What do You Need to Look for before Investing in China-Based U.S. Public Companies?

CDII

China Direct Industries, Inc.

Since late 2010, many China-based U.S. listed public companies have undergone a veritable swoon – one brought on by a confluence of company financial restatements, auditor resignation, delisting, trading halt, accusations of fraud, fears over the Chinese economy, and extreme volatile capital markets worldwide. This swoon has induced both pain in the pocketbook and the theft of personal sanity of many investors as each is left to consider whether the current systemic depression in the prices of China-based U.S. listed public companies is indicative of the true problem: fraud, or is it rather the result of short-term noise that is hiding the true value of these companies.

Let us look at the positives:

Over the past thirty years, China’s economy has grown over 250%. China’s GDP has grown at an average annual rate of nearly 10.0% reaching as   high  as 14.2%; the per capita GDP grew at an average annual rate of 8.1% and reaching as  high as 12.0%. Furthermore, the emerging middle class in China has grown from 65.5 million in January 2005 to 80 million in January 2007 and is forecasted to be 700 million by 2020. According to estimates by Deutsche Bank’s Chief Economist for Greater China, China will be the world’s largest economy in the world in a decade.

China’s budget deficit is mild compared with that of the Western countries such as U.S.,  and many within the European Union. Its population is much younger especially when compared to Japan and its economy is growing much faster.  In addition, China’s primary educational system is really good, and so is its infrastructure such as roads, bridges railroads, and communications and they are getting better each day. Furthermore, the Chinese have strong work ethics, and its government is determined to make China a world-class competitor.

The worldwide economic crisis of the past three years proved to the world that the economy China has been developing over the past three decades is both strong and resilient. . China held up better than most developed countries. In 2009, for example, China’s GDP increased 10.7 percent. That compares with a growth rate of 0.1 percent in the U.S., shrinkage of 3.9 percent in Japan, and shrinkage of 2.4 percent in Germany.

Many of the Chinese stocks trading in the U.S.  are shockingly undervalued.  If you want to make money on China while minimizing downside risk, the best way is to  invest in China through buying Chinese public companies that are listed on U.S. stock market exchanges.  Of course, due diligence is a must before you invest these companies.   I believe it’s wise  for U.S. investors to put a portion of their assets in China. I suggest 10 percent to 15 percent for most investors and 20 percent for those with higher risk tolerance.

There are over 700 Chinese firms that have listed on U.S. exchanges and they vary widely in terms of size and sector. These firms include the online search giant Baidu (NASDAQ: BIDU).  These Chinese companies also notably vary according to the means by which they achieved listings on U.S. exchanges. Some, such as the online travel services provider Ctrip (NASDAQ: CTRP), was brought public through the traditional IPO process by notable Wall Street firms. Companies such as these hold vaunted statuses and command rich valuations. Countless other firms came to market through a process known as a reverse merger – a transaction whereby a shell company – an incorporated legal entity that is already listed on the Over-the-Counter Bulletin Board, merges with the Chinese private entity.  The result is that the Chinese company is effectively made a publically traded entity at a much smaller cost than a traditional IPO and much more quickly. After become publically listed, the Chinese company can then raise capital through a share offering or a Private Investment in a Public Entity (“PIPE”) transaction.

What do you need to look for before you feel comfortable investing inChina-based U.S. public companies?

First, does the company have one of the top 15 PCAOB registered auditing firms based in the U.S., with offices or operations in China as auditor?  The key is that the auditing firm must be based in the U.S., because PCAOB is then able to audit the auditing firm once every three years.  The Big Four auditing firms have their Chinese subsidiaries in China to perform audit for China-based U.S. public companies, however, PCAOB is not allowed to audit their work paper.  In addition, you need to check if the auditing firm has its own offices or operations in China.  If not, it is more likely that the auditing firm has to hire a third party, often a Chinese accountant, to do field auditing.  The auditing quality is questionable.

Second, does the company have a reasonable business model?  You should carefully read the company’s 10Q and 10K to understand the company’s business.  The most important is to understand why the company is making or losing money.  Use common sense, if it is just too good to be true, just walk!

