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.