Wednesday, December 22, 2010

SEC's Smart Step at Fighting China Fraud

By Eric Jackson, Senior Contributor12/22/10 - 08:12 AM EST

NEW YORK (TheStreet) -- The Securities and Exchange Commission took a step in the right direction this week by punishing a small U.S. audit firm for work it had done for a Chinese company.

The SEC's settlement with Moore Stephens Wurth Frazer & Torbet LLP of Orange County is related to overstatements of financial results that China Energy Savings Technology made in 2004 and 2005.

Last month, I wrote in RealMoney that there were many small U.S. auditors operating in China that are basically a joke. They are not performing audits in the manner an average person would expect them to be done. In many cases -- not just a few -- I believe that these audit firms are simply signing off on numbers given to them by management to bank their auditing fees (which can be up to $300,000 for one year from one client) and in the hopes of winning new clients from that company's pre-IPO investors.

These cases appear to be isolated to the smaller-capitalization Chinese companies who initially go public in a reverse takeover (RTO) of an existing shell company on the over-the-counter (OTC) exchange with the intention of later uplisting to the Nasdaq or New York Stock Exchange.

The SEC's action on Monday likely is the tip of the iceberg of its investigations into this area.

I recently reached out to the SEC and asked to share some of my observations on how I've seen many of these RTOs operate over the last year. Last week, I spoke with several senior people from the Commission. Judging by the number of people on the call and their seniority, it's clear they are looking deeply at this area.

Unlike some, I think it's unfair and incorrect to assume all Chinese stocks that have less less than $500 million in market capitalization and have gone public via RTOs are frauds.

However, I do believe that fraud is common in this population. In my opinion, the biggest issue is the veracity of these companies' financial statements. And for that, I blame the auditors.


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

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Tuesday, December 21, 2010

Sina's Weibo Growth Means It's Significantly Undervalued

Tue 12/21/10 11:30 AM EST -- Eric Jackson
Stocks in this video: SINA | NTES | DANG | AOL | SOHU | YOKU

Eric Jackson says Sina's Weibo service will pass Twitter in number of users next year. Maybe Weibo isn't worth $4 Billion, like Twitter was valued at, but it's still worth more than what Sina's stock price indicates. Eric owns SINA.

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Video: Get Ready for the Next Big Chinese IPO

Eric Jackson says watch for a Renren IPO in early 2011: The Facebook/Groupon of China. Eric owns YOKU.
Tue 12/21/10 07:00 AM EST -- Eric Jackson
Stocks in this video: BIDU | DANG | YOKU

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Monday, December 20, 2010

Dangdang Gets Double-Teamed in Price War

By Eric Jackson
RealMoney Contributor

12/20/2010 5:00 PM EST
Click here for more stories by Eric Jackson

China-based bookseller Dangdang (DANG - commentary - Trade Now) will go down in history as having one of the most successful IPOs of 2010. The company raised just under $300 million, was priced at $16 per share, opened at $24 per share and hasn't looked back. The stock topped out as high as $34 per share a couple of days after the Dec. 7 IPO, but it has since fallen significantly from that level. Still, shares of Dangdang are trading above their initial post-IPO level, giving investors who partook in the IPO a nice return.

Although TD Ameritrade recently said that Dangdang is one of the three most traded stocks at the moment (the others are Youku (YOKY - commentary - Trade Now) and Baidu (BIDU - commentary - Trade Now)), it's amazing to me that there is not more information about the company readily available in the U.S.

For example, over the last week, Dangdang has been attacked by two companies that want to enter into a price war with it. It's not surprising. After all, Dangdang is in the middle of its first quarter as a public company. All newly public companies like to come out of the gate strong during their first earnings call. Their competitors know that this success can start to feed on itself with investors and consumers alike. Therefore, why not try to short-circuit that positive feedback loop with a negative one?

In other words, by entering in to a price war, competitors can make it appear that the new IPO is stumbling in its first earnings call, which can seed fear and doubt among investors and consumers. This, in turn, might position the competitors as "more successful."