Third, does the company have adequate investor relations presence in the U.S. such as U.S. representative (not IR contact), U.S. offices, U.S. website, up to date press releases, road shows and conferences, English speaking CFO, social media, and so on? These particular details can tell if the company is serious about its shareholder value.  A professional website with detailed information in English and contact links with individuals that will actually respond are very important.

Fourth, does the company have sales contracts with U.S. corporations, multinational corporations or corporations outside of China?  Because those contracts and the income they provide can be confirmed. A U.S. firm utilizing a Chinese company’s products also provides some indication of the quality of the goods and services being provided. The more contracts outside of China, the better you should feel.

Fifth, is the company willing to provide its Chinese tax return filings including valued added tax, income tax and its SAIC filings? Basically, these filings in China should be consistent with its SEC filings.  Keep in mind that some China-based companies may have  exporting businesses through their offshore entity, in which case, their Chinese filings may vary from their SEC filings.

James Wang, Ph.D.

Chairman and CEO

China Direct Industries, Inc. (NASDAQ: CDII)

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441

Phone: 954-363-7333

Fax: 954-363-7320

Mobile: 561-212-5029

Website: www.cdii.net

Challenges Facing Chinese Reverse Merger Companies: SEC Tightens Listing Standards and Its Implications

SEC

SEC

As the latest official stance, on November 9, 2011 the SEC approved new rules to toughen the standards that companies going public through a reverse merger must meet to become listed on the three major U.S. listing markets NYSE, Nasdaq, and NYSE Amex. The rules was adopted against the backdrop that the SEC and U.S. exchanges in recent months had suspended or halted trading in more than 35 companies based overseas accused of a lack of current and accurate disclosure about the firms and their finances, many of which were structured through reverse mergers. In June 2011, the SEC issued an investor bulletin warning investors about reverse merger companies.

The adoption of new rules was due to the pressure of marketplace. Since summer 2010, the trustworthiness of foreign reverse merger companies, most of which are Chinese firms that substantially operates in China, have been questioned by some independent research firms such Muddy Waters and Citron Research. Though the targeted companies are questioning the validity of the information source of these analyst reports, the plausible arguments and concerns raised by these reports have effectively created public distrust on the reverse merger structure and caused a wide stock price plummet of China-based listing companies for months.

The new rules prohibit a reverse merger company from applying to list until the company has completed a one-year trading in the U.S. over-the-counter market or another regulated U.S. or foreign exchange following the reverse merger and all the required disclosure are current and accurate in addition to the maintenance of minimum share price for at least 30 of the 60 trading days immediately prior to the listing application and the exchange’s decision to list.

Many Chinese stock analysts argue that the scrutiny should be on the specific companies rather than the reverser merger structure as that could hurt or put on hold normal capital formation for some small foreign companies. Many believe that SEC’s new rules have officially closed the window for a period of maybe one year or two for new Chinese companies in pipeline to enter the U.S. capital market and created a dilemma for current listing companies on market.

Challenged by the tightened SEC rules and marketplace distrust, the essential pressure that Chinese listing companies including those with well-performed finances are facing is to fight back investors trust and confidence through transparent, effective, full-access, proactive communications with investors and take tougher measures to strengthen corporate governance and financial management.

Investors still welcome listing companies with well-performed financial fundamentals. For instance, Qihoo 360 Technology Co., Ltd. (QIHU.NYSE) listed in March 2011 was targeted by Citron Research this November has seen a plummet of stock price during the month. However, the company Q3 financials filed on November 17 was above analyst estimates with quarterly net income rose to $11 million from $3.8 million in 2010 and revenue rose to $47.5 million from $15.5 million a year ago. The trading prices immediately rebounded that day.

