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Motley Fool Global Gains / GGS: Yongye International


Subject:  Re: Taking the Lid Off China Stock Scams Date:  12/5/2012  12:27 PM
Author:  wouter28 Number:  3543 of 4235

The death of the Chinese smallcap space should be looked upon with many people can move on to investing in stocks with higher odds of success.


This may have been true two to three years ago when all the Chinese RTO small-caps were still listed. Since that time, there have been two full audit cycles where the auditors have focused audit procedures to go after known fraud red flags used in this space. This has resulted in most of the suspect companies having their auditor quit and subsequently the stock getting delisted. This list of small-cap Chinese companies that have been delisted over the last two years is much too long to list here. The SEC and the US exchanges have been very aggressive about taking any legitimate opportunity to delist these companies. While this space has been significantly de-risked by the legitimate companies surviving a much higher threshold of scrutiny, the valuations of these companies have gone in the opposite direction. Because of the auditor resignations and the delistings, the headlines have tainted all small-cap Chinese stocks as frauds. This drives legitimate, vetted companies like YONG to trade at 2 -3 times earnings while growing earnings over 30% per year. The valuations are so low, that many management teams are taking advantage and taking the companies private at unheard of valuations. There is still so much fear in this space that the companies with go-private offers still trade at a discount and shareholders eagerly accept the low ball offers, thinking that now they can move on after suffering significant price declines.

The SEC is about 3-4 years late to this party. And now that this market has cleaned itself up through tougher auditing and aggressive delitings, Starrob celebrates that the legitimate companies who’s share prices have been decimated by headline news (not company news) may get delisted and the long-term shareholders who have stuck around knowing the risks, may lose the chance to profit as these companies continue to succeed. Well, I have to strongly disagree with you. I am much more interested in small-cap Chinese stocks now than I was two years ago and have allocated my portfolio accordingly. Just because small-cap Chinese stocks are not right for you does not mean you have to cheer that other investors may lose their chance to invest in this space while the odds of success has gone up significantly due to the de-risking that has occurred over the last two years and the excessively cheap valuations. I think the beginner investors you are trying to save moved away from this space long ago. The shareholders that remain know the risks involved in investing in this space.

Also this attitude of moving on after the stock valuations go down is not one of the true long-term investor. If the business model is still strong and the company still has a bright future, you should not sell just because others have sold the stock and driven down the valuations. If you have this kind of attitude, then I recommend investing in index funds. When valuations and risk both go down, this is an opportunity to buy. Sorry for the rant, but this kind of thinking is upsetting, especially when you are recommending that people steer away from stocks that have a higher chance of success because of the “perceived” risk and not the “actual” risk.
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