MicroCap Stocks Blog; 'Reverse Course: Chinese OTC BB Stocks'
By Josh Levine
The wave of Chinese stock listings on the U.S. equities markets is one of the big stories in recent years. And like anything in the investment world, there's the good, the bad, and the ugly.
For several reasons, I preferred to spend minimal time researching and analyzing Chinese companies. Rather than devote the time and energy navigating the maze of small firms coming out of China, I believed my resources were better spent on US-based prospects, which are vastly more accessible.
More importantly, although US microcaps are not immune to transparency problems, the Chinese micros present an extra dimension of challenges, where language and accounting often get lost in translation.
The majority of small Chinese companies went public in the U.S. through reverse mergers, with most listing on the OTC Bulletin Board. Indeed, Bloomberg BusinessWeek reports that more than 350 small Chinese companies have listed in the U.S. since 2004 through reverse mergers. By another estimate, more than 600 Chinese companies have taken the plunge altogether.
The sad truth is that few of these companies have succeeded, while legions of so-called experts and consultants have raked in big profits from lining up these transactions. In many cases, these 'advisers' turn a good Chinese company into a failed publicly-traded one through an OTCBB IPO or reverse merger, according to Peter Fuhrman, Chairman and CEO of China First Capital, Ltd.
A recent article in the Wall Street Journal reported: "The SEC has begun a crackdown on 'reverse takeover' market for Chinese companies. Specifically, the SEC’s enforcement and corporation-finance divisions have begun a wide-scale investigation into how networks of accountants, lawyers, and bankers have helped bring scores of Chinese companies onto the U.S. stock markets.”
The share prices of Chinese OTC BB stocks have been crushed as a result of this news and previous chatter about the risks here -- both real and speculative. As Fuhrman points out, much of the negativity is based on misperceptions about this market segment. He says:
"In general, the only American companies that do OTCBB IPOs are the weakest businesses, often with no revenues or profits. When a good Chinese company has an OTCBB IPO, its choice of using that process will always cast large and ineradicable doubts in the mind of US investors. The suspicion is, any Chinese entrepreneur who chooses a reverse merger or OTCBB IPO either has flawed business judgment or plans to defraud his investors. This is why so many of the Chinese companies quoted on the OTCBB companies have microscopic p/e multiples, sometimes less than 1X current year’s earnings."
With values like that, it could be an opportune time to take a serious look at small Chinese stocks!
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MicroCap Investor delves deep into the world of small stocks to identify big winners. Levine targets innovative companies on the path of the new and revolutionary, developing technologies that disrupt entrenched markets to create tremendous value.
About Josh Levine and Levine's MicroCap Investorwww.levinesmicrocapinvestor.com
Josh Levine has 25 years of senior-level experience in analyzing technology trends and investing in top-performing micro- and small-cap stocks. He excels at assessing management teams and evaluating new innovations and their impact on corporate valuations.
In 2002 he joined independent investment-research boutique ChangeWave Research, where he was editor of ChangeWave MicroCap Investor since 2004, becoming Levine's MicroCap Investor in 2010. He has been editor of the flagship ChangeWave Investing since 2007.
Levine is also senior analyst for ChangeWave Research. Through its survey network comprised of 25,000 members, ChangeWave tracks the rate of change in corporate and consumer demand trends and provides the results through an institutional research subscription service. Its macroeconomic research is among the best on Wall Street.
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