Orient Paper Visit Satisfies Investor

By Eric Jackson

07/02/10

Stock quotes in this article: ONP , FUQI

In March, I traveled with my colleagues to the headquarters of Orient Paper as part of due diligence trip on several Chinese-based, U.S.-listed companies. Coming back from the trip, and after doing more research, I invested in Orient Paper and I wrote several favorable articles on the company, articulating the case for why I thought it was under-valued.

Earlier this week, a new "research" company called Muddy Waters published its first report in which it alleged that Orient Paper is a fraud and assigned a price target of less than $1. They suggested the company had misappropriated private placement funds from investors, cooked the books and prevented them from doing their studious due diligence on site. It's had a disastrous impact on thestock price of ONP. Earlier this week, before the report came out, the stock was trading at close to $9. Yesterday, at the height of panicked selling, the stock touched $4.11.

Rick Pearson (a fellow contributing writer onTheStreet) came out last night with a strong responseto the Muddy Waters report.

I wanted to provide some additional comments, as I've spoken with the CFO, Winston Yen, several times in the last week, and one of my colleagues, Chris Lau, visited Orient Paper's headquarters yesterday in China to meet the CEO, Zhenyong Liu, the CFO and other members of the management team.

The writer (left) with CEO Zhenyong Liu (center) and my colleauge Chris Lau.

One of the first and most remarkable things Orient Paper's CFO told me about Muddy Waters is that the firm originally contacted the company last fall asking to write a positive research report about the company for a fee. Winston said they asked for hundreds of thousands of dollars in cash plus an unspecified amount of ONP stock and warrants for their services. (Editor's note: Muddy Waters, in a press release today, disputes the cash-for-coverage allegation.)

Orient Paper said it declined the offer. They don't believe they should have to pay for an analyst to write about them. Additionally, Liu has always disliked warrants because they are dilutive to shareholders.

Muddy Waters has disclosed that it has been short ONP's stock (and possibly also have owned put options) before the report came out.

Before getting into the allegations, let me say that, whenever I invest in a company, I do so with my own capital. Neither I nor any company I have ever been affiliated with has ever been paid by a company to write about them or promote them. I would never do this. When I went to ONP in March, I did so on my own dime. When I have written about the company, I have always disclosed my long position. As my articles on TheStreet since 2008 show, I write positive and negative pieces about companies.

Orient Paper's new digital photography line opened in March.

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2010 Outlook: One Quarter in the Books

By Eric Jackson
RealMoney Contributor
4/12/2010 12:01 PM EDT
Click here for more stories by Eric Jackson

With the first quarter in the books, it's always illuminating -- and sometimes a little humbling -- to review prior predictions. At the end of last year, I made some stock picks and macro predictions. Here's how they've panned out so far.

Universal Travel Group (UTA - commentary -Trade Now)

I just met with this company on my recent trip to China and wrote about it last week. I still like it moving forward, as it is going after the packaged-tour market in China, and the country's domestic tourism business -- let alone the international one -- is set to boom over the next decade. Since I wrote about the stock in late December, it is down 4.7% vs. the S&P's 6.8% gain.

China Sky One Medical (CSKI - commentary- Trade Now)

A provider of nutritional supplements, including ones for traditional Chinese medicine, CSKI has dropped 27% since my pick. I've learned that the company doesn't have any Chinese-language version of its website. To a large extent, it exists only for the US investor market. I would avoid it moving forward.

China Agritech (CAGC - commentary - Trade Now)

The stock has been on a tear since I picked it -- up 94% this quarter. I like the company and its Chinese organic fertilizer business. I recently met with the company's COO. The problem is valuation -- it's a bit frothy right now. I would wait before getting in.

Puda Coal (PUDA - commentary - Trade Now)

I'm still a big believer in this coking-coal company, which is gaining ownership of more and more coal mines in the Shanxi province of China. The stock is up 77% since my suggestion and just got upgraded last week. There are still good times ahead.

