On investing in Chinese companies

[anavalluc]

I have been a long time member of fool services and subscribe to a number of them but it has taken me many years to find this board : better late then never.

As a former subscriber to Global gains I too invest in some of their Chinese recs. including Wonder Auto which if memory serves went from 2 to about 14 before going bust. I think I got in at 3 and change and watched it all the way to 14 then down bought some more and sold the lot at 4 ish for a loss.

Any non US investment is subject to some risk and as someone who is a Euro and lives in Switzerland the same applies to me when investing in the U.S. I would expect hometown decisions when investing in fact I would say that Paul Singer gamed the system when he bought Argentinian debt and then used the U.S. legal system to extort money from the Argentine govt. Dirty pool to borrow and old US expression for one who doesn’t play by the rules.

I also sold the 200 covered calls against my ANET and was called last month. This was a mistake but I fail to see how this stock is super good value after rise from around 94 to today’s price since Jan 17 even after its fall from grace.

For me the same applies to Shopify. It is recommended on two of the services I subscribe to within the fool universe and would happily buy it at the 60 bucks one of them said to buy it at but is a stock still a good buy at double that price.

Lastly, for those of you who want to invest in non U.S. stock look through UK investment trusts holdings. These are closed end funds which are usually very well managed and can take a long term approach to investment due to their closed end nature.

One of the ones I look at is called Baillie gifford Shin Nippon to try to find good opportunities in Japan amongst the smaller companies there.

Thank you to all who write on this board , I am glad I found it.

[brittlerock]

Dreamer,
Baidu is used exclusively by everyone I know in China and I assume pretty much everyone who goes online and searches for something. So far as I know, there’s no viable alternative. This is, IMO, the primary reason that the Chinese government kicked Google out of China. They didn’t want an hard to control American company to have such widespread acceptance by the Chinese people. Baidu is Chinese, they two the government line without challenge or question.

I know nothing about iQiyi. Only observation is take notice of the lowercase “i” at the beginning of the name. That’s not an accident.

Can’t comment on Baozun either. I’ll be returning to China for a few months in the fall. Maybe I’ll ask about them.

[brittlerock]

Smorg,
I can only assume that the reports you cited are from reasonably reliable sources. I am a casual observer of things Chinese because my wife is Chinese and I have lived in the country about 25% of the time for a number of years. At the same time, I’m not plugged into any particular journalistic efforts and certainly have no political or business activities or ties in China.

I will say that there is a built-in Western bias in a lot of the press about China. There may be a dose of that going on in these reports. I’m not saying they should be ignored as being invalid, only that if only look for bad things that is only what you will see. IMO, whether it’s because he’s narrowed the scope of people on the take, or he’s only interested in the political goals of solidifying his position or whatever motivation, Xi has been undeniable successful in reducing government corruption.

And yes, it’s hard to separate government corruption from business corruption when large scale businesses, projects and renminbi are involved. But most certainly a good deal of that has been curtailed and a great deal of smaller scale corruption which, quite frankly is more visible to the average Chinese citizen has also been eradicated.

But, whatever the truth is about corruption, none of it bodes well for investments in Chinese companies which was the point Saul and I were both trying to make.

[brittlerock]

Smorg,
I absolutely agree. The risk levels associated with huge leveraged deals was given as the primary reason for the government’s takeover of Anbang Insurance Group. The point was not only to curtail their activities before the whole thing collapsed but to send a message to other Chinese companies that the have to reign in their debt levels and reduce the systemic risks in the Chinese economy.

[LifeOfDreamer]

Brittle,
Thanks for the reply.

Per recent tmf article, hinting Baidu yielding some mobile search share to Alibaba’s Shenma…was vurious if you have seen that or let us know after your next trip if you see a shift in trends at all. Thanks again!
https://www.google.com/amp/s/www.fool.com/amp/investing/2018…

-Dreamer

[brittlerock]

Duma,
That’s a lot, I’ve already written a bunch so I’ll just touch on a few things.

My impression is that the Chinese admire America and aspire to their impression of an American lifestyle, gleaned mostly from movies and lifestyle publications. At the same time, they do not envy America or Americans. They have no desire to become an American doppelganger. They are acutely aware of many of the problems in American society. The Chinese press and TV run frequent stories on US mass shootings, extrajudicial killings by the police, homelessness (especially of veterans), costs of healthcare, etc.

I would also caution about the notion of the Chinese having a “copy” mentality. They copy what they can which is often design and trademark aspects of foreign products, but when it comes to manufacturing technology they have far surpassed most American firms. In 2014 (most recent year for which there are stats) China held the world leadership position in patent applications with just under a million applications. They were 2nd only to the US with over 233,000 granted applications compared to just over 350,000 grants for the US.

