was previously known under a different name and imprisoned for smuggling in China, the committee "found evidence supporting Mr. Lam's denial of the allegation, as well as conflicting evidence with respect to this claim." However, in connection with the same smuggling activities, the committee said it found support for the allegation that Mr. Ze Qin Lin, husband of current CBPO director Ms. Lin Ling Li, was indeed sentenced to imprisonment in China.

Harbin Electric (HRBN) has not officially commented on auditor-related issues since the RINO disaster, however the company is actively working on a going private deal and has engaged high-profile names like Goldman Sachs, Morgan Stanley and Baring Private Equity for these matters. Big-4 auditor Deloitte has been retained to perform due diligence, but it seems the market has doubts that the Frazer Frost-audited HRBN will pass this test. The stock has dropped to new lows below $15 after announcement of the buyout proposal and is currently trading at $16.27 or 33% below the proposed $24 buyout price.

Roth Capital has been vigorously defending the company for the past few weeks. They pointed out that Harbin is the first U.S.-listed non-state-owned Chinese company that received loans from China Development Bank, which means they passed the bank's due diligence process which should add credibility (but didn't after all if we are going to judge by the reaction of the market). It certainly didn't help that the buyout proposal was modified soon after the loan was announced.

It will be interesting to see what the next steps of currently Frazer Frost-audited companies will be. Frost PLLC of Arkansas called off the merger with Stephens Wurth Frazer & Torbet LLP immediately after the RINO scandal became public. Of course this could be merely coincidental, but really? That means Frazer Frost will not exist for much longer, and all their current Chinese clients will have to appoint a successor firm or at least file the status of their auditor with the SEC. In my opinion, both CBPO and HRBN have long outgrown such a small firm with no permanent presence in China and they should upgrade their auditor as soon as possible. We'll see what happens. It is always a good idea to judge a company by its management's actions.

Friday Earnings Round-Up

Lotus Pharmaceuticals (LTUS) is currently trading at $1.05, down 17.97% for the year and down 38.24% from its February 3 high at $1.70. The Trading China Tracker Score is 13 (Strong Buy).

Lotus had a very good quarter with 40% revenue growth and 32% net income growth year over year. Both numbers are higher than company guidance of 20-30% growth for the balance of the year. EPS rose from $0.10 to $0.12 on a 9% higher share count. Operating cash flow is looking good with $6.64 million generated in the second quarter. The stock is currently trading at a P/E of just 2.5. In late July the company announced they would complete the construction of their new building with internally generated cash and "consider alternative funding options and structures only when our stock valuation improves, in order to protect against stock dilution." That's what shareholders want to hear.

Yuhe International (YUII) is currently trading at $8.96, down 5.19% for the year and down 27.97% from its March 9 high at $12.43. The Trading China Tracker Score is 3 (Hold).

Broiler breeder Yuhe reported second quarter EPS of $0.19 vs. $0.13 last year and $0.18 analyst consensus. Revenues came in a tad light with $12.48 million vs. $12.89m estimates, still 27% growth over the year ago quarter. The company is well on track to reach its full year target of $17 million net income which translates into EPS of $1.05 and a current P/E-ratio of 8.5. Yuhe's strongest results will occur in the second half of the year, given the seasonality of the business and the fact that the new parent breeders that were purchased in early 2010 will begin to generate revenue in the fourth quarter of 2010.

China Natural Gas (CHNG) is currently trading at $6.64, down 40.29% for the year and down 40.35% from its March 10 high at $11.13. The Trading China Tracker Score is 2 (Hold).

China Natural Gas presented rather unimpressive Q2 numbers with revenue growth of under 2% and adjusted net income (excl. non-cash warrant charges) of $3.9 million vs. $5.2 million in the year-ago quarter. Considering that the share count has climbed by 46% within a year, second quarter results showed negative EPS growth of 48.7%... not good. CHNG did not reiterate their full year guidance in the press release, however it should still stand at $22-23 million net income. This would mean the company has to double their earnings in the second half of 2010 from the first six months, we'll see how that works out.

China Biologic Products (CBPO) is currently trading at $12.90, up 6.78% for the year and down 10.30% from its May 19 high at $14.38. The Trading China Tracker Score is 3 (Hold).