Fuqi International (FUQI - commentary -Trade Now) The stock had a high-profile stumble when it delayed filing its 10K. News last week suggested the company would file it soon, which breathed new life into the stock. Still, it's down 29% since my recommendation. Assuming it cleans up its books, the stock is in a great space as a middle-market Chinese jeweler.

So, some hits and misses in this group. However, if you had taken an equally weighted position in all five stocks, the portfolio would have returned 22%, or triple the return of the S&P 500 over that period.

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China Trip: What's Next for Fuqi?

By Eric Jackson
RealMoney Contributor
4/8/2010 1:30 PM EDT
Click here for more stories by Eric Jackson

Of all the companies I met with during my recent two-week trip to China, none generated more reader interest than Fuqi International (FUQI - commentary - Trade Now), which has had a tough month.

Check out Eric Jackson's previous story on Fuqi.

Four weeks ago, the Shenzhen-based jewelry supplier to China's emerging middle-class consumer delayed filing its 10-K, after noticing some accounting discrepancies across the company's operations. The stock took a 40% hit on the news. It bottomed out in the low-$10s, and has been trading above $11 a share these past few days.

The question from all readers: Hang on, or dump it?

I don't own Fuqi, and I won't buy the stock until I hear more from the company about the restatement. For those of you who still own the stock, you will likely have a binary outcome in the next month or so, which either will lead to a surge or another sharp drop in the shares. I can't predict the outcome, so you need to decide your risk level.

However, I do want to describe my meeting with Fuqi.

I met with the CFO, Fred Wong, and EVP of Finance, Charlene Hua. Both are based in Hong Kong and commute across the border two to three days a week to the corporate office in Shenzhen. Wong has been CFO since 2004. Hua, a U.S.-educated former banker, has been with the company a little more than a year. I get the feeling she was hired to do M&A, but has been taking the lead in corporate communications since the accounting issues emerged last month because she's a very polished speaker.

Our meeting last week came at the end of the day and lasted around three hours. I credit the two executives for taking the time to answer all our questions. They were in an impossible position. Some investors have complained to me: Why did they spend the time with you? They should be spending every waking hour cleaning up their numbers. But if they had refused to meet us, other investors would have asked: Why were they scared to meet you and answer your questions?

We had some initial difficulty setting up the meeting. The staff in Shenzhen didn't seem to know how to respond to our request, and we were stonewalled. When we finally got in contact with Hua, the meeting was immediately scheduled. She apologized for the delays and said the company was taking steps to train their staff to deal better with investor requests made directly to the company, rather than coming through Fuqi's U.S.-based investor-relations company.

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What Hong Kong Tells Us About China

By Eric Jackson, Senior Contributor

03/24/10 - 06:00 AM EDT

Stock quotes in this article: UTA , ONP , PUDA , SHE , CWS , CAGC , CHBT , FUQI

HONG KONG (TheStreet) - I've spent the last couple of days in Hong Kong, the gateway to the Orient. Starting Thursday, I will embark on a 10-day trip in China meeting with different management teams from existing portfolio companies and prospective investments.

The companies include Universal Travel(UTA), Orient Paper(ONP),China Agritech(CAGC), Puda Coal(PUDA), Shengkai Innovations(SHE), China-Biotics(CHBT), China Wind Systems(CWS), and Fuqi International(FUQI).

The time in Hong Kong has opened my eyes to some of the dynamics going on in this city's economy and its relationship to mainland China, which are useful for any investor to keep in mind.

Hong Kong is booming at the moment. Recession? What recession? Any American looking to board a time machine and travel back to the glory days on 2006 should take the next flight to this city.

If you've grown weary about hearing the latest Case-Shiller data on housing and how foreclosures are about to start increasing again, you might find it jarring to walk around Hong Kong and read posters on real estate agency windows advertising dark and dirty 1,600 square- foot apartments going for $3 million to $4 million.