For the other direction, some listing companies are considering privatization. On November 22, 2011 Chinese interactive-media company Shanda Interactive Entertainment Ltd.  (SNDA.Nasdaq) announced the agreement to go private and pay stakeholders $41.35 an American depositary share, which values about $2.3 billion. The company in October received the offer from its Chairman and Chief Executive Tianqiao Chen that valued the company at $41.35 a share, a premium of $9.18, or 29%, over its Oct. 14 price. The privatization pursued by the companies like SNDA is commonly regarded as a calculated and temporary retreat from marketplace and the prelude to a return with a brand new public offering after the completion of reorganization and business improvement.

So, it is time to turn right or left. Stay or go? Chinese listing companies at the crossroad have to make decision now.

Jade Ye

Account Executive

China Direct Industries, Inc. (NASDAQ: CDII)

431 Fairway Drive Suite 200

Deerfield Beach, FL 33441

Website:www.cdii.net 

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Buying Straw Hats in Winter

CDII

China Direct Industries, Inc.

As part of my position at China Direct Industries, I oversee the public and investor relations component of our company, as well as a number of our publicly traded China-based advisory services clients.  As you can well imagine, that has me travelling quite often to investor and corporate conferences across the globe.  Very recently, I attended a conference in New York, sponsored by a major law firm, centered on the topic of China.  This conference was unique in many ways, but most strikingly so because of its main topic: fraud. The reason I found this topic so striking was that, for the last four years, when it came to China, the conferences were more about growth, the opportunity of a lifetime, and the sheer power of numbers that China possesses compared to the rest of the world.  It made me think about what a difference the last nine months has made for China stocks in the U.S. As I was watching some noted China bears go at it with some few remaining China bulls in a white collar Jerry Springer-like format, I could not stop my mind from drifting nostalgically into the past when I worked in the brokerage industry.

Having spent the better part of twenty years in the investment banking and brokerage industry, I have heard a great many clichés.  Classic sayings like “The trend is your friend” or “Bulls and bears make money, pigs get slaughtered” could be heard every day as brokers talked to their clients or managers tried to pump up the sales force. But, my favorite cliché, which I first heard from a retail sales manager who still remains one of my closest friends, was a bit more obscure “You should always buy your straw hats in winter”.  Maybe it struck a chord with me because I lived close to, dare I say it, the “Jersey Shore” and know that, come the day after Labor Day, all the beaches are free and every straw hat, umbrella and beach towel sold at the local shops gets marked down 40%, 50% and 70% as each week goes by.  Is investing with that philosophy the key to long term success? By itself, of course it’s not.  Nothing takes the place of doing your homework on individual stocks, but buying companies in a sector that is very out of favor can lead to huge returns over time.

History gives us many examples of hot sectors that have gone bust only to rise up again even stronger to handsomely reward the straw hat buyers willing to buck the trend.  In my past, I can vividly recall how the “Dot Com” sector went from “wave of the future” to “four letter word” in the span of six months in the year 2000.  High profile telecommunications companies like Lucent and World Com, which grew tremendously servicing that sector, turned out to basically be “cooking the books” to use another industry cliché.  Back then, every internet company and most tech companies were “a lie”, “a fraud”, and “going to zero”.  Sounds familiar, doesn’t it? Many internet companies did go bust or were swallowed up by larger companies for next to nothing, but many also far outperformed the market in the next 5 to 10 years.  Two that come to mind for the savvy straw hat buyers of 2001 were Captain Kirk’s Priceline, trading as low as $1.80 from a high of over $100 in 2000 (prior to a 1 for 6 reverse stock split), and a debt ridden online bookstore trading as low as $5.51 down from over $90 in 2000. I think its name was Amazon.com.

Closer to the present, when thinking of “fraud” or “worthless”, my mind settles on the banking industry and auto companies like GM.  The near collapse of our financial industry created a panic that briefly ushered in a new penny stock era with the likes of Citibank, Bank of America and Ford as its new ambassadors (all of which were trading close to a dollar or two a share).  In fact, there were so many cheap straw hats created by the panic of 2008 that the straw hat buyer did not even need to be that savvy to make a boat load of money in less than two years. And, for the record, I did make money on a few shares myself.