CBPO reported second quarter revenues of $40.9 million, up 23% from 2009 and slightly better than the $40.52 million consensus. Adjusted EPS came in at $0.40, up slightly from $0.38 last year and higher than analyst's calling for $0.36. China Biologic is on track to reach the upper end of their 2010 net income guidance, which means the stock is currently trading at a forward P/E of 9.2. CBPO should be fairly valued with a stock price in the low teens for the time being.

Sancon Resources Recovery (SRRY) is currently trading at $0.36, up 7.572% for the year and down 26.05% from its March 22 high at $0.48. The Trading China Tracker Score is 14 (Strong Buy).

Recycling company Sancon posted respectable Q2 results once again with EPS of $0.02 and a solid balance sheet. The company is steadily generating cash from operations and has now almost 60% of their current market capitalization in cash and cash equivalents. SRRY announced several growth initiatives in May and projected that their new waste paper collection business that started in June will contribute about $4 million in revenue in the first year. That is about 40% of current total revenue. Trading China EPS estimates have been raised to $0.12 for the FY 2010 and the stock is currently trading at a P/E of 3.

China Clean Energy (CCGY) is currently trading at $0.63, up 23.52% for the year and down 36.37% from its April 6 high at $0.99. The Trading China Tracker Score is 14 (Strong Buy).

The biggest positive surprise comes from biodiesel maker CCGY. Revenues grew by 232% to $14.14 million in the second quarter and the company reported EPS of $0.05 compared to breakeven in the year-ago period. The surprise was the strong performance of the biodiesel business which still suffered from tiny margins in Q1. Gross margins for biodiesel increased from 3.74% to 12% over the past 12 months. I've raised full year EPS expectations from $0.10 to $0.18 based on strong Q2 performance. This would value the company currently at just 3.5x 2010 earnings which means the stock has a good chance to revisit its April highs.

China Armco Metals (CNAM) is currently trading at $4.02, up 26.81% for the year and down 63.79% from its March 5 high at $11.10. The preliminary Trading China Tracker Score is -3 (Sell).

And the biggest negative surprise comes from China Armco which posted an unexpected loss for the second quarter which sent the Trading China Tracker Score from positive 10 to negative 3 as all metrics deteriorated. The Score is preliminary until the 10-Q is filed with the SEC as certain numbers like operating cash flow have not been revealed in the press release. CNAM reported revenues of $17 million, down 24.5% from the 2009 quarter. Adjusted EPS dropped to a loss of $0.05 from positive $0.33 last year, mostly due to significantly lower revenue and contracting gross margins. CNAM's recycling factory is just ramping up now and the metal ore trading business came under pressure in May and June.

CNAM management lowered full year net income guidance from $12 million to $10 million which still implies stellar results for the second half of 2010 as the company didn't earn a dime so far this year. We believe this is plausible as their recycling factory is now operational, and this is still one of the best long-term growth stories one can find. However, the very disappointing results show how much execution risk has to be considered when a tiny company like CNAM wants to bring their business to the next level. The stock is down a good 10% after hours and I would expect further weakness in the days ahead as there won't be many players out there defending the stock after those results. Given the unchanged and still excellent growth prospects of China Armco, I would be an aggressive buyer of the stock when it has calmed down, based and settled at a new post-earnings level, where ever that might be.

Portfolio Check - BSPM CNAM CBPO CKGT

Biostar Pharmaceuticals (BSPM) is currently trading at $2.69, down 39.56% for the year and down 51.18% from its April 23 high at $5.51. The Trading China Tracker Score is 9 (Buy).

Biostar management provided guidance for fiscal 2010 for revenues of $80.0 to $82.0 million with net income of $18 to $20 million. The company started 2010 with a solid balance sheet, working capital of $24.1 million, and issued another bullish business outlook in May. There are no analysts covering Biostar Pharmaceuticals. The stock is currently valued at just 0.9x sales and 4.1x earnings for 2010 and my 12-month price target is unchanged at $7.80, based on 12x 2010e EPS of $0.65.

