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.

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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.)

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