Stock Trading Ideas and News

by Tim Seymour

The March import/export

By Tim Seymour

Looks like Facebook may have finalized its choice of a local partner as it gears up to create a social networking site in China, and Baidu (BIDU) is the winner.

Sohu (SOHU) is reporting that Mark Zuckerberg and Baidu CEO Robin Li have been talking about putting together a social network and have signed an initial agreement to cooperate.

BIDU is already the Google (GOOG) of China in terms of the web search market. If it can become the Facebook of China as well, look out.

This may be another lost opportunity for GOOG to compete on the global stage, The U.S. search giant has been effectively forced out of China — one of the biggest and fastest-growing web markets — and now

Last week, news of China raising its interest rate by 0.25% barely moved the market. As reported by the Wall Street Journal, most analysts expected that there would be only one interest rate raise left in PBOC’s pocket this year. They reasoned that inflation would peak during the first half of 2011 and gradually drop in the second half largely due to a higher base.

These analysts might be too optimistic in their forecasts. The first thing that came to mind is a series news stories by both Chinese and English media on the National Development and Reform Commission (NDRC), a powerful economic planning body in China. Near the end of March, NDRC asked Chinese coal miners to keep the coal prices low, as coal is the major input for generating electricity in China. Then, NDRC urged Unilever (UL) and other consumer goods producers to stop raising prices. A few

Chinese Automotive Systems, Inc. (CAAS) , a leading supplier of power steering components and systems for Chinese passenger automobiles and commercial vehicles, announced preliminary unaudited selected December 2010 quarterly

Just a quick update on China's March month and quarterly trade data. The part that everyone's talking about is the quarterly trade surplus of virtually zero. Pretty much a first, it got close to there in the three months to April in 2010. But more on this later. First a quick run down on the stats: Exports were up 36% y/y to $152B, Imports were up 27% y/y to $152B leaving the surplus at basically zero. On a quarterly basis exports and imports were both about $400B, down from the high of $458B and $416B respectively in the 3-months to January 2011. On a monthly basis exports and imports were both up about 50% from February (the usual quirks from the spring festival holiday season).

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The manufacturing PMIs for March indicate that the pace of the robust global manufacturing sector has moderated. My GDP-weighted PMI for the major economies fell to 56.0 from 58.2 in February.

The pace of expansion in the U.S. eased slightly to a still robust 61.2 in March from 61.4 in February. The pace in the Eurozone also eased to 57.5 from 59.0 in February and easing was widespread. Greece, on the other hand, has seen a moderation of the contraction in its manufacturing sector. The U.K.’s manufacturing sector moderated relatively sharply from a robust 61.5 to 57.1.

As expected, the expansion in Japan’s manufacturing sector was halted as the impact of the terrible disaster is being felt. After registering its second consecutive month of expansion in February, the manufacturing PMI dropped from 52.9 to 46.4. The huge turnaround in Australia’s manufacturing sector in February came to an abrupt end in

Recently, Chinese small cap stocks have been assaulted from all sides with allegations of fraudulent and deceitful business practices. Rino International (RINO) was the first guilty party, but some attributed that to simple statistics; there are frauds in the United States as well.

More recently, China MediaExpress (CCME) came under scrutiny and despite a Big 4 auditor and investments from large market players, it seems the company will also be revealed as a sham. These two combined have shown that even Big 4 audits, investment from marquee firms and “legitimate” on the ground research can’t uncover fraud in every case. This week, two players of the Chinese short game have released independent reports on two different stocks. The latest targets are Duoyuan Global Water and Puda Coal.

Duoyuan Global Water (DGW)

Duoyuan was trading at $6.03 as recently as a week ago, but a report from infamous short Muddy Waters

Chinese RTO Puda Coal, Inc (PUDA) Chairman Ming Zhao transferred the ownership of PUDA’s sole Chinese operating entity, Shanxi Puda Coal Group Co., Ltd (“Shanxi Coal”), to himself in 2009 without shareholder approval according to official government filings. Then, in 2010, Zhao sold 49% and pledged the other 51% of Shanxi Coal to CITIC Trust Co., Ltd (“CITIC”), a Chinese private equity fund, for RMB245 million ($37.1 million).

