I think what we have in this space is the reverse equivalent of hyperinflation. When sentiment towards a currency drops in an extreme manner, it loses its purchasing power. So its value drops further. So it loses even more of its purchasing power. You get a "run away" situation.

That is what is happening here. These stocks don't pay dividends. They probably never will. There is no way for activist shareholders to take an active role in claiming the assets, as would happen if a US stock were to reach an absurd valuation. At best, a buyout can happen--but that represents meager upside potential. There is no way to change the board, no way to fire the CEO, no way alter company policy to realize the stock value. 

More importantly, the US-based VIE contracts and RTO agreements whereby defunct US-traded shells take on Chinese assets appear to be unenforceable, or at least minimally enforceable.

For that reason, the stocks can only operate like a currency. Their value is entirely a function of trust--trust that someone else will take them seriously. The events that have occurred over the past year and that will continue to occur are permanently breaking that trust, changing the paradigm altogether.

This situation is exacerbated by the fact that as a long investor you now have an opponent--the shorts. As sentiment drops, it is becoming easier and easier for that opponent to make his case. Even crappy hit pieces, like the piece on L & L Energy (NASDAQ:LLEN) a few days ago, are making stocks drop 20%. That situation feeds on itself. The more paranoid the market becomes, the more potent hit pieces become, which leads to even more paranoia, and more hit pieces. It's a runaway situation IMO.

China Growth Development (OOTC:CGDI) is the stock of the failed company Teeka Tan. A group of chinese characters came over here and wrote up a contract--completely unenforceable in China--that states that Teeka Tan now owns 6 malls in Taiyuan, Shaanxi province. What is the value of CGDI? In the end, absolutely nothing. You can't get to those assets or the profits they generate. The management will never share those assets with you. They came here for themselves.

This is like a huge video game. You are trading stocks on Nintendo. There is nothing underneath them that you can really claim to own. A very dangerous game when you're handing over real money to people.

CGDI can only bounce if investors believe that other people are going to confidently believe that CGDI represents a real stock with an enforceable claim on assets and profits. As sentiment drops in response to the massive fraud that has been revealed and that will continue to be revealed in the space, the clear indication that American investors will continue to get shafted in this saga, that belief continually weakens, which leads to lower prices, which leads to a greater perception of fraud and illegitimacy and shareholder abuse, which leads to lower prices, and so on. The reverse of hyperinflation.

People have been calling for bottoms since December. I can't count the number of people who have publicly and privately claimed "this is the bottom, sentiment is too negative." LOL. Not at all.

This space remains a gold mine from the short side. Free money is being handed out. Stocks that are worthless on multiple counts are being sold for hundreds of millions of dollars, simply because of the residue of psychological anchoring. The stocks look cheap of where they have traded in the past. But that doesn't mean anything.

We're in the second inning here. People think they are late, that they've missed the boat, but there is still a lot of fraud left to uncover. As prices continue to plunge, the space will be met with ever-increasing market paranoia, which will lead to continued moves down, and so on. The process doesn't have to stop. There are broken, fraudulent stocks in the US that have gone down for 5 years and that continue to linger in the pennies.

The value of identifying the few legitimate names IMO is not to go long them, but rather to identify them as names that are not really worth shorting on a fundamental basis. They will probably get bought out, which means an upward move of 30% or so.  30% is not enough to justify on the risk of a loss of principal, so going long isn't attractive, but neither is going short, because you risk 30% downside and tie up capital that can be deployed on better opportunities.  You want to identify the names that are genuine zeros. Then you can make a real investment with full upside and very little downside.

People may not like this, but we need to put our collective minds together and do the reverse of what we did in 2009. We need do the careful DD, obviously consulting on the ground work but also pouring through every piece of paperwork we can find, SEC or otherwise, looking for hidden shenanigans, ways in which management deceives and abuses shareholders, failures to comply with SEC rules (especially wrt insider trading), and so on.  This will allow us to find undiscovered frauds and get in before the train leaves the station and some shortseller gets to take all the profits. 

