Like many, I am generally not impressed with most of those who purport to know how to analyze China stocks listed on U.S. exchanges. I am NOT a stock analyst, but I know Chinese corporate structures and I know what is legal for foreign companies to do in China (and what isn’t) and, maybe most importantly, I do not think I have ever examined a Chinese company’s books that were not at least somewhat cooked. All these things give me great pause when investing in Chinese companies and they also cause me to doubt the bona fides of stock analysts who pretty much just ignore these things. For more on investing in U.S. listed Chinese stocks, check out “Thinking Clearly About Chinese Companies Listed On US Stock Exchanges. Or, If A Tree Falls In A Sino-Forest….“
So when I find a stock analyst who just “gets it” when it comes to Chinese stocks, I feel obligated to pass it on to you, our loyal readers. I knew I had found such an analyst after reading the following at the beginning of one of his articles:
When it comes to investing in China, I’ve seen a lot of “interesting” corporate structures. Nothing, however, has thrown me off more than recently listed online dating site Jiayuan.com (Nasdaq: DATE) . The reason? It’s unclear whether this company even has the right to be in business in China.
There’s shady, and then there’s this
Like a lot of Chinese companies, Jiayuan is organized so that owners of the Nasdaq-listed stock don’t actually “have any direct ownership interests or direct voting rights in any of our PRC [mainland China] operating companies.”Because the Chinese government restricts foreign ownership of things like Internet services and online payments businesses, and won’t grant foreigners a license to provide online dating services, the listed company simply has contractual arrangements whereby the operating companies in China, which are owned by Jiayuan’s Chinese management team, agree to allow the management team at the listed entity to direct the operations at the operating entities and obtain “substantially all” of their economic benefits. (Though “substantially all” — their words, not mine — seems to be something less than all.)
If you’re thinking this is complicated, confusing, ripe for conflicts of interest, and probably unenforceable in a court of law, you’re right.
The article is on Motley Fool and it is entitled, “The Biggest Risk” and it was written by Tim Hanson, the lead international advisor at The Motley Fool and head of its Global Gains research service. Tim tells me that he “has been been working in a research capacity at the Fool since 2005 and spending a lot of time on China since 2007.” He analyzes Chinese companies both their their public filings and by traveling to China and talking to the right people.
Tim wrote another excellent article on Baidu, entitled, “Could Baidu Get Blown Up?” in which he raises the necessary question as to whether it makes sense to invest in Baidu at a time when the powers that be in China have made clear they do not exactly appreciate diversity on the Internet and then flip around and manifest that with an anti-Baidu campaign on CCTV. Does it really make sense to invest in a Chinese company when that is happening?
I have not conducted my own analysis on either company so I cannot vouch for the accuracy of what Hanson is saying, but I can say that the mere fact that he is one of the few people writing on China stocks who is actually asking the right questions means he should be read. So if you are investing in Chinese stocks or planning to do so, I recommend you start reading Tim Hanson.