Zhao then recklessly leveraged Shanxi Coal by borrowing RMB3.5 billion ($530.3 million) from CITIC at an incredibly high 14.5% annual interest rate (including fees) to finance the development of its coal mines. PUDA shareholders are completely unaware of these transactions that decimate the value of its U.S. listed shares.

Background – An Industry Facing Government Mandated Consolidation

According to PUDA’s 2010 10-K filing:

In order to improve production efficiency, workplace safety and to reduce coal mine accidents, the Shanxi provincial government issued

China A-shares are traded in Shanghai and Shenzhen exchanges, and not available directly to foreign individual investors. China H-shares trade in Hong Kong and are open to foreign investors. The A-shares have historically traded at significant premiums to H-shares. This is because a bulk of the A-shares investors have been individual mainland retail investors who don't have many other avenues to invest their savings; remember, their savings rate is estimated to range from 35% to 50%. These Chinese retail investors are of a speculative bent and tend to chase performance, resulting in wild swings like the bubble of 2007. Mainland retail investors were limited in their ability to invest in H-shares till the recent introduction of the Qualified Domestic Institutional Investor (QDII) scheme. Short-selling was not permitted in the mainland until recently, so there was no way to arbitrage by shorting the A-shares and going long the equivalent H-shares.

The

One sure sign of a rising China is its more assertive stance in bilateral talks with the US. So last year, when US negotiators proposed that China help reduce the bilateral trade imbalance by opening up its markets to US exports, Beijing was ready with a proposal of its own: We’ll buy more American goods, if you scrap restrictions on high-tech exports. The US Cold War-style mentality, they argued, is the main thing standing in the way of more balanced trade.

Most experts consider the Chinese argument to be overblown. They estimate the annual amount of sales to China blocked by US export controls at US$2-3 billion. (The only hard number comes from a 2009 survey by the American Chambers of Commerce based in Beijing and Shanghai, which tallied US$560 million in actual lost sales). This barely puts a dent in China’s $252 billion trade gap with the US for

The growth potential for China’s financial sector is undisputed, driven by strong growth and an under-penetrated, large population rapidly accumulating wealth (see here). In anticipation of this, investor valuation of Chinese banks put them into the top group of global banks by market capitalization. Critical to the development of its economy, China’s domestic financial sector has been nurtured cautiously, shielded from foreign competition and remains under significant regulatory oversight. For example, in banking, lending growth is targeted, lending rates must exceed a floor, deposit rates cannot exceed a ceiling, and all deposits and foreign currency must be transmitted via the banking system. However, this has not prevented a circumvention of letter and spirit of the rules.

A recent example of this

On 4/6/2011, Advanced Battery Technologies (ABAT) issued a press release responding to our research report titled "Advanced Battery Technologies (ABAT): The Most Egregious Chinese RTO."

We present, side-by-side, excerpts from ABAT's response and statements from their official filings. ABAT's response contains numerous false and misleading statements which directly contradict its filings. We have provided links to these filings to make it convenient for the reader to verify our claims.

In our report, we noted that Chairman Fu now owns the company's key subsidiary, which ABAT had previously claimed ownership of.

We wrote:

If the filings are accurate, the Chairman transferred ownership of the company's sole operating subsidiary to himself without explanation or compensation. If the filings are inaccurate, then the company is guilty of misrepresenting itself as previously owning 100% of HLJ ZQPT.

Excerpt from ABAT response on 4/6/2011:

[HLJ ZQPT] has been owned by 16 investors, including Chairman Fu,

While the leadership in the United States quibbles about whether we’re at war in Libya or we’re not (hint: We are), or whether we should reduce our deficit by 0.23% or not (that’s the $33 billion Congress is currently debating), the developing world continues to care less and less.

Take a look at the charts below, which I gleefully borrowed from a recent Bank of Japan report on commodities:

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I understand that shorts have to exist in the market to balance the equation, and let me first say that after having read “The Art of Short Selling” thoroughly a couple of times, I have the utmost respect for fundamental short sellers such as Kathryn Staley, Jim Chanos and David Einhorn.

