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I don't think Bill will mind me re-posting the following from the HG discussion boards:

Date: 3/11/08 2:01 PM


By now many of you have read the Share Sleuth article discussing the capital formation at China Fire. I think that Chris Carey has brought up some good information that highlights some of the risks in investing in Chinese companies. Many are not at all shareholder friendly, have no idea how to treat outside shareholders, and have taken some very bad advice.

There are a number of Chinese companies that I track that have taken similar routes to going public -- some promoter tells them that the easiest way to do it is to do a reverse merger into a pink sheet shell company. It's true, of course, but it allows these companies to disclose substantially less information.

It's been for these reasons that China Fire had never made it to formal recommendation for us -- even though we were among the very first to go to their facilities in Beijing and see what they had to offer in what is -- without question -- a spectacular market.

But I'm struck that much of the information that Sharesleuth brought up are things that happened in the early stages of the company's existence as a public entity. I can't overstate just how foreign the concept of shareholder interests is to the average Chinese firm. Investor Relations specialists we met in Beijing said that plenty of these firms are interested in learning (and many are improving rapidly), but there is no tradition of it, and things we think are obvious in the US (such as disclosing payments to directors) are not intuitive to Chinese managers.

You can look at any company located in China, Hong Kong or Taiwan and you'll see very much the same thing. I'm not saying it's good, or ideal. I am saying that it is prevalent, even at massive companies like Hutchison Whampoa or Acer. Byzantine ownership structures are the rule.

That's the problem I have with this article. I think Carey could have taken any one of 200 Chinese companies listed in the US and made substantially the same point. These companies used expediency to come public in the US, and got plenty of bad advice from stock promoters, and didn't have the shareholder-centric tradition to even consider that anything other than the fact of going public was all that important.

There's nothing about this that particularly impacts China Fire's business. Honestly, and cynically, their customer base will not care at all about China Fire's share price or its nominee owners. China Fire is going to be valued on its ability to deliver on its promise, period.

I've reached out to Brian Lin to discuss the latest goings on. When I talk with him, I'm going to take the opportunity to remind him that this is what happens when the US market has the slightest amount of reason to distrust a manager. I'm going to point him to companies like Simpson Manufacturing, Costco, and Berkshire Hathaway as managers he should do everything he can to emulate, even if sometimes it hurts his pride to do so.

Bill Mann
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