China Armco Metals (CNAM) is currently trading at $3.04, down 4.11% for the year and down 72.62% from its March 5 high at $11.10. The Trading China Tracker Score is 12 (Strong Buy).

Armco has repeatedly reaffirmed its financial guidance with revenues for the full year of 2010 exceeding $220 million with net income exceeding $12.0 million. The company stated "we are in the strongest financial position in our history and intend to put our capital to work to further fuel our growth." Operating cash flow in the first quarter of 2010 was $15.46 million, about one third of their total market capitalization. And growth is very likely to accelerate beyond 2010. Based on official company guidance, CNAM shares are currently valued at just 0.2x sales and 4x earnings, based on 15.9 million shares (including new shares issued in a private placement last April). There are no analysts covering the stock yet. My 12-month price target for CNAM is $11.25, based on 15x 2010e EPS of $0.75.

China Biologic Products (CBPO) has been holding up very well in this market. The stock is currently trading at $12.26, up 1.49% for the year and down just 14.75 from its May 19 high at $14.38. The Trading China Tracker Score is 8 (Buy).

Official company guidance for 2010 calls for revenue in the range between $142 million and $149 million and net income of $34 million to $36 million. China Biologic has been added to the NASDAQ Biotechnology Index (NBI), effective May 24, 2010. Both analysts following CBPO recommend buying the stock with an average price target of $18.50. I am raising my price target by $2 to $15.50 based on 10x 2010e EPS of $1.55.

China Kangtai Cactus (CKGT) is currently trading at $1.47, down 45.76% for the year and down 45.36% from its April 16 high at $2.69. The Trading China Tracker Score is 11 (Buy).

Kangtai is targeting revenue for the full year 2010 to be nearly $35 million, up over 30% from $26.5 million in 2009. Operating cash flow has been very strong with $7.75 million for 2009 and $4.53 million for the first quarter of 2010. There are no analysts following the stock and EPS estimates are difficult due to the complicated share structure and limited history of new business segments like cigarettes. I am using a cash flow per share projection of $0.45 for the year and a multiplier of 10 to reach my price target of $4.50 for the stock.

China Portfolio Round-Up

Another rough week for Chinese Small Caps on US markets has passed. Many of the stocks in this universe lost about one third of their value in the past two weeks. This is not a small correction and with general US markets being weak and on the verge of another breakdown it is possible that we even see further downside in the China space.

The China Model Portfolio is focusing on long-term trades in undervalued growth stocks, that means that while it is sometimes painful to watch the portfolio value drop we do not have much reason to worry in the long term as long as the underlying values and stories of the portfolio positions stay intact. Or take it this way: all of the undervalued growth stocks from last week are no lesser growth stocks but even more undervalued now.

I would advise to take a cautious stance with starting new positions now and wait for the general markets to stabilize and to form a base. It might be that you have to buy in at a higher price as sentiment in the China space can sometimes change very quickly, but I prefer buying in an uptrend to reduce downside risk. The only type of stocks I would consider at the moment would be thinly traded OTC stocks where you can get huge bargains if you are lucky as buyers seem to have completely disappeared, volume has completely dried out, and you could benefit from 'stink bids' getting served by desperate, panicking sellers (see RDBO this Friday).

Biostar Pharmaceuticals (BSPM)

BSPM is down 30.53% from its recent high at $4.75 (January 5th). The stock is currently trading at a forward P/E of just 3.88 based on my FY10 estimate of EPS $0.85. That is a bargain for every long-term investor, especially if you consider the company's growth prospects and the (not very well communicated) intentions of the company to uplist to NYSE Amex in the very near future.

China Architectural Engineering (CAEI)

The stock is not moving much in this downturn, still sits at its base that formed last November/December. That's about all the positive to report. CAEI stays a potential turnaround story, a world class engineering and construction firm that you can buy at very depressed levels. I would limit exposure to a small position though as there is no immediate catalyst for the stock price coming up.

China MediaExpress (CCME)

CCME is down 20.72% from its recent high at $14.82, achieved on January 19th. With the current negative sentiment in Chinese small caps, CCME got dragged down with the rest of the group. That doesn't mean anything about this growth story would have changed, so I would stay calm and sit it out. China MediaExpress will likely be back in focus strongly when buyers return to the China space.