Sometimes it just gets too easy when a sector is hot, resulting in shoddy due diligence, overvaluation and sheer greed taking over.  The China sector is no different, and the problems now surfacing in accounting irregularities and, in several instances outright fraud, have certainly raised the risks for investors to very high levels.  But, sheer panic makes the pendulum swing too far the other way.  When it does, a company like Harbin Electric (a straw hat I happened to make some money on) traded at a 50% discount to an all-cash takeover offer of $24 per share.  The fact that this offer was vetted by several major law firms and financial institutions was lost in a high profile short-long tug of war.  Harbin did get taken over for that cash price in November of 2011 despite the widely publicized assurances of several major short sellers that it definitely would not happen.

So, as my mind wandered back into this conference and I listened to some really smart people make mostly negative comments about pretty much all China-based companies, I kept wondering if I had enough room in my closet for a few new hats.  While what has happened in China is very unsettling in terms of accounting irregularities, fraud and, more importantly, the difficulty in pursuing legal remedies where improprieties exist, it does not mean that every company in China is “a fraud”, “a lie”, and “going to zero”.  To the contrary, China is the only major country with a surplus that is still growing at a good pace. Compare that to the Euro Zone or even our country.  I guess that means to me that I will do a great deal of homework on China stocks and follow the actions of my favorite fictional straw hat buyer, Mr. Potter from the classic movie “It’s a Wonderful Life” who bought when others were in sheer panic during the Great Depression.  And guess what? He certainly wasn’t the nicest man in the little town of Bedford Falls, but he was by far the richest and he kept getting wealthier all the time!

Richard Galterio

Vice President

China Direct Industries, Inc. (NASDAQ:CDII)

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441

Office: 954.363.7333 ext. 316

Toll-Free: 877.680.7333

Fax: 954.363.7320

Email: richard.galterio@cdii.net

Website: www.cdii.net

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The Only Game in Town – Due Diligence

CDII

China Direct Industries, Inc.

TV personality and ex-hedge fund manager, Jim Cramer, although difficult to listen to for long periods of time, stands by a certain motto that I’d always found to be right-on-the-money. Occasionally as Cramer wraps up his afternoon show, Mad Money, he concludes by telling his audience, “Do your homework people! It’s the only game in town.”  All the “elephants” you’ve ever read about in Forbes, Fortune, etc., would NEVER invest 10 cents into a project without first performing a thorough investigation. That being said, the industrial commodities market is a unique one, and within this marketplace, you will find that every commodities trader has a special relationship with the term “D.D.”

Homework (more commonly referred to as Due Diligence) is everything, especially in the commodities markets. D.D. is the solution to everyone’s problems; it is the beating heart which allows for the healthy life of any long-term contract, whether the cargo of this contract be iron, cotton, or drinking water. Do not allow yourself to become too complacent. Aside from the most rudimentary of D.D., such as an entity’s corporate & tax-related documents and operating licenses, there exist several other factors which are equally paramount to a deal’s success, such as logistical solutions, network circles, and/or personal experience. Just as fundamental D.D. can be viewed as the beating heart of a transaction, logistical solutions serve as the ‘veins’ and ‘capillaries’ of such a transaction, allowing for the smooth flow of cargo from nation to nation.

Obviously the term ‘homework’ can refer to many things within the corporate world. Researching a particular candidate for a job opening, reading psychology-related books about negotiation, preparing for an upcoming interview, and/or studying case law can and should be deemed ‘homework’ by the hungry entrepreneurs of this world; however, in the industrial commodities markets, D.D. is exceptionally vital. If you work as a bank teller, for example, you may be able to slide by without having to do too much ‘homework’. If you trade commodities and disregard D.D., you are toast.

With current market levels being so volatile, many (impulsive) traders have found themselves in ‘tight spots’, while other, more patient traders have experienced nice profits at the expense of the reckless . Are the impulsive less-effective than the patient, at least when it comes to market forecasting? Perhaps. However, there was a time when these two men sat on the same level playing field, and it was the direct result of their recklessness/patience which landed them where they are today.

