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No. of Recommendations: 7
I was a shareholder of CFSG from the very beginning, having purchased the first half of my position when the company still traded OTC and the second right after it was listed on the NASDAQ. I loved how it was knocking the cover off of the ball, to use an analogy that is appropriate for the season, with its revenue and earnings numbers. I further appreciate how this is a real company with a real market for the goods that it produces. The fact that Bill and the team physically visited China Fire and toured its facilities is very comforting.

Here's why I sold my shares (fortunately at a small gain because I got in so early). I started to get a funny feeling about the company after Tim Hanson spoke with its CEO, Brian Lin, at the Roth Conference, http://boards.fool.com/Message.asp?mid=26420216. Brian really turned me off with the way that he kept talking about the stock's price and how to manage it rather than just focusing on the performance of the company. This may be just how the Chinese think, I don't know, but it still bothered me.

The Sharesluth article was the last straw for me. Regardless of whether the site over sensationalized some of the issues surrounding the company so that its owner, Cuban, could make money by shorting the stock, it uncovered some seriously shady things that really bothered me. I tried to ignore them and say, "so what, this is just a short trying to make a quick buck, this is a legit company with real operations." Issues like the ones that the article brought up are probably very common with smaller Chinese companies. Still, my personal confidence in the China Fire's management has been destroyed. If they have already been caught in a number of small lies, have been connected with shady people in the past, and are so concerned about their stock price, what's to stop them from lying about or manipulating their results? I'm not saying that they will or ever have, I just despise being tricked or lied to. As the saying goes fool me once shame on you, fool me twice shame on me. After my 10 day TMF waiting period for talking about this incident on the first day was over, I decided to sell my stake in the company. The waiting period was actually a good thing because the stock bounced back quite a bit during that period.

Bill obviously is an incredible investor and stock picker who knows what he is talking about. China Fire will probably be an outstanding investment that brings subscribers excellent returns for years to come. However for me, with so many great companies out there to invest in that don't have issues like these, I just can't bring myself to invest in them. I would rather stick my money in this month's "Best Buy" Telkom Indonesia or some other company.

Deej
No position in CFSG
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No. of Recommendations: 20
Deej, I respect your opinion. In fact, one of the lessons I wrote down after my failed investment in Irwin Financial was, "Listen to Deej!" However, in this case, I come to a different conclusion. I hope I don't come to regret it the same way I did differing with you on IFC.

I would make a couple of points. First, CFSG has been the subject of an unusual and intensive research campaign by a noted short seller. There seems to be an assumption that the warts discovered in this process do not exist in most other companies. But without similarly exhaustive examinations of those other companies, that seems to me a fallacious argument. In fact, it's my opinion that if a rich guy like Mark Cuban hired an experienced business journalist like Chris Carey and gave him carte blanche in time and money to do an expose on virtually any company, the muckraker would deliver a view of the sausage-making process that would make potential investors queasy.

Maybe I'm just more cynical about human nature in general, but we have seen example after example of supposedly upright American executives running ostensibly transparent businesses who are ultimately revealed, in fact, to be greedy and corrupt. I'm sure I don't have to run down the roster for you. I don't say criminal behavior is the norm, but it is my view that most executives are in the game to get rich and not out of a passion to sell widgets. Just this week, for example, Seth Jayson's research revealed the eye-opening compensation package being taken home by Middleby CEO Selim Bassoul, often cited as the model executive over at Hidden Gems.

Morality aside, I don't necessarily see this executive greed as a bad thing for the businesses they run. Greed or ego or some other personal motivation has created a lot of value for shareholders. I think CFSG CEO Brian Lin is simply not well enough versed in the semantic games we play about that here in the U.S. Executives are not supposed to talk about their stock prices, for example. Does that mean executives do not manage their stock prices? Not at all. They just know better than to talk about it publicly. Every time a company decides to buy back shares it is managing the stock price. Every time a company splits its shares it is managing the stock price. Every time a company puts out an earnings release emphasizing the good news and burying the bad, it is attempting to manage the stock price. If anything, Lin was too honest in his comments about this. As a shareholder, I am glad he wants the stock price to go up. I don't want him making shortsighted business decisions to do it, but I also don't want him taking home hefty executive compensation while the stock price languishes and the business fails to perform, which I've seen many American executives do. The fact, obscured or overlooked by Sharesleuth, is Lin's business is performing spectacularly by every measure we have.

As for the byzantine ownership structure and messy reverse merger detailed by Sharesleuth, again, perhaps it is my natural cynicism coming through, but I take for granted many unsavory business practices. When you suggest that Telkom Indonesia is a cleaner place for your money, I wonder how you know. Certainly, under Sukarno and Suharto, Indonesia was an authoritarian state that required a variety of corrupt practices from businesses if they were to survive. Perhaps the recent reforms have produced a fully transparent, ethical business climate, but I wouldn't bet on it.