China Armco Metals (CNAM)

CNAM is down 26.67% from its recent high at $4.50 (January 20th). The stock is dropping on very low daily volume of just about 20,000 shares last week, there are no buyers in many of the OTC-traded Chinese growth stocks. Should that make us worried? Not at all - if all goes as planned with the new scrap metal factory, the company can make up to one dollar per share in net income this year.

China Biologic Products (CBPO)

Down 27.66% from its January 11th high at $13.70. The stock took a big hit last week on a Seeking Alpha piece which questioned the background of a member of CBPO's senior management and claimed the company was seeded with stolen money. China Biologic responded with a press release, claiming that the article was based on research backed by a hedge fund that is shorting the stock and that they see this as "an attempt to discredit the Company's management and disrupt the Company's business and operations." Several analysts (Brean Murray, Rodman & Renshaw) came out in defense of the company, maintaining their buy ratings and price targets in the mid-teens.

By Friday's close, China Biologic's stock price has recovered more than 20% from Wednesday's intraday low of $8.13, so the overall drop from the January highs is now more or less in line with its peers in the sector. However, as there are doubts raised about senior management the stock might be stained for a while. To reflect that, I will reduce my price target by 10% from $15.00 to $13.50.

China Kangtai Cactus (CKGT)

CKGT is down 21.00% from its January 11th high at $3.00. As with many other OTC stocks, volume dried out completely towards the end of last week and is now a mere 25-40% of the average. Despite this drop the overall story of CKGT turned even more positive last week. The company reported that "the demand for our newly launched cactus cigarettes has exceeded our expectations," and CKGT secured a $2.1m contract for those cigarettes on Tuesday.

China Sun Group (CSGH)

China Sun is down 33.19% from its recent high at $2.35 (January 8th). Nothing in the story has changed, but there aren't any new developments to report either. Still waiting on concrete facts about the new finished batteries for the automotive industry. Rick Pearson put up a neat video about him visiting CSGH's site on TheStreet.com.

GC China Turbine (GCHT)

GCHT successfully bucked the trend and is actually up 5.75% for the week. This might have to do with a slew of press releases last week. On January 26th the company announced three new development projects with the Baicheng Municipal Government, adding up to a "potential value of orders in excess of" $550.4 million. The following day GCHT added another development project in Liaoning Province valued in excess of $34.4 million. Slowly we learn where the company's ambitious growth and revenue guidance is coming from, looks good at this point!

L&L Energy (LLEN)

The stock is down 26.21% from its January 12th high of $8.09. LLEN is currently trading at a conservatively estimated forward P/E of 5.1 which is, considering the growth prospects and uplisting plans of the company, very cheap. There are no indications that China's demand for coal is easing, quite the contrary. I like the stock here very much.

Lotus Pharmaceuticals (LTUS)

After a huge run-up the stock is now down 30% from its January 21st all-time high at $2.00. Volatility has been very high in LTUS the past week with huge intraday swings and the indication that contrary to many other OTC-listed Chinese stocks, there are still buyers out there for Lotus. I wouldn't be surprised if the stock will relatively outperform its peers in the next upswing.

New Energy Systems (NEWN)

NEWN announced significan news last week that has been completely overlooked by the market in the current negative sentiment for US-listed Chinese small caps. The company announced a $3m distribution agreement for solar mobile iPod and iPhone chargers. This is significant because it marks the first ever contract for the company outside of China and when there is one, more will follow. Another positive is that NEWN is obviously delivering on their promise to improve investor awareness and put out a bunch of well-designed press releases in the past weeks that give a good picture of the company's progress and growth prospects. At the current forward P/E of about 5 I consider NEWN one of the top holdings in the China Small Caps space and THE most promising stock in the lithium-ion space overall.

Orient Paper (ONP)

I have a price target of $14.50 on the stock and the stock traded above $15 both on January 12 and 13. If you follow the China Model Portfolio and you had a chance to see the price target being reached, then you could have sold the stock and would have done the exact right thing. The rules I set for the portfolio do not allow me to make mid-week changes and it was very unfortunate that ONP's weekly close was always well below the target price. But I want to stress that those targets are there for a reason and if one of the portfolio positions reaches the target price mid-week you should consider to get out. After all, it is a purely random decision to make changes only at Friday's close (could have been Tuesday or Wednesday and the ONP position would be gone now).

