Monday, November 29, 2010

The Farce of Small U.S. Auditors in China

By Eric Jackson
RealMoney Contributor

11/29/2010 2:30 PM EST
Click here for more stories by Eric Jackson

Over the last two weeks, a huge drama has been playing out with a small-cap China stock called RINO International (RINO - commentary - Trade Now). The wastewater filtration equipment provider to the Chinese steel industry was accused by Muddy Waters LLC of fraud earlier this month. RINO said nothing in response, dragged its feet and then released the following baffling 8-K last week:

On November 17, 2010 Frazer Frost, LLP, the independent auditors of RINO International Corporation (the "Registrant"), delivered a letter (the "Auditor's Letter") to the Registrant and each of its directors. The Auditor's Letter states in part:

In a telephone conversation on November 16, 2010, Mr. Zou Dejun, the Chief Executive Officer of the Company, informed Ms. Susan Woo of our firm, in substance, that as to the six RINO customer contracts discussed in the recent report of Muddy Waters LLC, the Company did not in fact enter into two of the six purported contracts, and a third contract among the six was explainable. When Ms. Woo inquired about the Company's other contracts, Mr. Zou said he was not sure, but there might be problems with 20 - 40% of them. Assuming that these statements were reasonably accurate, it appears that our reports would have been affected if this information had been known to us at the date of our reports, although the effect on the financial statements is currently unknown and cannot be quantified without a thorough investigation. We further note that in a conversation the following day, November 17, 2010, involving Ms. Woo, several directors of the Company, Company counsel, and Mr. Zou, Mr. Zou stated that he was not sure the day before and went back to look into some things, and found that apart from the two problematic contracts, all other contracts are legitimate and can be verified.

The auditing standards of the Public Company Accounting Oversight Board provide procedures to be followed by an auditor to prevent continued reliance on audit reports in such circumstances. In view of the information provided by Mr. Zou Dejun, we hereby advise the Company to promptly notify any person or entity that is known to be relying upon or is likely to rely upon our audit report(s) for the periods ended December 31, 2008 and December 31, 2009 and reviewed quarterly financial statements for periods between March 31, 2008 to September 30, 2010 that they should no longer be relied upon, and that revised financial statements and revised auditor's report(s) will be issued upon completion of an investigation.

Obviously, RINO's management deserves condemnation and criticism. Hopefully, the rapid disintegration of a company that came into this month with a market capitalization of nearly half a billion dollars will serve as a cautionary tale to other Chinese small-caps that think they can pull one over on U.S. investors with the help of complicit U.S. pre-IPO investors, law firms, auditors and IR firms.

As you might expect, since the RINO scandal unraveled (the stock has now been halted for a week, and there's no word on when the Nasdaq will see it resume trading), many investors have paid attention to RINO's auditor, Frazer Frost. Citron Research published a great post yesterday titled "Dude, Where's My Auditor? The Curious Case of Frazer Frost," outlining the many questions surrounding what this firm actually did as an auditor to deserve its fee.

In my experience meeting with China-based, U.S.-listed companies and investors, Frazer Frost is a very lax audit firm. As many people have pointed out, since RINO admitted fabricating customers, Frazer Frost announced it would not proceed with its previously announced merger with another audit firm called Moore Stephens Wurth Frazer & Torbet. If anyone thinks this is a coincidence, I have some swampland in Florida to sell you. I fully expect there are more bodies buried under the offices of both these firms and others like them.

Some investors, in RINO's wake, have speculated that Frazer Frost's other clients, such as Harbin Electric(HRBN - commentary - Trade Now), Fushi Copperweld (FSIN - commentary - Trade Now) and China Valves (CVVT - commentary - Trade Now), are good possible shorts. "If Frazer signed off on one fraud, why not another?" the thinking goes.

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Wednesday, November 24, 2010

China's YouTube IPO in Sweet Spot

By Eric Jackson, Senior Contributor11/24/10 - 06:00 AM EST

We have seen a barrage of new F-1 filings with the Securities and Exchange Commission in the last couple of weeks for new Chinese-based IPOs which should hit our shores within the next month.