Similar to the moral of the old children’s story “The Tortoise and the Hare”, the factor of speed, although an occasional asset, is not the answer to profits and success; diligence is.

Alex Friedberg

Vice President, International Logistics
CDII Trading, Inc.
431 Fairway Drive, Suite 200
Deerfield Beach, FL 33441

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What’s So Great About China?

What country is basically carrying the world economy, both as a resource vacuum and with its growing middle class? China. Which country outside of the US fixed income investor is the largest financier of the US? China…again. When it comes to investing, few people are bearish about China. It’s fast replacing the US as the engine of growth worldwide. It’s 1.4 billion people can turn something as unglam and ordinary as a touristy Taiwenese pineapple cake into an item so hot that Taiwan barely has enough pineapples to keep China visitors buying. In short, China is to the world economy what Oprah Winfrey is to book sellers.

Sure there are China naysayers out there. Their argument is that China banks are riddled with bad loans from real estate projects gone sour, and nobody truly knows how bad it is because China is not transparent.  China’s had this problem before with its big four government owned banks and basically did what the US government did by creating an entity to buy up all that bad debt in order to keep the big four’s books squeeky clean. How bad is the real estate and credit bubble in China? Agnes Deng, the portfolio manager at the closed-end Greater China Fund (GCH) run by Baring Asset Management Asia Ltd. in Hong Kong says China’s non-performing loans are actually quite low.  The banking crisis that the bears are forecasting will take China down from its pedastal may never prove valid.

“From where we sit here in Hong Kong, I personally don’t believe there is a credit or asset bubble in China,” Deng told Forbes recently.

“A lot of money has been going into construction and that kind of debt is heavy in the overall banking system. But it is reasonably OK. In terms of property, we don’t believe there is any national bubble for the property sector. We do see it in the first tier cities like Beijing and Shanghai, but notice that the overall demand and economic growth in China has been quite steady over the last many years and that growth will continue to carry out the momentum we have seen in the last two to five years. So we will eventually adjust to some of the oversupply in construction projects in the pipeline,” she says. “I wouldn’t bet on a housing developers crash or a broadbased asset bubble in China. The leadership in Beijing should be able to solve this issue.”

China’s central government has been forcing a slowdown of the national economy. Inflation remains high, mostly due to consumer demand, a stronger currency, higher incomes, and imported inflation from commodities. However, the government has taken a special interest in reducing demand for residential construction and existing properties.

If the government is successful at keeping inflation in check, then China’s growth might not be in the double digits, but investors expect it to remain well above 7%.  Housing will trend higher, but grow below inflation levels of 5.5%.  A gradual appreciation of the currency, the yuan, and higher incomes is making Chinese consumers richer. It’s a homogenous society, so if one Chinese person likes Twinkletoes shoes, then a million more are sure to like it, too, says Deng.

Her $443 million fund is overweight real estate, but underweight financials compared to the benchmark Russell Greater China index. She holds China Construction Bank — their biggest holding currently — and the Industrial and Commerical Bank of China, both state owned. Even though banks are an underweight for the fund, Deng thinks China banks are solid assets for long term investors.

China Construction Bank’s loan to deposit ratio is less than 80%, so it is not leveraged at all, she says. For banks, if you have 10 dollars and lend out 75 cents, you’re conservative. If they have 10 dollars and lend out 100, they’re Goldman Sachs.

The People’s Bank of China has been requiring banks to keep 20% of their reserves in central bank reserves as a guarantee. China’soverall non-performing loans (NPL) is below 2%, even though the market is thinking the numbers are higher because some government development projects have gone sour.  “If you include those projects since the financial crisis of 2008, then the NPL ratio is still going to be below 5%,” she says, cheerleading for China’s financials. “As an aggregate amount, five percent is quite big. Computed with the overall loan book that the China Construction Bank or Chinese banking overall has, then it is really quite small. China’s banking regulators have done a good job getting the financials to deleverage quickly after 2008.”