In the meantime, ONP lost a whopping 40.53% from its all-time high at $15.15 and the stock is back to where it was in November. If I could have sold the position at the target price I would likely now re-buy it here at $9.00 as there is absolutely nothing in the story that justifies this 40% drop. Now we just have to be patient for the stock to reach the target again.

Skystar Bio-Pharmaceutical (SKBI)

Surprising action in SKBI last week as the stock was the biggest loser in the model portfolio. The only identifiable reason was a note by GeoInvesting.com to remove the stock from their recommendation lists. GeoInvesting's reasoning is "unimpressive EPS growth for the next three quarters," and they have a 2010e EPS of $1.80 in their research.

Now this number of $1.80 is exactly what I have on my lists as well and it translates into a forward P/E of 4.80 for a Nasdaq-listed stock in a high growth industry. Funny enough, GeoInvesting projects accelerating EPS growth of up to 46.3% in Q4/2010 and with their forecast of weak Q1 number, growth in Q1/2011 will be even more impressive coming from a low base. GeoInvesting's call makes no sense at all and we all should just ignore it, in this market environment many did not, though.

Worldwide Energy & Manufacturing (WEMU)

WEMU announced a new financing last week which means a 94% dilution (incl. warrants) for current shareholders. The stock dropped hard but held up above the offering price of $4.50 which is a sign of strength in this market. While this kind of massive dilution is exactly what I do not want to see ever again in any of my holdings, I am still willing to give the company a chance to deliver on Q4 and FY09 promises with their annual report that is due at the end of March. If there is no upside surprise in those numbers I will sell the complete position immediately.

The massive share increase with the financing certainly makes my old price target for the stock unsustainable. I am reducing the target price for WEMU from $15.00 to $9.60, based on 12x projected 2010 EPS of $0.80.

Fantastic Start of the Year

2010 started with a BANG!! lifting the China Portfolio up to new heights. I am making several changes to the portfolio positions this weekend and there will likely be another post tomorrow with some new additions.

Biostar Pharmaceuticals (BSPM): down 5.84% for the week, total return 48.58%
BSPM is consolidating its recent gains but there is much more room for the stock to appreciate, especially as I consider an uplisting to a national exchange to be imminent.

I am doubling my position in the China Portfolio here. I am ADDING 1000 BSPM for Friday's close at $4.19. I am also raising the target price to 10x 2010e EPS of $0.82 to $8.20.

China Agritech (CAGC): up 31.88% for the week, total return 87.39%
The stock has reached my target price of $35 and I consider it fairly valued at current levels.

Closing position: I am SELLING 250 CAGC for Friday's close at $36.86 for a 87.39% gain or $4,297.50.

China Architectural Engineering (CAEI): up 15.25% for the week, total return 13.08%
I am not very happy with this position since CAEI bought a multiplayer online game developer in December. Stick with what you're good at? However, CAEI stays in the China Portfolio for now as I expect its core business to do much better in the coming months now that the Dubai disaster is out of the way.

China Armco Metals (CNAM): up 34.07% for the week, total return 26.49%
China Armco took off this week as the opening of the scrap metal recycling factory nears. No changes to my original investment thesis here.

China Biologic Products (CBPO): up 7.62% for the week, total return 62.50%
China Biologic is rapidly approaching my target of $15. No changes this week, but I will have to re-evaluate the target price in the coming week.

China Kangtai Cactus (CKGT): up 3.32% for the week, total return 64.71%
Despite the 65% gain over the past six weeks the stock is still trading far below what I consider fair value. A problem might be an expected to be huge non-cash charge with Q4/09 numbers resulting from EITF 07-05 adjustments, but earnings shouldn't be out before mid-February.