It's the reverse of 2009.  

WKBT - reasons why this is a complete POS.

1) Recent offering - made absolutely no sense.

As of 3Q, WKBT had $30MM in cash and $4MM in total liabilities.

http://www.sec.gov/Archives/edgar/data/1484042/000114420410059830/v201132_10q.htm

Those liabilities consisted almost entirely of taxes payable and unearned revenue. The company had zero debt of any kind--not even small short-term loans from banks, which many CGS TCM companies (e.g., TPI) have been able to acquire.

Given those circumstances, what reason or justification did the company have for conducting an offering at a market cap of $77M, which was less than 4 times the company's ttm SEC earnings?

Here's their explanation:

"The Offering will finance a media campaign utilizing print, radio and television to create further awareness of Weikang products in our markets."

http://www.sec.gov/Archives/edgar/data/1484042/000114420411005521/v209813_ex99-11.htm

So you raise funds at less than 4 times earnings despite already having almost half of your market cap in liquid cash, and the justification is a media campaign?

If I had to guess what sort of phony dilution excuse a bunch of chinese scamsters might try to use to fool Americans if they needed something quick, a "media campaign" would seem like a really good guess.

2) Margins - they are way out of kilt with similarly sized Shenzhen-listed competition.

http://www.geoinvesting.com/forums/yaf_postsm5098_US-Listed-v-Chinese-Listed-Comparisons.aspx#singleMsg

The average net margin for the Shenzhen TCM companies I sampled was 13%. WKBT's alleged net margins are 33%. If WKBT's SEC financials are true, then it is the cream of the crop in China, with better operating metrics than China's best and brightest, the companies that list on Shenzhen at 200 times earnings. I find that extremely unlikely.

I'm willing to believe that some companies just "do it better", but I'm not willing to believe that the ones that just "do it better" are the ones that have to come over here and play the pathetic RTO game at 4 times earnings.

3) SAIC filings - as I've said, the proper, conservative way to value a chinese small cap is to use SAIC or SAT financials. That's especially true for an FIE like WKBT. Based on WKBT's SAIC, the company generated $500K in 2009 net income, which gives it a current P/E of around 72, almost as high as BIDU. That's scary expensive for a TCM maker with no biotechnological moat whatsoever.

Now, the company will tell you "Oh, we don't take SAIC filings seriously, the numbers are fabricated."

But then look at the excuse they gave for the offering.

"The Offering proceeds from today's completion of the $5.0 million placement and the Company's first financing for $2.5 million in January 2010 will meet WKBT's external investment requirement under the November 2007 FIE business license granted by the Heilongjiang Office of the State Administration for Industry and Commerce ("SAIC") which in March 2010 was extended until November 2027"

http://www.sec.gov/Archives/edgar/data/1484042/000114420411005521/v209813_ex99-11.htm

So, in other words, it's of the utmost importance that you do a financially unnecessary offering at a terrible price so that you can gain after-the-fact compliance with technical menutia pertaining to an SAIC business license that you've already received, but then you turn around and defraud the SAIC, understating your income by 97%? And you commit tax evasion?

I seriously doubt that. As usual, the people being defrauded here IMO are American investors, not the Chinese government.

With that said, WKBT is oversold and may be due for an earnings bounce. That's the time to go short. Earnings bounces in obviously fraudulent names are what we need to be focused on right now.

Fuqi Intl (OOTC:FUQI) has been very strong recently.  Is something up?

Interesting Idea - China Topreach (OOTC:CGSXF)

Maj, Bob, we need to take a look at this one on arbitrage.  It trades as HK:1381 in Hong Kong, and the arbitrage value is about 4.86 v. (bid/ask 2.02/3.50) over here.  Maybe Bob can call these guys up and figure out what the hell is going on.  Supposedly they are going to distribute HK shares to the US shareholders (the float is miniscule and they just don't want to bother anymore trying to get listed on NASDAQ with all the fraud that's going on). Probably will take many years, so definitely a huge value trap right now that no one should touch, but it could eventually become interesting if we could suck out more effective communication from the company.