At the moment, Dangdang is being attacked by private Chinese company 360buy and American juggernaut Amazon (AMZN - commentary - Trade Now). 360buy (also known as Jingdong Mall) recently announced that it would spend RMB 80 million (approximately $12 million) on discounting prices prior to the peak holiday shopping season. This came after 360buy said a week ago that it would drop prices on its books by 20% in order to win business.


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Dangdang Price War

Mon, 20 Dec 2010 - Eric Jackson

Contributor Eric Jackson says recent Chinese IPO Dangdang has been attacked by 2 competitors within the last week on pricing into the holiday season. But why hasn't any of the American business media covered it?

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Friday, December 17, 2010

Get Ready for China's Next Blockbuster IPO

By Eric Jackson
RealMoney Contributor
12/16/2010 5:30 PM EST
Click here for more stories by Eric Jackson

If we've learned anything from the successful IPOs of Youku (YOKU - commentary - Trade Now) andDangdang (DANG - commentary - Trade Now) this month, it's that U.S. investors and media love referring to these Chinese companies in relation to their closest domestic equivalents.

Youku was constantly referred to as the "YouTube of China," though some smarter analysts said that it was closer to the "Hulu of China" because of its more professional, rather than user-generated, content. Even more astute analysts made said Youku could possibly become the "Netflix (NFLX - commentary - Trade Now) of China," based on Netflix's new streaming capabilities, which Youku might emulate.

With Dangdang (pronounced "Dong Dong"), the obvious comparison was Amazon (AMZN -commentary - Trade Now), hence it became the "Amazon of China."

Of course, none of these comparisons are completely accurate. One difference is that the newly public Chinese companies face different competitive dynamics in China than their counterparts faced in the U.S. when they were at similar stages of development. There are also differences in the growth rates and potential market sizes. Regardless, investors clearly wanted in on the action.

Other Chinese IPOs last week that weren't instantly compared to U.S. firms, including Bona Film Group(BONA - commentary - Trade Now) (BONA) and Ski-Mobi (MOBI - commentary - Trade Now) quickly saw their stocks fall (though I believe Bona has a great business).

So what's the next big IPO we'll see out of China? Get ready for Renren, the new "Facebook/Groupon of China." Renren, a subsidiary of Beijing-based Oak Pacific Interactive, is China's leading social-networking services (SNS) provider. The company currently has 150 million registered users, 480 million page views a day and 4.1 billion user interactions per day.

To put that into context, Facebook has 500 million active registered users, and its valuation as a private company has recently been estimated to be between $30 billion and $50 billion. Tencent has over 650 million users of its QQ instant messaging service (which is obviously a different type of social service than Facebook), and its market capitalization in Hong Kong is $41 billion (14% bigger than Baidu (BIDU -commentary - Trade Now).)


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Thursday, December 16, 2010

Bruce Berkowitz' Big Week

Eric Jackson tips his cap to Bruce Berkowitz on his concentrated bets in the financials that are working so well.

Thu 12/16/10 12:30 PM EST
-- Eric Jackson
Stocks in this video: C | AIG

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Chinese IPOs Defy Value Logic

Eric Jackson says it's ridiculous to talk about trailing revenues with these companies. Eric owns AAPL, YOKU and DANG.

Thu 12/16/10 09:12 AM EST
-- Eric Jackson
Stocks in this video: AMZN | BIDU | DANG | YOKU | AAPL

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Wednesday, December 15, 2010

We Need More IPOs

Eric Jackson says more companies should say "no" to M&A like Groupon did to Google and go IPO to drive America's economy.

Eric Owns GOOG, DANG and YOKU.

Wed 12/15/10 12:08 PM EST -- Eric Jackson

Stocks in this video: YHOO | DANG | YOKU | MSFT | GOOG

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More IPOs Are Needed

By Eric Jackson, Senior Contributor12/15/10 - 06:00 AM EST

NEW YORK (TheStreet) -- Last night, I watched the Charlie Rose interview with Groupon Founder and CEO Andrew Mason. It was the first time I've seen him speak and, aside from a bad sense of humor, I was impressed.