Deng’s take on China has paid off. The Greater China Fund’s sales growth percentage as of March 31, 2011 was 10% compared to a sell-off in the China fund category averages of 22%. Deng’s fund’s long term earnings percentage is 20.3% compared with 16.3% for the Russell Greater China index and 15.9% for the category average.

Year-to-date, the Greater China Fund has outperformed the iShares FTSE Xinhua China 25 (FXI). Both are down on the year thanks to their real estate and banking positions, but the FTSE China is down 1.7% as of July 31, 2011 and GCH is down 1.1%. Over the last 12 months, GCH has clobbered the FTSE China, up 11.4% to the iShares’ gain of 2.7%. Deng’s fund has even outperformed the Matthews China Fund (MCHFX), up 8.7% and another closed-end competitor from Boston, the China Fund (CHN), which is up 6.3% YTD. Since the fund launched in the early 1990s, its beat its benchmark. It’s up 9.1% as of June 30, 2011, while the benchmark Russell Greater China is down 0.5%.

Besides real estate, the fund is also overweight telecom and technology. On the telecom side, Deng likes China Unicom (CHU) because it is the only wireless mobile provider that uses the iPhone and iPad, and Apple (AAPL) dominates China’s tablet market.

“China Unicom sells iPhones and iPads and that’s a big plus for that stock. China Mobile, China Unicom and China Telecom all use different technology, so Apple is just China Unicom,” she says. “China Mobile is 3G and uses a home grown technology that the overall big brand names do not use. China Mobile ends up losing market share because of that and China Unicom gains market share. We still like China Mobile because it trades at a discount, but China Unicom is more of a growth story and that is the main reason why investors invest in China…for growth.”

On the tech side, it’s SINA Corporation (SINA) all the way. Sina’s an internet and social networking powerhouse that runs the weibo platform, a China microblog that has more users nationwide than Twitter has worldwide.

“China’s internet penetration is still low. There is a long way to grow. Many China internet stocks have been quite expensive, like Tencent Holdings a few years ago it was around $2 to $3 and now its around $140. Baidu (BIDU) has always been expensive, but they just keep reporting amazing earnings with upside and that has them trading at fifty times p/e because they are growing phenomonally.”

Not too long ago, the Chinese government, in its attempt to lend a fig leaf to its offshore political rival, Taiwan, allowed for Chinese nationals to travel to the island. Politically, the permission slip is like Washington letting Americans travel to Cuba and bring back cigars. While Chinese aren’t returning from Taiwan with cigars, they are returning with Taiwan’s signaturepineapple cakes. As a result, says Deng, Pineapple cake sales are up 40% year over year because of China demand. China’s growing relationship with Taiwan is also good for Taipei listed companies.

What’s so great about China is basically what’s been great about China for the last 10 years. When 1% of the population earns enough to buy an automobile and trades in a bicycle for a Buick, it makes China General Motors’ biggest market; it drives the fundamentals behind oil futures over $100 on average in the years ahead. When the same amount are eating more, it drives the price of soybeans as much as the weather and keeps farmers from Iowa to Parana, Brazil with a reliable customer.

The International Monetary Fund expects China to grow around 9.1% in 2011.

 

 

Kenneth Rapoza, Contributor

Covering Brazil, Russia, India & China.

 

http://www.forbes.com/sites/kenrapoza/2011/07/31/whats-so-great-about-china/2/

 

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China Picks From The World’s Largest Money Managers

U.S. listed Chinese equities, as represented by the PowerShares Golden Dragon Halter USX China Portfolio (PGJ) have been in a downturn since April, off by 40% peak-to-nadir, dragged down by weakening fundamentals in the developed economies of the U.S. and Europe, and slowing growth in China. Recently, however, since the beginning of October, most Chinese stocks have staged a strong 25% rebound off of the lows at the end of September. While the short- to intermediate-term outlook is uncertain, the long-term outlook for China and most emerging economies continues to be bullish. As such, we believe that a well diversified portfolio focused on the long-term ought to have some weighting among Chinese equities.