Everywhere you go, you see advertisements for some new extravagant condo building being built. People here like to demonstrate their prosperity, often by wearing high-end brands proudly. On a stroll last night through a prosperous section of Kowloon, I was startled to see a line to get into the biggest Louis Vuitton shop I've ever seen. Yes, there was a line of people waiting to get into a store so they could spend $10,000 to buy a bag.

I now understand why Vancouver and Toronto are experiencing mini-housing bubbles at the moment: People from Hong Kong are going up there to scoop up investment properties at a fraction of the price they would pay here.

This real estate boom is driven by the constricted supply of housing on the small island, the low marginal tax rate of 15% (how's that for a mortgage tax deduction?), and most importantly, newly wealthy mainland Chinese teeming over the border every day eager to spend their money in Hong Kong.

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FUQI: Fool's Gold

By Eric Jackson

RealMoney Contributor

3/17/2010 12:30 PM EDT

Click here for more stories by Eric Jackson

Fuqi International (FUQI - commentary - Trade Now) announced last night a major restatement of its 2009 numbers and other accounting irregularities, which will delay the filing of its 10-K with the SEC. The stock dropped 35% in early trading today. Some have asked me if this is a buying opportunity. My verdict: I'd steer clear for now. It's just too risky.

I wrote a positive piece about FUQI in early January, saying that the stock was undervalued and that the growing market for jewelry in China would aid the stock. While I'm still convinced about the Chinese jewelry market, my valuation was based on the assumption that the company's numbers were correct. We know now that they weren't.

And this is one of the great risks of investing in smaller, growth-oriented Chinese companies: governance standards are not the same as for smaller American companies. When I talk about governance standards, I mean the composition and conduct of the board of directors, as well as the implementation of proper accounting standards -- and a curbing of related-party transactions.

Related-party transactions seem to have been part of the problem here with Fuqi, as well as with another high-flying Chinese growth stock,Yuhe International (YUII - commentary -Trade Now), which saw its stock take a haircut a week ago.

I sold my Fuqi long position and calls last week. I had been a believer in the stock and expected the company to do well this year. I'll be going to China in a few days for two weeks to meet with several management teams of companies I believe have a chance of seeing their stock prices double this year. Fuqi was one of the companies I had looked forward to meeting.

Several weeks ago, Chinese-speaking employees of my firm, based in Hong Kong and within China, started to reach out to the companies of interest to us. We introduced our firm and expressed our interest in their companies. We disclosed our stock position in them (usually long) and said we wanted to meet with them to better understand their business and potentially increase our position in their company.

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Ask Your Questions for Chinese Growth Companies

I am going to be in China for 2 weeks at the end of this month to meet with management of several Chinese companies. I'm now working to confirm the final list of meetings, but it appears likely as though I'll meet with the majority of the following companies:

- Origin Agritech SEED

- China Agritech CAGC

- China Mass Media CMM

- China Wind Systems CWS

- Puda Coal PUDA

- FUQI FUQI

- Universal Travel UTA

- Shengkai Innovations SHE

If you have any specific questions, please send them along. If I ask, and they answer, I will post the responses once I get back.

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Score Some Beijing Bling With Fuqi

By Eric Jackson

TheStreet.com Senior Contributor

1/8/2010 6:59 AM EST

Tremendous wealth has been created over the past four years due to China's boom, with the property market being particularly heated, and that trend looks likely to continue throughout 2010. Seeing opportunity in these newly found fortunes, armies of Chinese retailers are seeking to entice the nouveau riche with their goods.

Compared to North America, high-end luxury brands in Asia have been raking in huge margins for years, and those companies are now lining up to take advantage of China's growth. Naturally, jewelry is part of that group, but rather than play an expansion of a larger Western brand into China, consider directly investing in Chinese high-end jewelry wholesaler Fuqi International (FUQI - commentary - Trade Now).

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