What grabs your attention is that these guys started a company and reportedly got a $6 billion buyout offer within two years -- in the wake of the deepest recession since the Great Depression. Tony Robbins should make them a case study to pump up his audience at future motivational seminars.

Different reports circulated this past week that Groupon does annualized gross revenues of $2 billion before splitting profits with the merchants they refer business to. That kind of growth demonstrates how -- in an era of Facebook and Twitter -- good ideas and businesses can propagate like crazy.

What's more impressive about Groupon though is it's turning down Google's(GOOG_) generous buyout offer. Instead, it opted to go it alone and grow its business. Here's what Mason said about why it did that: "Here is what I can say. I think every choice we make in the company comes down to a core of this idea we have of what Groupon could be and the place it could play in the world and in the rest of the 21st century. And every choice we make is which option will it make it more possible for us to get there? " So I think whatever we decide to do with the company, the people that we hire, the deals we run, every itty-bitty choices, how do we build this company into something that transforms the way people buy from local businesses."

If the offer on the table for Groupon was $6 billion, Google was offering to pay four times what it paid for YouTube four years ago and double what it paid for DoubleClick three years ago.

We're just not used to people saying no to that kind of money.

Four years ago, Facebook turned down a reported $1 billion offer from Yahoo!(YHOO_)(YHOO). Eighteen months later, Microsoft(MSFT_) invested $240 million in the company at a $15 billion post-money valuation. There were calls at the time that the price was completely unrealistic and showed how desperate Microsoft was to stay relevant. Yet, today, most analysts say the company would be worth $30 billion to $50 billion if it went public.


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

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Monday, December 13, 2010

Chinese IPOs and the Value Investor

By Eric Jackson
RealMoney Contributor

12/13/2010 5:01 PM EST
Click here for more stories by Eric Jackson

A week ago, I think it's fair to say that 99% of investors and probably 99.5% of the media weren't paying attention to the fact that Youku (YOKU - commentary - Trade Now) or Dangdang (DANG - commentary -Trade Now) were going public.

However, after these stocks immediately jumped over 160% and 80% in value on their first day of trading on Wednesday, people sat up and took notice. Then, as their prices kept going up on Thursday and Friday morning, people's jaws started to really drop.

However, the inevitable backlash started to come against both companies. Most of the critics of both companies are Bill Miller-esque raging value fundamentalists.

Speaking about Youku, you often hear the complaint, "How can a company that had $35 million in revenue in the first nine months of the year and lost money be worth $5 billion?" (That was Friday. It's worth less today, but you get the point.)

I consider myself a value investor at heart. How can you not like the idea of picking up something for 50 cents when all indications are that it's worth a buck? And I certainly believe that the market is not always efficient or rational, thereby giving investors many opportunities to pick up something that has been temporarily thrown into the discount bin.

At the same time, I've never been good at investing on the basis of momentum or trading the technicals of a chart. Many people do it every day and swear by it. But that's just not me.

However, speaking as a "value guy," I get a little sick at the self-righteousness of some value investors and their criticisms of these Chinese IPOs. The simple truth is that any pure value investor missed - commentary - Trade Now) after its IPO and for the last 13 years since.

I don't think there's ever been a time during that stretch -- even post-Lehman -- when a value investor would have been said to get into Amazon. Yet it's been a great investment over that period.


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Thursday, December 09, 2010

Rip-Roaring China IPOs

By Eric Jackson
RealMoney Contributor

12/9/2010 11:30 AM EST
Click here for more stories by Eric Jackson

Wednesday's price action in the new Chinese initial public offerings in Youku (YOKU -commentary - Trade Now) and Dangdang (DANG- commentary - Trade Now) was eye-popping. Americans love easy comparisons to for understanding foreign businesses, so we've heard endlessly heard that Youku and Dangdang are China's YouTube and Amazon (AMZN -commentary - Trade Now), respectively.

Dangdang ended its first day of trading up 87%. Youku ended up 161% for the day. It feels like 1999 all over again.

However, any time you see moves like that, you will get the chorus of worriers. "These price-to-sales ratios are crazy!" is one comment I heard during yesterday's market action. "This is going to end in tears!" One more: "I'm going to short the hell out of these two stocks."