On Monday in RealMoney , I discussed a recent oneBitauto(BITA_), which went public last week and is still clinging to its offer price. That stock is positioning itself as the leader of automotive information on the Web in China.

I've also recently spoken about one of China's versions of YouTube, Tudou (TUDO), which filed earlier this month to go public. Last week, we saw Tudou's top competitor, Youku(YOKU), also file papers with the SEC to go public soon.

The more you follow Chinese companies, the more you see how American investors demand to understand a potential investment in simple comparisons to names they know stateside.Dangdang (DANG), which also filed for an IPO in the last few days, is called China's version ofAmazon(AMZN_). Baidu(BIDU_) used to be called China's Google(GOOG_) -- until Google retreated from the country earlier this year.

Now, with Tudou and Youku, we get the comparisons of both services to YouTube. Actually, both online video sites are more like China's version of YouTube and Hulu (because a majority of their content is licensed), if the U.S. had a much more fragmented online video market.

YouTube (owned by Google) commands 43% of the U.S, online video content market as of June. This is far ahead of Hulu at 3%, Microsoft(MSFT_) at 2% and Viacom(VIA_) at 1%.

In China, where remember that YouTube and Facebook are blocked by the Great Firewall, Youku is the online video leader with a 20% market share. Tudou has a 16% share. There are many other small players, including which is 51% owned by Shanda Interactive(SNDA_) , with much a smaller share of the market. (Youku prefers to state in its IPO document that it holds a 40% market share for the time users spend viewing online videos, with Tudou at 23%.)

Some are concerned about these online video sites wondering if there will be sufficient demand for two similar companies which are not profitable. After all, remember the constant criticism Google took from Wall Street analysts about when YouTube was going to be profitable? Imagine if YouTube had gone public and had to face that criticism on its own. Isn't it natural to expect Youku to face withering criticism, resulting in a lackluster stock price? I don't think so.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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Tuesday, November 23, 2010

A China Play for Your Watch List

By Eric Jackson
RealMoney Contributor

11/23/2010 7:45 AM EST
Click here for more stories by Eric Jackson

Several China-based companies have held initial public offerings (IPOs) in the U.S. over the past couple weeks. There is also a significant backlog of China-based IPO candidates waiting to go public on the NYSE before 2010 comes to an end. Despite some of the recent problems with Chinese micro-caps trading in the U.S., the domestic appetite for anything tied to the Chinese market appears to be insatiable.

Some observers wonder if investor demand will be able to keep pace with the supply of IPOs coming down the pike. The China bears believe that, because there are so many new issues coming from that country, this must a sign that another bubble about to burst (just like the dot-com fiasco a decade ago).

The China bulls -- and I am one -- would say that most of these IPOs have been ready to go for the last couple of years but haven't been able to get out of the chute due to the general uncertainty in the markets. The majority of these companies stuck in the IPO pipeline are best-of-breed, technology-related names.

For any of these company's related to the Web, the broad macro trends (i.e., the rising-tide theory) are recited in their F-1 filings with the SEC by rote: only 400 million Chinese out of a total population of 1.3 billion are online and their overall purchasing power is still small, but rising quickly.

One Chinese company that held its IPO last week is Bitauto Holdings (BITA - commentary - Trade Now), the product category leader for Internet-based auto information and marketing in China. And, of course, China surpassed the U.S. last year as the top car-consuming country in the world.

Bitauto's shares debuted on the NYSE at $12 each, and they continue to hover around that point to this day. This company, which was brought public by Citi (C - commentary - Trade Now) and UBS Investment Bank (UBS - commentary - Trade Now) is not widely known in the U.S., so I'll provide some details here.

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Thursday, November 18, 2010

The World of the Web in China

By Eric Jackson
RealMoney Contributor

11/18/2010 5:30 PM EST
Click here for more stories by Eric Jackson

Has there been a downturn lately in the markets? You wouldn't know it from looking at some of the China Web names.

In the last month, the Nasdaq is basically flat. However, the big China Web names Sina (SINA -commentary - Trade Now) and Sohu (SOHU -commentary - Trade Now) are up 12% and 20% respectively. Just yesterday, on another down day for the markets, Sina was up 6% after it released a positive earnings report the night before. Investors had first sold off the stock in after-hours trading because the company's outlook for future revenues appeared to be lower than what analysts had expected.

