In the last few years, Chinese companies have bought out shell companies on North American stock exchanges (mostly the Nasdaq and TMX) to become listed in North America. Buying out a company that is already listed is a quick and easy way to become publicly-traded, without the cost and public scrutiny (due diligence) that comes when being newly-listed. Therein lies the trouble.
If one does a stock screener search of companies with great earnings, great return on equity, low debt levels and low stock price, many of the companies which turn up are Chinese (see list at end of this article). Why are these great companies so undervalued? Why are so many of the undervalued companies Chinese? The answer: they are undervalued because investors worry many publicly-traded Chinese companies may not actually exist.
Last week, Sino-Forest Corporation brought this problem into full view. Once Canada’s largest publicly-traded timber company, Sino-Forest’s stock price has dropped 83% in two weeks, losing 3.7 billion dollars in value to investors. There are allegations that Sino-Forest has vastly overstated its assets, and that many of its trades may actually be to subsidiaries of itself. In other words, the company as stated may not be real.
This is certainly not the first time a Chinese company has seemed suspect. There are multi-million dollar pharmaceutical companies in China which claim to sell hundreds of popular products, yet none of my Chinese friends (even those who work in the pharmaceutical industry) have ever heard of them.
The Chinese problem weighs so heavily on the minds of investors that it extends to even good companies. One of my favourite mining companies, Hawthorne Gold, merged with a Chinese company and changed its name to China Minerals Mining Corporation. Within weeks its price dropped in half. Clearly, having “China” in your company name is like developing leprosy.
The Chinese market - both in the stock market and in real estate – seems to be composed of many empty shells.
Beware.
____
Click above to expand
____
For further information, see:
Key partner casts doubt on Sino-Forest claim
____
