3 years ago, I wrote about Chinese companies with poorly executed websites. Specifically, I pointed out that YONG and CXDC didn’t have great websites. (For your information: CXDC has a market cap of $235M and the borrow is about 7%.) Let’s revisit these companies.
- YONG: Back then, I took a large position in YONG put options, betting on the Yongye takeover bid failing. Unfortunately, the takeover bid did go through and I lost money. Fast forward 3 years, their websites have disappeared. Yongyeintl.com was the website aimed at investors. It went dark on or before September 14, 2014 according to archive.org, shortly after the going-private transaction. China-yongye.com was the Chinese language website. It went dark on or before February 28, 2017 – the website is currently an error page (in Chinese). So now you understand my irritation with losing money betting against YONG. While I don’t know what happened to this company, I think it’s safe to say that their website execution got worse.
- CXDC: Back then, they did not seem to have paid for their stock photography. Now, they have rectified that. However, the copy on this website is pretty awful. The copy on the top of the website (archive.org) reads: “Welcome to China XD Chinese website”. Those are the exact words… in English. The copy on the bottom reads: “In case of information discrepancy between the Chinese website and English website of the company, the English website shall prevail”. That’s quite the paradox- we’re welcomed to the Chinese website but apparently it is the website that will prevail in case of [sic] “information discrepancy”. On top of that, a lot of the links on the website do not work (e.g. I could not figure out how to watch their corporate video). But hey, at least they paid for their stock photography.
Yongye filed two interesting 8-Ks on June 23 (last week) and 30 (today). The latest press release states that “the parties are still working on the logistics to complete the amended going private transaction”. What does the press release mean by “working on the logistics”?
For whatever reason, some Chinese companies listed on foreign exchanges have bad websites.
For example, Yongye links to a press release put out by ambulance-chasing lawyers targeting Yongye.
A week ago, Yongye announced that shareholders approved the going private transaction (8-K filing). This would suggest that the merger has a higher chance of happening than before the vote. There is one less possible scenario as to why the going private transaction might fail for a second time.
Strangely enough, the stock is trading down a week later. I have no idea why this is. Shareholders may soon be paid $7.10 and the stock was previously trading at $7.08/$7.09. Perhaps Mr. Market’s mood swings are taking effect or some weaker merger arb players are panicking. In any case, I am closing a portion of my short position in Yongye. The $7 Jan 2016 puts previously trading at a bid/ask spread of $0.00/$0.05. The current spread is $0.30/$0.40. If you had a time travel machine, you could have made several times your money on these puts (before commissions and rebates). (*EDIT: When I talk about time travel, I’m being a little facetious.)
One somewhat similar situation is Fushi Copperweld, covered here on the Bronte Capital blog. Shortly before the going private transaction closed, somebody panicked and the common shares traded down. The transaction ultimately closed and the shorts lost money.
*Disclosure: I own Yongye puts. No position in the common.
Today, Yongye stock shot up over the possibility of the company going private at $7.00/share. You should read the SC 13D filing on Edgar for details. The last attempt was for $6.69/share and it failed.
I am speculating that the second takeover will fail like the first. Suppose that I buy puts with a $5 strike at 10 cents (*I ignore commissions, which can be quite significant). The potential upside is 50X. I believe that Yongye may very well turn out to be a fraud and see its share price drop dramatically. The risk/reward here seems compelling.
The options market for Yongye is somewhat liquid and there are Jan 2016 puts available.
Unfortunately, I’ve had a bad start in 2014. My long positions and my short positions are moving against me. I suppose that this is bound to happen because stocks are never perfectly correlated. (If they were perfectly correlated then there would be no point in trying to pick stocks or to profit from short selling.)
While I have a large number of short positions (30+), I have managed to find many stocks (mainly Chinese and solar stocks) that have quickly moved against me.
Chinese Internet users face restrictions as to the websites that they can and cannot visit as China censors the Internet. It makes sense for Chinese companies to get an ICP number/license to ensure that its customers can easily visit its website without having to circumvent the ‘Great Firewall of China’.
When performing due diligence on Chinese stocks, I want to see that its website has an ICP number/license. Chinese websites will typically display the number at the very bottom of its webpages. Remember to check the Chinese version of a site as the English version may not show the ICP number.