However, given some time to study the report, Sina investors saw that the short-term hit to the company was primarily due to stricter government rules and regulations affecting the fourth quarter. Yet, for 2011, the company was continuing to expect strong growth.

The whole portal space in China has been buoyant this year. China has seen media ad spending jump by 18%, thanks to big events like the recently closed Expo in Shanghai and the current Asian Games in Guangzhou. Big portals are having a big second half of 2010. (NTES - commentary - Trade Now) is up 27% in the last six months.

Of all the Chinese Internet stocks, Baidu (BIDU - commentary - Trade Now) is the best known to U.S. investors. It's now trading around $110, giving it a $37 billion market capitalization. Once Google (GOOG -commentary - Trade Now) exited the mainland earlier this year, Baidu stepped on the gas pedal, and it hasn't looked back. The stock is up 153% for the last 12 months and -- would you believe -- it is a 10-bagger from about two years ago, when it closed at a low of $10.91 on Dec. 5, 2008.

As a reference point, Baidu is now valued at twice the level of Yahoo! (YHOO - commentary - Trade Now) and the same as eBay (EBAY - commentary - Trade Now).


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Wednesday, November 17, 2010

Life in China Today

My friend Mark at Fund My Mutual Fund put up a series of recent ABC News videos on life in China today. Having just got back from there, I can attest that these are very representative of what's going on there. They are really worth watching.

A hotel built in 6 days. Kids starting to learn English in Kindergarten. Migrant workers making $14 a day sewing umbrellas and sending half back home to their families in the country. Amazing.

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Soros' Opinions Given Too Much Weight

By Eric Jackson, Senior Contributor11/17/10 - 06:00 AM EST

George Soros is arguably the most famous first generation hedge fund manager in the world.

A quick search of the 80-year-old's name yields 2.5 million hits on Google. Julian Robertson, 78, yields 740,000 hits. Carl Icahn, 74, generates 400,000 hits. (If you want to characterize Warren Buffett as also a first- generation hedge fund manager, the 80-year-old wins the popularity contest with 3.6 million Google hits.)

Of the current set of modern hedge fund managers, only John Paulson yields more Google hits than Soros, with 2.6 million hits. Soros has about 10 times the number of hits as the man David Rosenberg calls the best money manager in the world: Paul Tudor Jones. David Einhorn has only 225,000 hits and Bill Ackman generates only 84,000 hits. Eddie Lampert, who was once declared the next Warren Buffett, has only 32,000 hits.

Of course, past performance -- and hits on Google -- by no means indicate future performance. Yet, these hits indicate how often the broader media pay attention to the views of these managers as a part of the public discourse on our financial markets.

Popularity of these managers is why CNBC and other media outlets pay so much attention to their 13-F filings, which disclose how their portfolios change each quarter. For example, earlier this week, we found out that John Paulson trimmed his Bank of America(BAC_) stake last quarter and sold his entireGoldman Sachs(GS_) stake. David Einhorn bought more Apple(AAPL_).

In a Wall Street Journal story yesterday, we also learned that Soros "reduced his direct ownership stake in the SPDR Gold Trust(GLD_)" and he "reported no stake in Best Buy(BBY_)."

To the Journal's credit, it also referenced that it was Soros' hedge fund -- Soros Fund Management -- which made other moves. In one paragraph, the Journal uses Soros and his fund interchangeably: "The value of Mr. Soros's stockholdings was $6.7 billion at the end of the third quarter. The fund reported stockholdings worth $5.1 billion at the end of the second quarter."

However, in an hour long discussion with Reuters' Chrystia Freeland in September, where he discussed his macro views on gold, the U.S. deficit, and Europe's debt problems, Soros admitted during a Q&A session afterwards when asked about one of his fund's stock positions that he wasn't involved in the day-to-day decisions of the fund. Therefore, he couldn't discuss a specific stock.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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Monday, November 15, 2010

Protecting Potash From Itself

By Eric Jackson
RealMoney Contributor

11/15/2010 5:00 PM EST
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BHP Billiton (BHP - commentary - Trade Now) pulled its offer for Potash (POT - commentary - Trade Now) yesterday afternoon and said it would spend $4 billion on stock buybacks. Investors, however, still believe a deal is possible. Shares of Potash dipped less than 2% to $137 on yesterday's news. The stock was trading at $111 prior to the buyout offer in August.