China, like India, is in a nascent stage of capitalism. I have no doubt that what Bill euphemistically refers to as "work-arounds" are prevelant throughout both countries. Not long ago, former HG Faro Technologies self-reported its own bribery in Asia. I also have no doubt that if Chris Carey was able to spend the time and money researching any particular business in either country that he spent researching CFSG, he would find warts that would make the idealistic investor run for cover. Frankly, I find some comfort in knowing this was the best he could come up with. Developing the best rationale he could for shorting the stock -- in essence, for why this business will fail -- he came up with nothing about the business itself. He found shady characters associated with the shell company CFSG used in the reverse merger to get itself listed on an American exchange, a complex, partially opaque ownership structure, and, shockingly, inflated claims on a resume. I believe Notre Dame encountered this problem with a football coach it hired briefly not long ago.

Would I prefer the Good Housekeeping Seal of Approval? I suppose, although I fear if CFSG had one, it would be trading at CTRP's multiple and would not represent the value it does today. All investments are about risk and reward. The reason CFSG represents the potential reward that it does, the reason it is available at this price, is because of the discount applied for the management risk you cite. So the question for each of us is whether that risk is worth that potential reward.

Again, I respect your view and I do not discount the possiblity that you will end up being right. I guess my bottom line is I prefer the devil I know to the devil I don't. If a model executive like Selim Bassoul is taking home $12 million a year from a small cap, I feel like there are precious few businesses out there that would not be revealed to have serious warts if subjected to Sharesleuth-like scrutiny. Given the country in which it operates, what Sharesleuth came up with on CFSG is not enough to scare me away.
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No. of Recommendations: 11
"As for the byzantine ownership structure and messy reverse merger detailed by Sharesleuth, again, perhaps it is my natural cynicism coming through, but I take for granted many unsavory business practices. When you suggest that Telkom Indonesia is a cleaner place for your money, I wonder how you know. Certainly, under Sukarno and Suharto, Indonesia was an authoritarian state that required a variety of corrupt practices from businesses if they were to survive. Perhaps the recent reforms have produced a fully transparent, ethical business climate, but I wouldn't bet on it."


I would not bet on it either. I go to Indonesia quite often and it is of my opinion even under Indonesia's newest president that Indonesia is among the most corrupt countries in Asia but you can say that about almost all the Asian Tigers...Thailand, Philippines, Cambodia...

I am not going to ramble on like I usually do but one day I will post some stories about Indonesia. It is very much like the wild west there....All the Asian Tigers are with the exception of Singapore. Anyone that wants ethical companies...invest in Singaporean companies. Ethics and efficiency is what they pride themselves on.

Investing in any emerging market company you have to expect this sort of thing which is why in years past so many investment professionals recommended not investing in emerging markets and that if you had to do it then do it through a mutual fund but now since the investment returns in the USA stink, now everyone wants to invest globally in emerging markets.

Truth is if I took many people to Indonesia and showed them around, they would be positively terrified to invest in a place like that. Same applies to Brazil. India too. Russia too. Turkey too and yes China too.

Trust me...when you see those little boxes that say political risk or country risk. Well, let me say Bill leaves a lot out on the quick reviews of the risks in these companies. The cup would overflow if he wrote all the risks and virtually no one would invest.

I rather invest here in CFSG rather than let's say BSC but I am through really defending CFSG on the ShareSleuth article because I started to realize how much those issues really scare people. I remember how it scared me and I quickly sold but then bought back in after reconsidering.

I just hope everyone realizes that you may have some of these same type of issues or worse in your favorite emerging market stock. It is just that ShareSleuth did not get around to writing about your company yet.




Rob S
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No. of Recommendations: 20
There seems to be an assumption that the warts discovered in this process do not exist in most other companies. But without similarly exhaustive examinations of those other companies, that seems to me a fallacious argument.

Bingo.

Look, I am not in the habit of trying to talk people into investments. In fact, I'm absolutely delighted when someone as smart as Deej puts his noodle to work and says "yep, not going to do it." It's incredibly valuable to all of us -- including me -- that people share these insights on the discussion boards.

But the above is exactly right. It's not so much that the issues that ShareSleuth discovered aren't relevant. They are. If this stock were trading at an enormous multiple I'd worry about them more than I do. However, the thing you have to realize is that what was written about China Fire is true for almost every Chinese small cap company, and most of the large ones. (And it's no different for Indian companies. Read the shareholder and ownership structure of Sterlite and think about it and you'll likely be horrified.)

Did you know that in Taiwan compensation to managers and directors comes below earnings? So you have, under Taiwanese GAAP, an earnings per share number, that every news outlet in the world reports, and then the real earnings number is completely ignored because multi-million dollar payments to executives and directors is subtracted.

