6 Tips To Avoid Investing in Fraudulent Chinese Stock

The recent accounting scandal at Chinese software company Longtop (NASDAQ: LFT), which hoodwinked even its blue-chip underwriters, causing its auditor Deloitte Touche Tohmatsu to resign (see Reuters’ report on the incident), has highlighted the enormous dangers inherent in the recent craze for cashing-in on China’s ongoing IPO boom.

It’s not just Longtop, but a whole host of other firms who are suspected of bad accounting practices, which leave their IPOs and valuations on very thin ice. The proverbial brown stuff has hit the fan already for two Chinese firms – Shengdatech, and China MediaExpress – who have been delisted from Nasdaq, and are now under US legal investigation for misleading investors.

So, for sage advice on how to spot some warning signs that the Chinese stock you’re eyeing might be full of hot air, here’s a list of five warning signs from iChinaStock.com, and a sixth word of wisdom added by experienced US-China businessman and analyst Bill Bishop:

#1 Over-the-Counter Bulletin Board Transfer, or other forms of back-door listing
– which could then be concealed in their introduction.

#2 Companies whose names start with “China”
– because this acquires proper State approval, and so a grand-sounding “China la-la-la” name is often fake.

#3 Products are sold in China, but Chinese-language information is very limited
– so, if your Chinese contacts have never heard of the company, be very skeptical.

#4 The business defies common sense
– with especial regards to the company’s claims, relative to, say, their HQ’s location or their competitor’s market share.

#5 The underwriter, audit firm and accounting firm are also an important consideration
– and iChinaStock notes that Deloitte has been burned three whole times this year by fraudulent Chinese firms.

#6 The CFO does not live in the same city as corporate HQ and is not a regular presence there
– as seen in the Longtop scandal, where the CFO was believed to mostly reside in Canada, not China.

For the full lowdown on each of the six tips, with more critical details, head to the two links in the ‘sources’ info, below.

Sources: iChinaStock’s article, which details 5 key warning signs; and analyst Bill Bishop’s insightful supplement to that, on his Digicha site.