We don’t build large panel flat screen displays in America because we don’t know how to do it better and more cheaply than the Chinese. This is not a matter of low labor costs because these items are very low touch and in the high tech areas China is not the world’s low labor cost center any longer. Chinese wages have risen a lot over the last 20 years. This is why more than any other reason a lot of manufacturing jobs will never return to the US. We no longer possess the skills or technology. I could give several other examples. The Chinese have even taken world leadership with respect to seemingly “old” and mundane manufacturing technologies like specialized printing (specialized printing includes things like having perfect, undistorted artwork and lettering on heat shrink labels used on odd shaped containers).

Will Chinese financial accounting improve as the Chinese economic influence spreads. I’ll give that a resounding maybe. But even you suggest that that’s a good 2 - 5 years off (I’d give it longer). I invest in the best investments I can find today for what I hope will remain good investments in the future. I don’t invest in companies that may or may not become good investments in 2 - 5 years.

I do have about 1% of my total capital in such companies (none of them Chinese), but I consider those speculative rather than investments.

And yes, Guilin, Yangshuo and the surrounding countryside of Guangxi province are very beautiful.
And yes, the Chinese have a centuries long tradition of holding education in high regard. Teaching is a well paid and highly respected profession in China.

[Smorgasbord1]

I still have an email from TMF (Tim Hanson is the claimed author), dated Aug 21, 2010, pushing Global Gains. It’s far too long to post here, but here some snippets:

In a few short weeks, my No. 1 China Stock from my trip is up more than 35%. But you have plenty of room to buy in.
…
I know that must sound fantastic, but please hear me out…
…
Who else wants to cash in on China’s “final” revolution?
…
Yes, I want you to buy them all… Our top pick, Yongye is up 106%.)

YONG turned out to be a losing investment, with the company finally taking itself private in 2014. MDP had sold out at a loss in 2012. One TMFer posted (after the sell rec):
At the time I’d spent all of 15 mins looking at Yong’s latest quarterly and annual report, focusing mostly on cash flow/cash conversion as my experience of Chinese firms listed in London was that they were mostly awful in this department, which in turn created suspicions about whether the businesses were actually genuine.
Certainly there were enough question marks to put me off Yong in my quick look, and I remain convinced that superb sales growth can be acheived by any company if you have ultra-generous trade terms and lax enough cash collection. The other lesson I would draw here is that all the laborious site visits, customer visits, calls with management, other research etc to shore up the ‘story’ on your behalf, has proved seemingly worthless in the face of what sensible investing is all about – buying companies that return you cash.

Tim Hanson’s email continues:
My No. 1 idea is the brainchild of an anointed “insider” – a distinguished alumnus of China Central Television (CCTV). As a result, the company once enjoyed a monopoly on a valuable CCTV property, but no more.

CCTV in Beijing: Proud partner of my No.1 China Stock for 2010

In response to the temporary setback as this exclusive arrangement was unwound, the company took a 60% hit to first-quarter revenue. Lost amid the handwringing, however, are two important facts that stand testament to the company’s superior management: Through it all, the company remained both profitable AND cash flow positive.

And here’s the kicker: Despite sitting on $3 per ADS (essentially a U.S. share) in cash and investments – nearly twice the current market price – the stock trades at less than 1 times sales and 6 times earnings. And if that’s not enough there’s a final near-term catalyst, you’ll read about it my report.

I believe this was a rec for CCME. Separately, one Seeking Alpha author literally claimed it was “the best stock in the world”: https://seekingalpha.com/article/242389-china-mediaexpress-t… . Three months later, Deloitte resigned as auditor. Ouch. BTW, Citron correctly id’ed CCME as a short before the bottom dropped out. Here’s a Forbes article: https://www.forbes.com/sites/benzingainsights/2011/02/07/is-…

Any fundamental analyst who takes a look at the operating metrics and balance sheet of China MediaExpress Holdings (NASDAQ: CCME) would find what appears to be a gem of a company. CCME reported net profit margins for Q3 of 2010 of 54.66% versus 43.48% in the year ago period. Operating margin went from 59.04% in Q3 2009 to 72.42% in Q3 2010. Astounding! But it gets better.

For Q3 2010, CCME reported a return on average assets of 60.97%. Remarkably, this metric (while unbelievably impressive) fell from the 63.15% the company reported in the year ago period. Return on average equity also fell, although it remains unbelievably impressive. In Q3 2009, return on equity was 86.09% versus a staggering 100.84% in the comparable year ago quarter.