Interesting.  Good luck to the guy, I've been bothering them about a dividend for 9 months now. 

http://finance.yahoo.com/news/Shareholder-Sends-Proposal-to-prnews-1286622944.html?x=0&.v=1 

If they respond and pay a dividend, which I doubt they will, I would definitely be a buyer.

Given the revenues, I wouldn't think very many are SSE's, but if you want to check, the companies are listed below.  Note also that there are SSE 's in the US Chinese Listed Space, specifically YHGG.PK

What do you mean by SSE?

Agreed.  We may have our first failed audit of the season right here.  Geoinvesting definitely needs to conduct some on-the-ground DD on this one to find out what is actually going on. 

What I find especially irritating is the way that Rodman seems to have coordinated with the company to pump this shift as some kind of bullish development.  

"We view the appointment of Mazars as a positive step for the company. Mazars is one of the top 10 international accounting firms (in terms of global billings) with approximately 13,000 professionals in 61 countries. The company extends its international reach further via the membership of Praxity alliance which gives it access to a total of 33,500 professional in 84 countries. With recent reports of accounting deficiencies discovered in a few US-listed Chinese small-cap companies, we believe this auditor upgrade is timely and will help strengthen investors’ confidence in the company."

"Upgrade"?  "Timely"?  LOL, gimme a break.

China Power Equipment (OOTC:CPQQ) announced that it has upgraded to "Top Auditing Firm Mazars."  The announcement occurred concurrently with a bullish note from Rodman and Renshaw. 

In the body of CPQQ's PR, we learn that the company upgraded specifically from ACSB to Mazars CPA Limited, a Hong Kong affiliate of Mazars.  A cursory look at other names that Mazars CPA Limited audits raises questions as to whether this was much of an "upgrade." 

Biostar Pharmaceuticals (NASDAQ:BSPM) – Biostar Pharmaceuticals – 2.48

Changda Intl (OOTC:CIHD) – Changda International Holdings – .830

Chinawe.com (OOTC:CHWE) – Chinawe.com – .006

Chisen Electric (OTCCB:CIEC) – Chisen Electric – 4.70

Ticker not found - COL China Online International

Pacific Vegas Global (OOTC:PVEG) – Pacific Vegas Global Strategies –  .004

Physical Property (OOTC:PPYH) – Physical Property Holdings –  .001

Smartpay Express (OOTC:SPYE) – Smart Pay Express – .0201

Telestone Technologies (NASDAQ:TSTC) – Telestone Technologies – 8.20

http://pcaobus.org/International/Inspections/Documents/issuer_audit_clients_of_certain_non-US_firms_by_client.pdf 

If CPQQ wanted to upgrade, why would they upgrade to *this* auditor?  And why would they upgrade now, right in the middle of audit season?  One possibility is that they were having problems passing their current audit with ACSB.  The company claims that is not the case.

I'm a bit suspicious, however, because a similar January changeover to the same Mazars CPA Limited occurred last year at TSTC, a company with alleged accounting problems associated with a large A/R situation.

TSTC shifted from Mazars CPA Limited to QC CPA  on July 28, 2009.

http://www.sec.gov/Archives/edgar/data/817129/000114420409036941/v154620_8k.htm

Then, on January 14, 2010, TSTC shifted back from QC CPA to Mazars CPA Limited.

http://www.sec.gov/Archives/edgar/data/817129/000114420410002881/v171901_8k.htm

The question with respect to TSTC is, why would they shift from one auditor to another, and then shift back right in the middle of audit season?  Now, you have CPQQ shifting to the same auditor at a similarly late point in the audit season.  At a minimum, it looks bad, and so if CPQQ wanted to make an upgrade, they should have done so much earlier.