BHP certainly still has a lot of dry powder -- even after its commitment to spend $4 billion on buybacks at some unspecified. That's just 10% of the amount that the company was prepared to spend on its acquisition of Potash.

There are many merger arbitrage hedge funds still betting that a deal will go through. However, based on the Canadian government's rejection of the proposed deal a few weeks ago, I'm not so sure it will happen.

Many were surprised by this decision. Countless articles have pointed out that this was only the second time since the 1980s that the Canadian government has ruled out a proposed deal. However, there's been little analysis into why the deal was ruled out and what it might mean for future deals.

Industry Canada -- the Canadian equivalent of the Federal Trade Commission (FTC) -- has to sign off on any foreign buyout of a Canadian company. The organization actually green-lighted the BHP deal. It was the Minister of Industry, Tony Clement, who blocked the deal -- and it came down to politics.

The federal Conservatives have led the country -- fairly well when you consider Canada's position today relative to the rest of the world -- as a minority government for the last four years. They are widely expected to call another election in the next six months.

It became clear weeks ago that many Western Canadian business leaders weren't behind the BHP takeover. They basically didn't like the future it presented to many of them -- most of whom lead energy or agricultural companies that potentially could be attractive buyout candidates in the future. They have seen dozens of acquisitions of mid- to large-sized Canadian companies out over the last 15 years, and they have seen those companies basically become branch plants or branch resource locations (where key executives remain abroad and local Canadian jobs are lost). What's more, the key resources fall under the control of some foreign company.


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Friday, November 12, 2010

Why You Should Watch This Chinese IPO

By Eric Jackson
RealMoney Contributor

11/12/2010 7:45 AM EST
Click here for more stories by Eric Jackson

Earlier this week, a company that could be behind the next great Chinese Internet stock filed its F-1 with the Securities and Exchange Commission for an initial public offering. Ladies and gentlemen, meet Tudou (its ticker post-IPO will be TUDO). You will want to watch it.

Tudou is one of the companies that are vying to be China's YouTube. Unlike here in the U.S., several companies in China are competing for that moniker. Tudou is currently No. 2 in China for market share in the video-sharing space, with 16% market share. It trails Youku, which has 20% of the market share in China.

Youku is still private. Tudou will be the first of these two giants to test the public markets. There are smaller video sites like or Ku6 Media (KUTV), which is owned by Shanda Interactive (SNDA - commentary - Trade Now), but Shanda is a much smaller player and has only a $150 million market capitalization.

In case you didn't know, neither YouTube nor Hulu is available in China because of the Great Firewall. Therefore, China's hometown video sites have a greenfield market to capture for themselves.

Tudou is seeking to raise $120 million in the IPO, with Credit Suisse (CS - commentary - Trade Now) and Deutsche Bank (DB - commentary - Trade Now) acting as lead underwriters on the deal. Some of the early Tudou investors who will get some of their money back -- after pouring in $135 million -- include IDG China, GGV Capital and Temasek Holdings, the state investment company for Singapore.

Growth in All Directions

What Tudou has going for it in spades is growth. It has over 70 million registered users in a country where 400 million of the population actively uses the Internet today. Tudou only had 16 million users in 2007.

As its users have grown, so have its revenues. Tudou has generated $33.8 million in revenue in the first nine months of this year, a 230% increase over the same period a year ago.


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Thursday, November 11, 2010

5 Most Important Issues at G20 Meeting

By Eric Jackson11/11/10 - 04:00 AM EST

NEW YORK (TheStreet) -- It seems like yesterday that the most recent G20 was gathering in Toronto to discuss a more coordinated response by governments and central banks to deal with potential crises. That was five months ago. We're about to start a new G20 meeting, this time in Seoul, today.

It's useful to remember past expectations for these meetings and their results. G20 meetings tend to be heavy on hype going in, with plenty of chances for photo-ops and analysis by talking heads.

