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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Spekulatius who wrote (42220)	4/9/2011 1:41:43 AM
From: Jurgis Bekepuris	1 Recommendation Read Replies (2) \| Respond to of 78705

Did you read Tim Clissold's "Mr. China"? Message 27137210 What's described in the book is very similar to what's happening with Chinese RTOs. Western investors expect Chinese companies to be the same as Western companies. And perhaps some of the big ones are. But small ones are not. So westerners become frustrated and decide that RTOs are simply fraud. Cause in our mentality there is no other explanation. But if you look through Chinese mindset (and you read through Clissold's adventures ;)), there are a lot of other possibilities. Yes, there's definitely corruption and using investors as cash supply bags, etc. But there's also a lot of completely different understanding of what's "important". Chinese manager can easily go on growth binge not looking at acquisition prices. Chinese manager may decide that buying real estate is the way to go even if it's rank speculation. Chinese manager can easily buy companies from related parties either because they look good to him or just to have good relations with his relatives. They can easily pay suppliers, but hold year of AR just because it's right from their point of view. Like Clissold writes there's a big culture of fuzzyness, which obviously becomes a "fraud" in western mindset. There are laws, but even the bureaucrats are not always certain what to do to follow them. There are regulations that no one follows until some official decides that they HAVE to be followed. The laws are very selectively enforced. So westerners on "Seeking Alpha" or Yahoo get into knots about whether SAIC and SEC numbers should match. In Western world yes. In China - no. Or someone digs out that a company (CGPI) does not have all documents for land that they sell as cemetery plots. Or their license was revoked. Or something. Most of these claims are true. The fact that they are true does not matter a yota to the Chinese manager though. They could operate just fine for years, but when western investors demand certainty, they are stuck because half of the company's business and structure may already contradict dozens of laws and regulations. In fact, filing exact numbers and going through all the correct procedures may leave the Chinese side in deep doodoo in China. And not necessarily because they did something super-criminal, but because they had to trample on the unspoken vague bureaucracy lines. And then there are accounting numbers that may be fuzzy as well, since nobody gives a damn about exact numbers until they are needed for western investors. So they write something up. It might be conscious invention - let's say "fraud". It might be just generally sounding OK numbers that seemed right at the time from some papers in someone's office. Obviously, western investors think that the fact that Chinese company listed on US exchange means that it's "important" for it to make great returns for shareholders, file exact earnings statements, satisfy the auditors, not dilute shareholder equity, protect the shareholders against stock price drops, etc. For Chinese that's not necessarily the main priorities at all. There's also a natural conflict with the original Chinese owners/shareholders, who usually still manage the business. They consider the company theirs and don't understand why they have to follow the demands of western (often minority) shareholders. Obviously, western investors can be very angry because they expect different behavior, but there's not much they can do to enforce it. Clissold was on location, he had control of the companies and he had control of the BODs. And even then he pretty much miserably failed. (On the other hand he operated in 1990's when the "western company" mentality in China was way less understood and followed; current investors have it somewhat better because they can expect some Chinese management to be more understanding of western requirements). So where does this leaves us? Not in a very good spot. Pretty much, we should not invest in small Chinese companies. It's not clear if larger ones are OK. The drama at Ali Baba is both discouraging and encouraging. It's encouraging because the company stood up against shifty internal behavior for the image of the company and its shareholders. It's discouraging because such shifty behavior happened even in a large (huge) and well-regarded company. Sidelines of Ali Baba story are discouraging too - there are non-public Ali Baba group entities being run by Jack Ma the way he wants with no oversight. Obviously, he's very well known figure so he can afford to say that he does not want to run the private companies for short-term investor goals. But this also smells of the "I do whatever I want" mentality that seems to permeate other Chinese companies. Obviously things changed a bunch since 1990's and they will continue changing. So it's possible to invest into some companies. The decision which ones are investable are still going to be hard for some time. We went through a similar period in Eastern Europe. It took over 20 years by now and it's still probably not up to US standards. (And the process never went well in Russia...). It's hard to expect that this will take less time in China.