Now combine these truly unbelievable operating metrics with a YoY reported revenue growth rate of 118% and you get YoY quarterly earnings growth of 166.90%. What a company! Any rational person would assume that China MediaExpress had found the cure for cancer. What do they actually do? Well, they are engaged in the media business. Kind of hard to believe, no?
…
The reason is because a crime has been committed.

Let’s go back to YONG. While the email was pitched in Aug, 2010, YONG had been a Global Gains rec since April. In late July TMFer Rich Smith published a TMF article that was quite bearish on the stock (https://www.fool.com/investing/general/2010/07/26/rocket-sto… ), which set off a number of people on the GG YONG board (http://discussion.fool.com/the-fool-is-a-fool-28660200.aspx?sort… if you have the right combo of premium services), complaining about The Motley Fool being motley. Smith was right on YONG, but he also recommended CGA as an alternative. Oops. CGA fired its auditor shortly after Deloittle quit YONG. I myself lost $2400 on that investment.

Back to the promotional email: because we focus on international stocks at Motley Fool Global Gains – and let’s be honest, investing directly in overseas companies demands a little more attention – we watch them more rigorously and keep in closer contact with you.

That extra contact – and the fact that we keep our membership base small – helps you sleep better at night, knowing that my team and I are personally monitoring your overseas investments

Well, none of us who participated ended up sleeping well at all.

I love this part of the email: If you make as much as I think you will, maybe you’ll buy me a beer one day!

What, so that we can all weep into it together?

What attracted me to GG was their repeated assurances that they were keeping close tabs on these companies; Making frequent visits to the companies, talking to management and seeing the operations in action. But in the end, it was all to no avail. From CFOs with no prior experience to outright fraud, the vast majority of the recommended Chinese stocks lost money for investors.

Barron’s has a decent story about the fraud in Chinese financials (somewhat about the new documentary “The China Hustle”) that explains what TMF might have fallen victim to: https://www.barrons.com/articles/when-chinese-stock-fraud-wa…

…a camera that David planted outside a factory in Xi’an, China. The time-lapse sequence shows the place idle, except when investors toured.

Back in the aughts, hundreds of Chinese companies got instant U.S. listings by merging into a public, but moribund, U.S. company and then ringing the market’s opening bell. The fad saw some $50 billion worth of these deals launch before investors learned that many of the China reverse-takeover firms were frauds. Their factories fake. Their books cooked.

BTW, the article implies that investing in big Chinese companies like Tencent and Alibaba do not have these risks.

The evidence backs up what Saul and others say about the culture in China towards fraud. Remember the 2008 Chinese milk scandal, where 4 infants died because Chinese companies were putting melamine into baby formula? Chinese people still prefer to buy foreign brands now: https://qz.com/1133484/buying-infant-milk-powder-is-still-a-…

But that’s not good enough protection in China: In April last year, Shanghai authorities arrested nine people involved in producing more than 17,000 tins of fake milk powder with counterfeit labels — so these products looked like those from American infant formula brand Similac

It even extends into things like scientific research papers. Since 2012, the country has retracted more scientific papers because of faked peer reviews than all other countries and territories put together, according to Retraction Watch, a blog that tracks and seeks to publicize retractions of research papers. (https://www.nytimes.com/2017/10/13/world/asia/china-science-… )
Compounding the problem, they say, is the fact that Chinese universities and research institutes suffer from a lack of oversight, and mete out weak punishments for those who are caught cheating.
“In America, if you purposely falsify data, then your career in academia is over,” Professor Zhang said. “But in China, the cost of cheating is very low. They won’t fire you. You might not get promoted immediately, but once people forget, then you might have a chance to move up.”

Fraud is so bad in China that fake videos about things like seaweed made from plastic caused the seaweed market to plummet last year (https://mothership.sg/2017/03/no-the-plastic-seaweed-from-ch… ). So, now we have fraudulent reports of fraud in China.

Of course fraud happens everywhere. But, it does seem more prevalent and with less punishment in China than in many other countries.

[brittlerock]

Saul,
That’s just one of countless examples of how Chinese companies take advantage of foreign investors. The scenario is almost always the same. The analysts are invited to the company’s HQ, usually very modern and glitzy. The meeting rooms are high tech with large screen displays. The presentations are glowing (and in flawless English). The analysts are feted at 5 star restaurants and often put up at the company’s expense in 5 star hotels. They are always shuttled about in chauffeur driven, foreign limos. Some companies even foot the bill for the airfare.

