Invest With Confidence in China
The China Small Cap Sector has been in turmoil this year. Allegations of widespread fraud have surfaced, and investors on the long side of this sector have suffered substantial losses. Estimates have the losses at about $4 billion this year. All of the stocks listed in the panel are trading well below their previous highs, and all have been publicly accused of fraudulently activity.
Over the past 15 years hundreds of Merchant Bankers types have convinced China based companies to engage in transactions that allowed them to become US listed pub cos, promising access to capital and liquidity to many family owned businesses. As a result, there are now over 200 China based on companies trading on senior exchanges in the US, and about 600 on the lesser exchanges.
A lack of understanding for what is required to be a US listed public company, along with cultural differences and criminal fraudulent activity with impunity from consequences has led to the complete demise of the China small cap sector. Fraud has been uncovered by the market, widespread scandals have erupted.
Both the analysts and the auditors have been fooled. Valuations in this sector have arrived at historically low levels, reflecting the market's distrust of the SEC filings. Short sellers who have successfully uncovered these fraudulent activities have enriched themselves greatly and rightly so.
In the view of EmergingChinaStocks.com there are once-in-a-lifetime values to be found in the sector when it can be determined the financial results are trustworthy. Much like the 10 major crashes the market has experienced since 1987, there are bargains to be found when the rest of the investing world has shunned an entire class of equities.
To that end, EmergingChinaStocks has engaged with a group of 20 Chinese national forensic accountants who specialize in performing due diligence far beyond the practices of the auditors. It requires the cooperation of the company, but once completed, investors will know the SEC filings can be relied on.
At present, you will only find a few ideas in the sector on our recommended list. These are companies who have been vetted in some way by a third party.
The future of due diligence in the China small cap sector is found in 3rd party verification. The work analysts and auditors cannot be depended on any longer. EmergingChinaStocks.com is the only online publication actively engaged in effective 3rd Party investigations to independently confirm the accuracy of the financial results using highly experienced forensic Chinese CPAs. Their methods range far outside of those of the auditors, and this work will help us indentify the right stocks to own.
Even when the financial performance can be confirmed, we don't expect the China based small caps to trades at valuations akin to their US counterparts. There are still many significant risk factors related to global investing and specifically to China. The 40 multiples we see in US small cap growth stocks won't be achieved in the China small cap world for some time. However, there are 3 to 5 fold returns to be made as many of these companies return to a more reasonable 10 to 15 multiple of earnings.
Those are the companies EmergingChinaStocks.com will uncover.