I wrote about Youku being the monster China IPO two weeks ago, though I'm not some Pollyanna cheerleader. Still, even I was surprised by the giant move the stock made yesterday.

The critics of Youku point out that the company has raised more than $100 million from venture capitalists to date, and that it has yet to turn a profit. In fact, Youku's losses have only grown along with the company itself. It has faced increasing costs of acquiring proprietary content (think Hulu), keeping up with intense competition, paying for more servers to stream video and large pirating risks. Even if the company can supplement its advertising-based revenue with subscription revenue, critics wonder how will it will convince the Chinese to pay for content when bootleg DVDs can be bought for pennies on the street.

Yet, what Youku has going for it -- as I've said before -- is that it's the leader in the online video space at the moment. China's No. 2 online-video company, Tudou, filed to go public first, but Youku is actually the first one out. If it didn't have name recognition in the U.S. before yesterday, it does now. That will be important for Youku's continued access to the capital markets in order to fund its growth -- assuming its price holds up.


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Wednesday, December 08, 2010

Sina's Got Growth Power in Weibo

By Eric Jackson, Senior Contributor12/08/10 - 07:28 AM EST

NEW YORK (TheStreet) -- Most American investors are aware that Sina(SINA_) andSohu(SOHU_) are among the big Web portals of China. They know that both have been around for a long time and that both sites look cluttered with information and ads compared with their American counterparts. However, there's much more to the story, especially with what's been cooking at Sina over the last 18 months.

As with any area of investing, it pays to dig beneath the surface of the common bullet points about a company to really figure out its competitive strengths and industry dynamics. The great American portals of the Internet's first wave have either been greatly diminished -- like AOL(AOL_) or Yahoo!(YHOO_) -- or have morphed into part of a broader online strategy like Microsoft's(MSFT_) MSN.

Arguably, the most exciting areas of the consumer Web in the last 10 years are social networking sites like Facebook and Twitter, both of which are private. So although both have seen their private valuations balloon over the last few years an argument could be made that public investors haven't appreciated yet their full value in those of comparable companies. But there are no such comparable companies in the U.S., right? True. But look at China.

Youku, one of China's "YouTubes," will come public later this week, while one of China's "Facebooks" --Renren -- will come public in the coming weeks.

Sina, however, has managed to grow its own Twitter. It's called Weibo and it's the biggest reason for the recent ramp-up in the stock price and why Sina is still considerably undervalued compared to where it will be in six to 12 months from now.

Most are familiar with Twitter's success story. It started in late 2006 so it's now four years old. People at first couldn't understand who would be self-indulgent enough to update the world that he just ate a ham sandwich. Few realized that for many users the Twitter stream would become a primary way of getting information -- like an old RSS fee -- as well as staying in touch with friends and on top of areas of interest.


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

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Tuesday, December 07, 2010

Las Vegas Sands Still the Best Casino Bet

By Eric Jackson
RealMoney Contributor

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

About a year ago, I took a cautious view on Las Vegas Sands (LVS - commentary - Trade Now), stating that I was troubled by the governance of the company and was worried about some of the risks involved in bringing back Macau and waiting for Las Vegas casino revenue to rebound.

For the next four months, the stock basically treaded water. However, in March, I changed my view. Considering how quickly Macau traffic had been growing at the time and China's bounce from its recent stimulus, I suggested that the past risks I had mentioned were far outweighed. I said there was a substantial jump coming in the stock.

That's exactly what has happened. Macau has only continued to explode since the spring. Most of the market (including me) was also surprised at how successful the opening of Marina Bay Sands has been in Singapore. It seems that folks in that part of Asia are just as excited to gamble at a top resort as the Mainland Chinese are in Macau.

Since the spring, Las Vegas Sands' stock has gone from $20 to around $50 today.

The question now, of course, is, where does the stock go from here? I'm still as bullish as ever on Las Vegas Sands' stock and think it could double again over the next 12 months.

