U.S.-listed Chinese companies have come under intense scrutiny by many investors and analysts lately. Unfortunately, that scrutiny has produced a lot more than hot air. For now, anyway, it seems like the cloud of pessimism is casting a long shadow on these businesses.

Tutorial: Top-Stock Picking Strategies

Legitimate Concern
The companies under the radar are U.S.-listed, Chinese-based businesses that essentially bought out dying publicly traded companies for purposes of obtaining the publicly traded shell. The route to going public is far quicker and cheaper via buying a public shell than going through the traditional process. As such, there is legitimate concern that a lot of these companies don't operate the business they claim to own, or even report their true numbers.

The recent bombshell surrounding these businesses involved Sino-Forest (TSE:TRE.TO), a Canadian-listed company that owns tree plantations in China. Several weeks ago, shares were trading for as high as $25. Yet equity research firm Muddy Waters recently released a report accusing Sino-Forest of overstating its assets and earnings. In response, investors sent shares down by over 80% on the news. Shares now trade for $2.35. Even more significant, Sino-Forest counted hedge fund manager John Paulson, famous for his shorting of mortgage securities in 2008, as a large shareholder. He has since sold his stake, losing some $750 million.

Gems Amidst the Carnage?
In fact, in the past six months, some 25 of these Chinese companies have reported irregularities. So the claims made by analysts and investors have a lot of credibility. But it may be a stretch to think all such Chinese businesses are frauds. Only insiders are 100% certain, but all investing entails uncertainty. A name that has not come under accusation is snack and beverage company China Marine (NYSE:CMFO). But shares have been slashed, as investors have lost faith. At $2.80 a share, CMFO has a P/E of 3.7 and no debt. Any valuation metric is useless, if you question the authenticity of the numbers, but China Marine appears okay.

China Fire and Security (Nasdaq:CFSG) is another U.S.-listed Chinese company that recently agreed to be acquired by U.S. private equity firm Bain Capital. Clearly, this deal suggests that not all such companies are frauds. Other names like chemical company Yonge International (Nasdaq:YONG) have come under intense scrutiny, but the jury is still out. Unsurprisingly, the company has vehemently declined allegations. But more interesting, the CEO recently bought $3 million worth of shares in the open market paying an average of $5.40 a share. Shares currently reflect a P/E of 5.

The Bottom Line
There appears to be no doubt that some U.S.-listed Chinese companies are not what they say to be. But investors willing to dig deeper will come to realize that the entire lot of these names is not as polluted as others. To be sure, many of the accused companies are being accused by those who are short the stock. Clearly, the short sellers have been valuable in revealing the dishonest companies, but the goods may be great values today as a result of the sell off. (For more, see The Value Investor's Handbook.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!