China North East Petroleum (NEP): up 12.76% for the week, total return 75.00%
The stock has reached my target price of $10.20 - actually it has seen $11.59 mid-week - and consequently I am closing the position here. I am not ready to up the target price above 8x 2010e earnings. This doesn't mean the stock couldn't run much further from here, momentum is clearly on its side, but according to the rules set up for this model portfolio the position has to be sold here.

Closing position: I am SELLING 1000 NEP for Friday's close at $10.43 for a 75.00% gain or $4,470.00..

China Recycling Energy (CREG): down 5.10% for the week, total return 38.16%
Everything looks fine here. The stock was stalling last week but long-term prospects are as bright as ever. No changes.

China Sun Group (CSGH): up 19.89% for the week, total return 43.87%
Excellent week for CSGH took the stock to new all-time highs. I am raising my target price from $2.50 to $3.50 on momentum in li-ion stocks and expected imminent news from the company on customer battery testing.

GC China Turbine (GCHT): up 13.55% for the week, total return -13.11%
The stock caught some interest last week but that I expect it to go much higher with actually verifiable numbers for the fourth quarter. GCHT is projecting its net sales to reach $550m in 2012, up from less than $30m last year. While I think that this is probably too ambitious, we can safely assume triple digit annual growth for the next 2-3 years. Investor Presentation (PDF)

I am doubling my position in the China Portfolio here. I am ADDING 750 GCHT for Friday's close at $2.85..

Gulf Resources (GFRE): up 24.27% for the week, total return 63.73%
The stock has reached my target price of $14.50 and I consider it fairly valued at current levels.

Closing position: I am SELLING 500 GFRE for Friday's close at $14.49 for a 63.73% gain or $2,820.00.

Lotus Pharmaceuticals (LTUS): down 5.47% for the week, total return 40.77%
Quiet trading in LTUS last week. The stock is trading at 52-week highs after it broke through the $1.20 resistance in December.

I am doubling my position in the China Portfolio here. I am ADDING 3000 LTUS for Friday's close at $1.35..

New Energy Systems (NEWN): up 25.42% for the week, total return 40.95%
NEWN released 2010 guidance of at least $1.23 per share this week. I am raising my target price to 12x 2010e EPS or $14.75. I consider this target to be very conservative and it is likely that I am not selling the position when the target is reached.

Orient Paper (ORPN): up 29.58% for the week, total return 42.95%
ONP is one of the top momentum plays in the China space at the moment. After lagging the market for a while the stock took off now and even scratched my target price of $14.50 this week. I will re-evaluate this target now and keep ONP in the China Portfolio for at least another week, although a short-term pullback is quite likely.

Skystar Bio-Pharmaceutical (SKBI): up 6.04% for the week, total return -6.63%
I do fully expect SKBI to do what ONP did last week in the near future: making a jump of a few dollars on strong volume. I am not in the slightest worried about SKBI's relative underperformance in the China Portfolio so far.

Worldwide Energy & Manufacturing (WEMU): up 15.45% for the week, total return 15.45%
Nice first week for the newest addition to the China Portfolio. If this stock gets volume we can see it retesting the 2009 highs this spring already.

Weekly Recap

Biostar Pharmaceuticals (BSPM): up 20.19% for the week, total return 32.98%
The Biostar story is just beginning to unfold. There is a nice article by Maj Soueidan on TheStreet.com that tells the story again with some new details.

China Agritech (CAGC): up 2.21% for the week, total return 38.54%
China agricultural stocks have been very strong in the past four weeks. After having exploded from below $19 to the low $30s this month, CAGC is currently consolidating its gains. The stock has been added to the IBD100 last weekend. On Friday China released economic numbers which point to inflation for the first time this year. This could give ag stocks in general a further boost.

China Architectural Engineering (CAEI): up 23.81% for the week, total return 21.50%
On Thursday CAEI was rebounding strongly on high volume based on technicals. Despite its currently weak fundamentals, remember that this is a world class engineering firm with a track record of many large and prestigious projects.

China Armco Metals (CNAM): down 3.08% for the week, total return -6.25%
China Armco didn't do anything this week. The company expects to launch operations in its steel recycling and scrap metal recycling business early in 2010. The recycling facility is expected to be capable of recycling one million metric tons of scrap metal per year which will position the Company as one of the top 10 largest recyclers of scrap metal in China.