Yet, on Thursday last week, the stock suddenly dropped in the middle of the day from nearly $52 to $47. The reason for the move was that the Macau government refused Las Vegas Sands' request to proceed with developing Lots 7 and 8 on the Cotai Strip.

Las Vegas Sands can and most likely will appeal. The company has 15 days to do this and another 15 days after that, if the company can take it to a court procedure. I expect it will.

In the last few days, there has been lots of analyst speculation about why the Macau government rejected the land premise without disclosing any reason. The market likely fears that:


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Thursday, December 02, 2010

Takeaways From 'The Greatest Trade Ever'

By Eric Jackson
RealMoney Contributor

12/2/2010 12:00 PM EST
Click here for more stories by Eric Jackson

It was an interesting exercise to reflect on what book has had the biggest impact on me as a trader or investor. I'm picking a recent book that recounts the history of John Paulson's bet on a collapse of subprime housing in 2006-2008: Greg Zuckerman's The Greatest Trade Ever.

Most people I talk to about the book have been drawn to it because of the money Paulson made -- several billions personally -- and they are amazed that he was able to see in advance what everyone now sees as obvious after the fact: Housing's explosive growth was illusory, built on a sand foundation of easy credit.

As an investor, you can't help but be impressed by the returns that Paulson scored. However, the pearls of the book are the little things you notice about his process of approaching and then executing the trade. These actions are replicable, even though the trade itself is not.

Here are my key takeaways from the book:

1. Don't let others label you, and more importantly, don't label yourself.

John Paulson had been a moderately successful merger arbitrage guy. He raised money from investors with that as his mandate. People expected him to keep using that strategy. Most hedge-fund managers at that stage of their careers would be on auto-pilot. After all, he could have kept making good money doing just that. Even though he had no housing experience, he wasn't afraid to jump in when he saw the opportunity. Many of his longtime investors weren't happy. This wasn't what they signed up for when they gave him their money. Paulson didn't care. He saw the opportunity and didn't let others, or his own reservations, get in the way.

2. The biggest trades require planning and a refutation of conventional wisdom.

I have never been drawn to momentum trading or studying charts. I know lots of people who do it and are fantastically successful.


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Wednesday, December 01, 2010

IDG's Pat McGovern on Investing in China

By Eric Jackson, Senior Contributor11/30/10 - 06:00 AM EST

Pat McGovern is the founder and chairman of International Data Group (IDG), the world's leading technology media, events, and research company with 2009 revenues of $3.05 billion.

He is on the Advisory Board of IDG Capital Partners which manages $2.5 billion in capital to invest in China-focused technology companies. They are arguably the top VC firm in China today. I asked Pat how it happened in this interview:

Q: It's not conventional wisdom for a firm like IDG to make the move into venture investing. How and when did you decide to do that?

A: Our research has shown that the rate of growth of the technology market is related to how many new products and services are being introduced into the market.

Entrepreneurial start-ups have the best record of taking the latest technology from the laboratory and bringing it to the market with better price performance or application characteristics than those already available.

Therefore, we decided to help stimulate the growth of the technology market by investing in start-up companies which results in the long run in greater revenue growth and profitability for IDG.

Q: And when specifically did you decide to go into China?

A: IDG's mission is to help people worldwide increase their standards of living, productivity, and quality of life by learning how to acquire and use information technology well. Since China has the world's largest population, we desired to enter China as early as possible.

Fortunately, we were able to establish a joint venture in China in March 1980 to offer technology publications and information services. This was the first joint venture of any type between the U.S. and China.

Q: When I travel through China, I hear about IDG Capital Partners all the time. You're arguably the top venture firm there today. How did that happen?

A: In the early 1990s, a considerable number of people who had left China to get educated in the United States and Europe and had worked for one or more technology companies in the U.S. were beginning to return to China. They wanted to start new companies based on their knowledge of the latest technology and using the marketing methods and business practices that they had learned overseas.

At that time, local Chinese investors were focused on investing in asset-based companies, such as real estate, highway builders, manufacturing equipment producers, etc. They were reluctant to invest in the business founder who only had a paper plan to show them.


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

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