China 2.0

Apparently there is a new wave of Chinese stocks hitting US exchanges.  Some of them are Web 2.0 related.  Needless to say, I am extremely skeptical about these Chinese stocks.  Historically, there has been an extreme level of blatant fraud from China.  This is mainly because these Chinese stocks were listed on foreign exchanges around the world and because scumbags gravitate towards reverse mergers.  (To be fair, these China 2.0 stocks are not reverse mergers.)  The underwriting of these China 2.0 stocks seem rather loose.  They do not have to comply with all parts of Sarbanes-Oxley thanks to the JOBS act.  At least 3 of these companies (GOMO, WBAI, WUBA) have identified material weaknesses in their internal controls.

There is legal uncertainty over whether or not VIE structures will hold up.  On top of that, Chinese authorities have not done much to protect foreign investors from Chinese frauds.  (They have done shockingly little in my opinion.  The Silvercorp saga is also extremely troubling as an investigator who worked for a short seller is still detained in a Chinese jail last time I checked.)  I will be working on getting up to speed on these stocks and figuring out which ones are good shorts.

Links

Sungy Mobile Set To Burn U.S. Investors – I’m a fan of Richard Pearson’s work on exposing paid stock promotion where the shills did not disclose their financial ties.  I am still going through his work on other stocks but so far it looks like his analysis is good.

China accounting blog – Good information on problems with the VIE structures, accounting issues with Chinese companies, and some analysis as to why auditors failed to detect all of the Chinese reverse merger frauds.

*Disclosure:  Not short any China 2.0 stocks… yet.

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