China MediaExpress (CCME) is a Chinese company that I currently hold and is currently under heavy scrutiny as a fraud. Reports by boutiques specializing on shorts have been released, and while I must give credit to Muddy Waters for the work they have put in to their report, the main argument of the shorter’s report is that the numbers are “too good to be true”.

But I’m going to present a case for at least why the SEC filings are accurate.

The role of an independent auditor is crucial in protecting investors from dishonest management and

The topic of a reserve currency to replace the dollar never gets old, and the logic behind it is a bit fuzzy. First and foremost, why is the dollar the reserve currency of choice? Does America threaten to bombard any country that chooses to keep its reserves in euros, yen, Swiss francs, or gold, instead of adorable Benjamin Franklins? Let’s look at the landscape first.

The Financial Times published the article “The best alternative to a new global currency,” authored by Joseph Stiglitz, a recipient of the Nobel Prize in Economics in 2001. Mr. Stiglitz points out some issues, as follows:

Further, when crises occur in many countries simultaneously, as happened, for instance, during the 1998 east Asian crisis, IMF lending could be totally financed by new SDR issues in unlimited amounts. If and when the world economy recovered or boomed, SDR issues could then cease, or even be reabsorbed.

I am short ChinaCast Education (CAST) for the following reasons:

1. ChinaCast has engaged in several dubious transactions with seemingly related parties.
2. It's quite possible that ChinaCast investors' funds were misused or misappropriated during these unusual transactions.
3. Several of ChinaCast's important subsidiaries were not audited by Deloitte, but rather, by largely unknown auditing firms.
4. There appear to be numerous errors and omissions in past ChinaCast filings with the SEC and communications with investors.
5. ChinaCast is highly reliant on creating future transactions to keep up its reportedly strong rate on growth.
6. ChinaCast's questionable management team is rapidly losing investors' confidence.

The Pitch

ChinaCast Education wants you to believe that it, a tiny Chinese company, has managed to create a prosperous education business by purchasing private universities at great prices from, among other people, a peasant farmer and the owner of a tiny printing shop. This outstanding

Fascinating read in the March 2011 issue of Wired magazine documenting an increasing trend among U.S. small businesses: They seem to be bringing manufacturing work that had been outsourced to China back stateside (see Small Businesses Buck Trend, ht Jon).

According to Wired:

For U.S. firms, the decision to manufacture overseas has long seemed a no-brainer. Labor costs in China and other developing nations have been so cheap that as recently as two or three years ago, anyone who refused to offshore was viewed as a dinosaur, certain to go extinct as bolder companies built the future in Asia. But stamping out products in Guangdong Province is no longer the bargain it once was, and U.S. manufacturing is no longer as expensive. As the labor equation has balanced out, companies—particularly the small to medium-size businesses that make up the innovative guts of America’s technology industry—are taking a long, hard look

“We never want to rely on the kindness of strangers in order to meet tomorrow’s obligations.”
~ Warren Buffett

Synopsis

ADY has serious financial problems. The company is heavily indebted, yet has a history of producing negative cash flow and no immediate prospects for operating improvements. It is highly questionable whether or not ADY should be considered a going concern. ADY is relying on the kindness of its PRC bankers to remain alive at the moment, but with huge near term payment commitments, this kindness will be tested. In order to survive long term, I believe ADY will need to raise at least an additional $100m in equity capital.

Yet, ADY is a Chinese RTO that has already burned through three other private equity funds’ money, has negative cash flow, has no proper CFO, and after over five years as a public company in the USA (including a stretch of

In our previous report explaining why we are short Advanced Battery Technologies (ABAT), we claimed that “ABAT spent $20 million to acquire a company linked to the Chairman without disclosing the relationship.” Further research confirms that the truth is even more nefarious than we initially believed. The target company was not only related, but appears to be a company that ABAT had already acquired in 2008 for $1 million. The announcement of a new acquisition appears to be a fabrication allowing Chairman Fu to funnel $20 million of shareholder funds out of the company into his own pocket. We also learned of disturbing allegations by the CEO of the company acquired in 2008. That individual alleges that ABAT's Chairman threatened his life in retaliation for a lawsuit over $600,000 worth of ABAT shares.

In January 2011, the company claimed that it acquired Shenzhen Zhongqiang New Energy Science & Technology