However, the crafting of the end-of-summit "declaration" starts a few hours after the leaders first sit down to talk. The final details are hammered out by underling administrators showing complete unanimity by all parties.

Recall that it was expected that the Toronto summit would center on countries pressuring China to let the yuan float upwards. The night before the event started, the Chinese government announced it would be open to such flexibility. The country offered no details on how or when it would make such adjustments (although it has followed through modestly since then). The announcement was sufficient to deflect attention from the issue for the meeting.

So, despite the recent rhetoric about the risk of future "currency wars" among countries trying to increase competitiveness, or the supposed anger by foreignfinance ministers over the Federal Reserve's decision last week to proceed with a new program of quantitative easing, or calls for China to -- again -- raise the value of the yuan against the dollar, I expect little discussion of these issues in Seoul or in the final statement.

So much of the public talking points we hear -- whether it's from Treasury Secretary Timothy Geithner, President Barack Obama or the Chinese government -- relating to these issues is mere "political theater" meant to score points with the public back home that government officials are doing something in their people's best interest.

So, rather than paying attention to these issues, it will be more interesting to monitor some of those that are less popular, but potentially significant, that don't attract attention from the folks back home and, therefore, can truly be issues where coordinated agreement can occur.

I think very highly of Canadian central banker Mark Carney. A Goldman Sachs(GS_) alum, he is a straight-talker and eminently reasonable, in my view. While young and early in his tenure at the bank, he is already highly regarded by Federal Reserve Chairman Ben Bernanke and other central-bank peers.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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Wednesday, November 10, 2010

QE2's Unintended Global Consequences

By Eric Jackson, Senior Contributor11/10/10 - 06:00 AM EST

Fed Chairman Ben Bernanke did the right thing in launching QE2 last week. Nevertheless, it's spawned a rash of criticism from the likes of Kevin Warsh, Germany's finance minister, and Sarah Palin.

On a recent trip to China, I got a chance to read the excellent In Fed We Trust by David Wessell about Bernanke and his recent years at the Federal Reserve. What was clear in the profile is that, while Bernanke acknowledges that he was slow to see the extent of the subprime problem coming in 2006 through the first half of 2008, he has been aggressively doing "whatever it takes" ever since to slay the dragon of a deflation-driven recession.

After a life in academia studying the Great Depression and -- more recently -- Japan's travails from a 20-year deflation slide, Bernanke has good reason to fear an economy falling back into a quicksand pit.

Bernanke knows two things about his public perception. First, he, like politicians, gets no credit for any actions he took that prevented problems from happening two years ago and second, there's an inherent bias that the Fed and certainly among the mainstream press and the public to fear inflation much more than deflation.

As late as early September 2008, Bernanke was fighting fellow Fed governors' hearts and minds against the imminent threat of inflation. Runaway inflation is a much easier concept for Glenn Beck to diagram on a chalkboard compared to runaway deflation. What's the schematic for that?

So, three cheers for Bernanke taking action last week. He and the Fed governors have a dual mandate: full employment and price stability for the US economy. Given the data and where we are in this recovery, the Fed made the right call.

But Ben Bernanke doesn't have responsibility for the rest of the world and, unfortunately, there will be challenging unintended consequences of his actions last week on other emerging economies.

Specifically, China and other economies -- like Hong Kong -- with their currencies pegged to the US dollar will feel added inflationary pressures on their already strong economies. Simply put, Bernanke's explicit prescription for healing the U.S. economy is now gas being poured on to already hot economies who bounced back remarkably quickly from the crisis two years ago.

In a recent letter to his investors, renowned hedge fund manager Paul Tudor Jones complained about the Chinese yuan's peg to the US dollar: "On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom. After 15 years of impressive productivity gains relative to its trading partners, though, it now resists the smallest appreciation.... "As someone who has traded foreign exchange since 1980, I believe the RMB/USD rate is currently the single most important of all exchange rates. It not only drives the largest foreign trade relationship in the world, it also drives virtually every other exchange rate globally. Dozens of other emerging market countries suppress their exchange rate against the US dollar because the RMB is effectively pegged to the dollar."

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