In this article, via an analysis of the investing activities of the world largest fund managers, managing between $100 billion and over a trillion dollars, in China stocks, we aim to wade through the minefield of over 200 Chinese equities, and identify the ones that these mega fund managers are most bullish and bearish about. The list includes prominent managers such as Wellington Management ($1.6 trillion in total assets under management), Vanguard Group ($1.4 trillion), Fidelity Investments ($640 billion), T Rowe Price ($330 billion), and Goldman Sachs Asset Management ($580 billion), among others.

We determined based on our analysis that mega fund managers are bullish on the Chinese companies. During the June quarter, these mega fund managers together added a net $1.39 billion to their $21.06 billion prior quarter position in the group, selling $2.44 billion and buying $3.83 million worth of stocks in the group. While Chinese solar companies were included to determine the overall tone of mega fund managers toward the China group, we excluded describing the investing activities of these mega managers in Chinese solar companies, since they were covered separately in another article that focused on the investing activities of these mega fund managers in the solar sector.

The following are the major (non-solar) China companies that these mega fund managers are most bullish about (see Table):

  • Baidu Inc. (BIDU): Often touted as the Google (GOOG) of China, BIDU is a leading Chinese provider of internet search, targeted online advertising and other internet content services. Mega funds added a net $157 million to their $1.04 billion prior quarter position, and taken together mega funds hold 23.5% of the outstanding shares. The top buyer was T Rowe Price ($324 million), and the top mega fund holders are T Rowe Price ($2.53 billion) and Fidelity Investments ($1.56 billion). Overall, 517 institutions hold 70.7% of BIDU shares, with Baillie Gifford & Co ($3.61 billion) and T Rowe Price being the largest holders with 9.2% and 6.8% of the outstanding shares respectively. We recommended buying BIDU in our coverage of Chinese equities on October 3rd when it traded at $105, identifying it as the best opportunity among Chinese equities; it is now up 35% from that price in the last four weeks.
  • Sina Corp. (SINA): SINA is a Chinese internet portal offering media content and services for China and global Chinese communities. Mega funds added a net $305 million to their $1.46 billion prior quarter position, and taken together mega funds hold 32.3% of the outstanding shares. The top buyers were Capital Research Global Investors ($282 million) and Goldman Sachs Asset Management ($95 million), and the top holders were T Rowe Price ($503 million) and Capital Research Global Investors ($317 million). Overall, 250 institutions hold 72.6% of SINA shares, with T Rowe Price and FIL Ltd. ($364 million) being the largest holders with 7.8% and 6.3% of the outstanding shares respectively. We recommended selling SINA in our coverage of Chinese equities on September 26th when it traded just north of $82; it closed Monday at $81.29 while the average Chinese stock is up 10% during that same period.
  • Youku.com Inc. (YOKU): YOKU, China’s largest video-streaming company, is more popularly known as the YouTube of China. But in reality, it is more a combination of Netflix and YouTube; Netflix, because it offers mostly professionally-generated content licensed from movie studios and TV companies, and YouTube due to its reliance on advertising as a main source of revenue. Mega funds added a net $240 million to their $147 million prior quarter position, and taken together mega funds hold 23.6% of the outstanding shares. The top buyers were Janus Capital Management ($74 million) and T Rowe Price ($65 million). Overall, 134 institutions hold 66.4% of YOKU shares, with Brookside Capital Management ($290 million), Maverick Capital ($201 million) and Marisco Capital Management ($189 million) being the largest holders with 12.1%, 8.4% and 7.9% of the outstanding shares respectively. We turned bearish on YOKU in our coverage on August 15th when it traded at $26; it closed Monday at $21.24 while the average Chinese stock is down about 5% during that same period.
  • Renren Inc. (RENN): RENN, often called the Facebook of China, is a Chinese operator of a social networking platform that enables users to communicate and share information via Renren.com. Mega funds taken together added a new $192 million position during the June quarter, and taken together mega funds hold 10.4% of the outstanding shares. The top buyers were Morgan Stanley ($65 million), Goldman Sachs Asset Management ($48 million) and Fidelity Investments ($46 million). Overall, 73 institutions hold 12.7% of YOKU shares, with General Atlantic LLC ($95 million) and Morgan Stanley being the largest holders with 1.8% and 1.2% of the outstanding shares respectively. We recommended buying RENN in our coverage of Chinese equities on October 3rd when it traded at $4.80s; it closed Monday at $7.04, up 45% from where we recommended it four weeks ago.
  • Focus Media Holdings Ltd. (FMCN): FMCN operates the largest out-of-the-home digital advertising network in China through 131,006 flat-panel and 324,364 poster frame displays. Mega funds added a net $169 million to their $542 million prior quarter position, and taken together mega funds hold 17.9% of the outstanding shares. The top buyers were Fidelity Investments ($155 million) and Capital World Investors ($45 million). Overall, 200 institutions hold 56.6% of FMCN shares, with Fidelity Investments ($274 million) being the largest holder with 7.3% of the outstanding shares. We recommended buying FMCN in our coverage of big movers on October 5th when it traded in the $20 range; it closed Monday at $27.18, up over 35% from where we recommended it four weeks ago.