The problems with corporate governance among Chinese companies is systemic. What's worse is that some pretty unscrupulous folks started combing the country a few years ago and started bringing these companies public through reverse mergers into shell companies, which is a cheaper way to go public and creates a much lower threshold for reporting. It also means that the dirtbags who were involved in the previous companies are still involved with the new firms as shareholders, sometimes substantial ones.

When we first sat down with Brian Lin he was talking about getting the company off of the pink sheets and onto the AmEx. This was the advice he'd been given. "No, no, no, I said. The Amex barely gives you any more legitimacy than staying on the pink sheets. Lo and behold, they move to the Nasdaq instead.

Brian Lin has his faults -- he's a young guy who is just learning about the requirements expected of him as a public company listed in the United States. What I find remarkable about Brian is his willingness to listen to us, even when we had no real stake in the company. I told him a few weeks ago that he needed to quit discussing the company's stock price, because it's the kind of thing that breeds distrust among the types of shareholders he ought to want to have, and this was a completely new concept for him. No one had told him this before. But in a week when his own previous missteps had cost him and his shareholders dearly, he did not blame Sharesleuth or Chris Carey. He was baffled by it (remember, there's no such thing as short selling in China), but he blamed himself.

Not saying that means that we should throw caution to the wind, but it's a powerful sign to me nonetheless.

Just so you know, I do not assume that any Chinese company is well managed from an outside shareholder perspective. I am hopeful that the ShareSleuth article shows more of them that disaster awaits if they give too much reason to be distrusted.

Fool on!

Bill Mann

P.S. Starrob, if you want to bring over my and Tim's Gems posts on CFSG, that's fine.
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No. of Recommendations: 0
Excellent post, ultimatespinach. You make some great points. While my ultimate goal is to find companies that I can buy stock in and put them on cruise control for many years, such as MIDD, I think that I have an itichier trigger finger on the sell button than some people. This can be a positive and a negative. As you mentioned, it saved me from a lot of the pain that Irwin dished out. Another positive example is FMD. Once it became apparent to me that it might be a while, if ever before FMD would be able to securitize another package of loans, the original reason why I bought the company disappeared and it turned into more or less a bank that issues student loans. It may or may not have been a good value at that point, but I didn't care. I had a huge position that I sold out half of at $20 and the other half at around $15. That looks like a wise move today, but there's nothing saying that the company won't eventually bounce back.

I definitely have sold some companies way too early, like Monsanto when its P/E ratio was a million, grumble, grumble...but this strategy enables me to place the companies that I am most comfortable with in my portfolio. If I miss a few winners, which I absolutely hope that China Fire will be for your and the newsletter's sake, so be it.

Have a great weekend.

Deej
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No. of Recommendations: 6
Brian Lin has his faults -- he's a young guy who is just learning about the requirements expected of him as a public company listed in the United States. What I find remarkable about Brian is his willingness to listen to us, even when we had no real stake in the company. I told him a few weeks ago that he needed to quit discussing the company's stock price, because it's the kind of thing that breeds distrust among the types of shareholders he ought to want to have

If I become a shareholder, Bill, I'll be penciling you in on the proxy for a board seat.
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Ya know the exact same thing had crossed my mind this morning.
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No. of Recommendations: 0
And it's no different for Indian companies.
I think this statement is a sweeping generalization.

1) Typically you see this with 1st generation companies where the promotors need for the control.
2) In the past, the ownership laws' created some complications where the companies where forced to do stupid complicated holding structures
3) But then I will also present companies like TATA's, INFOSYS, or former government owned now privatized companies... like BHEL, ONGC, EIL, L&T, ICICI Bank.. The corporate governance will be as good as any best companies in US.

That brings, I don't know whether L&T or EIL is listed as ADR's but I would be very interested in GG' opinion of them.
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No. of Recommendations: 6
Infosys' corporate governance is top of the heap. I'm put them up against anyone. Indian companies have the same problems that Chinese ones regarding governance -- they operate in a country where regulations and laws are byzantine, conflicting, capricious and expensive; and corruption is pervasive. My point was that managers in these countries have had to become very good at "dodges" to deal with and get around laws and attitudes at all levels of government and in the courts that would baffle most working in the West.

India's regulations can be absolutely spirit-breaking.

I noted from my time working in India and valuing companies that due to 50 yeaers of socialist rule and absurd corporate taxation levels that businesses there kept multiple sets of books and were extremely good at hiding things through complex corporate structures, nominee companies, crossholdings, or simply underreporting.

While these are necessary realities for companies trying to operate in these markets, they create deficiencies for public companies in both countries, and they are widespread.

Bill Mann
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