The analysts have no motivation and less desire to walk the streets of a Chinese city or pull back the curtain on the company presentations.

Some years ago, before I ever visited China I followed a investment publication authored by an ABC (American born Chinese) analyst. I remember one column he wrote touting a drug store chain that had opened thousands of stores in numerous cities all over China. On my first visit to China I walked for days in Shanghai - I saw not a single store of this brand. When I returned to the US I sold my shares (at a moderate loss) and canceled my subscription.

I realized that the author was running a scam to pay for his high end travels at the expense of his subscribers. He ran his business just like a lot of other Chinese businesses even though he was an US citizen.

[brittlerock]

2008 was a very special year for China because they hosted the summer Olympics that year. It was their first big performance on the world stage. 8 is an auspicious number in the very superstitious Chinese culture. The Olympics opened a 8:00 PM on August 8, 2008. The opening ceremony featured 2008 drummers playing in perfect unison. In America it’s hard to find 2 drummers who can play together.

I was in China during the milk scandal. Also, the riots in Tibet and Xinjiang took place just before the Olympics in 2008. Boeing named the 787 for the Chinese (the plane was supposed to be delivered to Chinese carriers prior to the Olympics, but it ended being delivered 2 years later).

To this day when my wife and I buy milk in China we always buy UHT pasteurized milk from Australia, New Zealand, the US or a European import. We don’t buy any Chinese dairy products ever. My wife’s family requests that we buy made in America supplements and even ginseng and ship it to them even though shipping is quite expensive.

[Smorgasbord1]

In America it’s hard to find 2 drummers who can play together.

Well, of course! Here in America we each march to a different beat. That’s what makes us great! ;^)

(That is, of course, if you ignore The Grateful Dead, The Doobie Brothers, The Allman Brothers Band, The Charlie Daniels Band, .38 Special, etc.)

[anthonyms]

Perhaps Ant can give his perspective because he has done quite well in various larger Chinese companies like BABA, BIDU, JD, etc.

Guys

Yeh I shared my tome on this last year in a similar thread. If there was a search function I would be able to find it

I get there is risk here. I get there is a fear of the unknown. I get that there is considerable misinformation & misinterpretation.

However yes I have invested in large blue chip Chinese firms listed in US and HK and done well.
I have also invested in mid size Chinese firms listed in SG and done well. I do not invest in Chinese small caps.

Here’s what I said previously about my investments…

http://discussion.fool.com/john-sounds-exactly-where-the-risks-a…

The emergence of China is the single most significant economic and investment opportunity of our generation and of this century - just as the US was last century. I’m prepared to have some exposure to this and so for that matter are probably 90% of Fortune 1000 companies. Feel free to leave yourselves out of this one but I’m not. What I do do is manage my risk in only investing in large caps, ideally with direct ownership structures and with proven business models with excellent trust levels from its consumers, with clean management and only up to a certain threshold of exposure.

Other observations I would make are:

1. Americans and Chinese are far more similar than either would believe. Just as Americans represent the ultimate in convenience culture - more so the Chinese. Just as Americans got fat very quickly - as are the Chinese (work in progress). Just as Americans urbanised - so have the Chinese. Just as America sought world economic domination - so are the Chinese. Just as Americans are competitive - even more so the Chinese. Just as Americans redefined materialism - even more so the Chinese. Just as Americans sought technology leadership - as are the Chinese. Just as America sought a freedom to roam in its foreign policy - so are the Chinese. Just as America hitched its surrounding world to it economically via the Marshall plan - so are the Chinese with OBOR

2. The progress Xi in China and Modi in India are making in reducing corruption should not be underestimated

3. One belt one road will deliver China the internationalisation it seeks - the currency, the economy, the investment capital, the industrial production, the foreign policy and the global leadership.

4. China is 20% of the world population. Just at parity it should reach 20% of the world’s economy. It will out grow and become the largest in the world. The US is 5% of the population has been an oversized economic giant. Just as there is risk with China’s emergence there is also the risk that US fails to maintain its high water mark and heads the same way every other industrial superpower has previously - from Great Britain back to the Greek and Roman empires. So far no leading economic superpower has ever maintained that lead. The odds of America declining and being a net donor to China (and India’s emergence) is almost a certainty.

Ant

[brittlerock]

Smorg,
I said hard, not impossible. But even with the groups cited, the drummers rarely play in unison. One usually has the responsibility for holding the groove while the other plays some syncopation around the groove drummer.

[zsimpson]

My point is that deterrents already exist that should prevent china from making a move in the first place that affects my invested money.

Wasn’t the same thing said about Venezuela?

Kathleen