China Biologic Products (CBPO): up 1.55% for the week, total return 15.00%
Despite having moved up to Nasdaq, trading volume is still low and there isn't much accumulation of the stock yet. CBPO is a value play in the Chinese healthcare sector that is still under the radar... we just have to be patient here.

China Kangtai Cactus (CKGT): up 22.73% for the week, total return 42.94%
Strong week for China Kangtai which brought a new 52-week high at Friday's close. And all that on no news from the company. My price target for the stock is still far away and shows room for a further double from current levels.

China North East Petroleum (NEP): up 20.18% for the week, total return 35.11%
I have totally underestimated this stock, to be honest. Despite a strong dollar and weak oil dropping below $70 this week, NEP has skyrocketed above the previous high of the year and scratched the $7 mark already. I had only added a quarter position to the China portfolio for concerns about falling oil prices dragging NEP down but that is apparently not happening. If you had bought more of the stock in the $5 area or below, congratulations.

I am doubling my position in the China Portfolio here. I am ADDING 500 NEP for Friday's close at $6.85. I am also raising the target price from $7.50 to 8x 2010e EPS of $1.28 to $10.20.

China Recycling Energy (CREG): up 24.10% for the week, total return 21.91%
China Recycling successfully raised $26.75 million to finance phase 2 and 3 of the Erdos TCH power generation project. And this financing happened without any dilution to shareholders. With a little delay the stock jumped to a new 52w-high on Friday.

China Sun Group (CSGH): down 5.33% for the week, total return 3.23%
Nothing happened this month so far, this is a sit and wait value play which might start to take off at any given moment. Fundamentals, story and outlook are unchanged from my initial profile.

GC China Turbine (GCHT): down 11.56% for the week, total return -20.73%
This is a very speculative stock in the China Portfolio and for that reason I have only added a quarter position so far. GCHT is a start-up manufacturer of wind turbines. The company currently has the capability to produce an average of 30 wind turbines per month which allows it to fulfill its initial orders of 150 wind turbines, worth in excess of US$ 128 million within one year. The company has yet to post revenues and profits, will likely have to invest a lot of money into more production facilities and the development of the planned 3.0MW utility scale turbines, and there are many risks involved in this plan incl. dilution and government policy changes. I consider this to be a very promising story but associated risks demand to keep the portfolio position small for the time being.

Gulf Resources (GFRE): up 3.60% for the week, total return 17.06%
This Friday, Gulf Resources raised $25 million in a private placement. The new shares were sold at $8.50, a 16% discount to Thursday's closing price. While the stock initially traded down to $9 on the news it steadily climbed higher and ended the day in positive territory. I view this as a very positive sign for the performance of the stock in the coming weeks.

Lotus Pharmaceuticals (LTUS): down 4.55% for the week, total return 9.49%
After a failed break-out attempt in early December we are now still waiting for the real move higher. For that to happen LTUS has to break resistance at $1.12 and trade above that level for two days with volume. Fundamentally this stock is worth $5 so it doesn't matter if it sits in the 90 cents or slightly above $1, the real move has yet to come and it should be mind-blowing. I will double the China Portfolio position as soon as the break-out scenario unfolds.

New Energy Systems (NEWN): down 3.72% for the week, total return -1.43%
NEWN successfully completed the acquisition of fellow Li-ion battery manufacturer Anytone this week. 3.6 million new shares have been issues on an average stock price of $6.60 per share. While this acquisition at 5.0x 2010 projected net income for Anytone could be considered a steal, the stock currently sits at a level even lower than the $6.60 acquisition price. At current levels, I consider NEWN to be one of the lowest risk positions in the China Portfolio and a core holding for 2010.

Orient Paper (ORPN): up 0.54% for the week, total return -1.58%
In a filing with the SEC on Friday afternoon, Orient Paper indicated that the listing of their common stock on NYSE Amex is imminent. No PR has been released yet so there is a chance to accumulate the stock before this news breaks. I expect ORPN to trade above $10 with such a press release and to hold this level with the uplisted to Amex. I do already have a full position of ORPN in the China Portfolio which I can't raise by the rules set for this model portfolio.