Chinese Companies Looking Elsewhere

By George Leong for Investment Contrarians | Sep 7, 2012

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Chinese stocks are leaving the U.S. equities markets as fast as they arrived. It has been a relatively quiet year for new Chinese stocks, following the debut of 60 Chinese stocks on U.S. equities markets from 2008 to 2011. In 2012, there has been one Chinese listing on U.S. equities markets, along with the delisting of several Chinese stocks that have been privatized. Since August 2011, 23 Chinese stocks have delisted from U.S. equities markets, according to Money Week magazine.

Some of the companies were delisted by the exchanges due to fraud, while others decided to pack up and obtain listing in Hong Kong and elsewhere. Others were taken private due to a lack of buying and overall distrust in the U.S. equities markets.

We all know about the trail of fraud initiated by numerous Chinese companies that emerged on U.S. equities markets via the speculative reverse merger process.

The pipeline of new Chinese stocks has essentially dried up in the North American equities markets, as Chinese companies are currently subject to intense scrutiny and detail reporting. I like the move to cleaning up the mess from fraudulent companies, albeit, many sound Chinese stocks have suffered in the process due to the general distrust in the market.

The reality is that I do not sense a return to recent years. Speculation of several big Chinese e-commerce initial public offerings (IPOs) looking to list in the U.S. equities markets this year have not come to fruition. Three Chinese Internet plays that were looking at listing in the U.S. were 360buy.com (online retailer), Vancl.com (largest online clothing retailer in China), and Xiu.com (online seller of luxury goods). 360buy.com had planned to launch an IPO valued between $4.0 billion and $5.0 billion in the second half of 2012, albeit, it has been delayed.

For Chinese companies, it will be a long journey before investors can regain their trust. The new strict requirements for listing on U.S. equities markets will help to ensure that only sound Chinese stocks are listed. This is the only way investors can feel comfortable dealing with Chinese stocks.

With the new listing requirements, the pipeline of reverse mergers has dried up from U.S. companies and especially from China.

The weakness of the reverse merger stocks is evident from the poor performance of the Bloomberg Chinese Reverse Mergers Index (CHINARTO) which is a market capitalization weighted index that tracks around 82 Chinese stocks trading on U.S. exchanges following reverse mergers. As of Thursday, the index is down 7.5% year-to-date and 22.5% over the past year, and my sense is that there is minimal opportunity now.

Just take a look at Shenzhen, China-based Deer Consumer Products, Inc. (NASDAQ/DEER), a small Chinese maker of small electric appliances for the home and kitchen, managed by its founders. Unfortunately, the founders may not be forthcoming on their operating results. Trading in the stock was halted on the NASDAQ on August 13 and will continue to be so until the company provides NASDAQ with the information it requested.

Short-selling trader Jon Carnes hired an independent third-party investigator on August 3 to visit two of Deer’s factories in Yangjiang. There was no evidence of production or workers. The report included aerial shots of the facility where there were no trucks or any sign of activity—pretty strange given the company’s strong growth in revenues.

This fiasco demonstrates the issue with looking at Chinese stocks on U.S. equities markets, as we have to rely on the validity of the company’s financial statements and newswires.

In too many cases so far, there have been fraudulent activities that have scammed investors.

Tags: China, equities market, short-selling