The following are the major (non-solar) China companies that these mega fund managers are most bearish about (see Table):

  • Sohu.com Inc. (SOHU): SOHU is the third largest internet portal and a leading brand in China. It offers Chinese language web navigational and search capabilities, twelve main content channels, Web-based communications and community services, and a platform for e-commerce services. Mega funds cut a net $139 million from their $714 million prior quarter position, and taken together mega funds hold 24.5% of the outstanding shares. The top sellers were Oppenheimer Funds ($120 million) and Vanguard Group Inc. ($94 million). Overall, 213 institutions hold 65.8% of SOHU shares, with Orbis Holdings Ltd. ($468 million) and Morgan Stanley ($227 million) being the largest holders with 17.7% and 8.6% of the outstanding shares respectively. We recommended buying SOHU in our coverageof Chinese equities on October 3rd when it traded at $47, identifying it as a screaming buy, especially in relation to its peer SINA; it is now up 30% from that price in the last four weeks.
  • E-commerce China Dangdang (DANG): DANG is a Chinese online retailer offering books and other media, personal care and general merchandise via Dangdang.com. Often called the Amazon (AMZN) of China, DANG is the number two e-Commerce player in China, behind TaoBao. Its business model is similar to AMZN except that it employs a courier-based delivery system that collects cash on delivery. Mega funds cut a net $26 million from their $52 million prior quarter position, and taken together mega funds hold 4.6% of the outstanding shares. The top sellers were Fidelity Investments ($16 million) and Wellington Capital Management ($8 million). Overall, 85 institutions hold 12.5% of DANG shares, with Morgan Stanley ($13 million) being the largest holders with 2.3% of the outstanding shares. We recommended buying DANG in our coverage of Chinese equities on October 3rd when it traded at $4.80s; it closed Monday at $6.97, up over 45% from where we recommended it four weeks ago.
  • Chanyou.com Ltd. (CYOU): CYOU is a Chinese provider of free-to-play massively multi-player online role-playing games (MMORPGs), which are interactive online games that can be played simultaneously by various game players. Mega funds cut a net $24 million from their $83 million prior quarter position, and taken together mega funds hold 4.3% of the outstanding shares. The top sellers were Oppenheimer Funds ($9 million) and Barclays Global Investors ($6 million). Overall, 78 institutions hold 14.0% of CYOU shares, with HSBC Holdings ($38 million) being the largest holder with 6.5% of the outstanding shares.
  • Harbin Electric Inc. (HRBN): HRBN is a Chinese manufacturer of electric motors, including industrial rotary, linear, and specialty motors. Mega funds cut a net $25 million from their $56 million prior quarter position, and taken together mega funds hold 4.2% of the outstanding shares. The top sellers were Vanguard Group ($17 million) and Bank of New York Mellon Corp. ($7 million). Overall, 106 institutions hold 35.4% of HRBN shares, with Pentwater Capital Management ($49 million) being the largest holder with 6.9% of the outstanding shares.

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General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

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