This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Memo to Chinese CEOs: Knock It Off!

Stocks in this article: PUDA

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Kevin McElroy

NEW YORK ( TheStreet) -- I'm a big believer in the Chinese growth story. As famed commodity investor Jim Rogers says, "The 19th century was the century of the U.K., the 20th century was the century of the U.S., the 21st century is going to be the century of China."

Until recently, one of my favorite ways to play the inevitability of the China growth story was to buy a company called Puda Coal (PUDA).

If you've been reading my letter for very long, you know what's going on with coal in China. Coal-burning power plants produce more than two-thirds of the electricity in China, and a significant portion of that coal has to be imported from places like Australia.

That means that demand for domestic coal production has a margin of safety. For Chinese firms, domestic Chinese coal is cheaper, easier to access and absent of political or regional conflicts or difficulties.

Investigating Chinese Reverse Mergers

I was particularly interested in Puda because the company produces metallurgical or coking coal. This type of coal is vital to the production of steel, so it's vital to the production of high-rises and skyscrapers that seem to be popping up in China today like dandelions after a late-spring rainstorm.

But it appears that at least one executive at Puda may have ripped off American shareholders. A report from the notorious Chinese bear-raider Alfred Little, alleges that Ming Zhao, the co-founder and executive chairman, of Puda "sold half the company and pledged the other half to Chinese ... investors."

I don't know if these allegations are true. And that's part of the problem. If we were talking about an American company, you and I could look up source documentation on the Securities and Exchange Commission Web site or refer to audits from trusted accounting firms. There might be a paper trail worth a darn to inspect. By the way, congratulations to Alfred Little that there's money to be made shorting Chinese companies when their houses aren't in order.

Regardless of whether Mr. Little is correct or not, there needs to be accountability for these firms, and if the SEC can't do it, then the markets will.

That's because we're talking about a Chinese small-cap with one set of books that gets shown to the SEC and maybe another set of books that's shopped around with Chinese authorities, and perhaps a third set of books used internally.

It would be one thing if Puda was the exception, but it seems as though malfeasance from Chinese companies, small-caps especially, is becoming the rule.

With very few exceptions, such as Enron and WorldCom, significant malfeasance at the corporate-financial level is a moot point in the United States.

American chairmen at nearly any public company are so well paid and so focused on profitability, that stealing money or front-running shares just isn't worth the risk.

But unfortunately, you can't say the same thing about many Chinese company chairmen.

For instance, our friend Mr. Ming Zhao only made $26,000 last year, according to SEC filings. That includes compensation in the form of salary, stock and exercised options.

For reference -- and just to pick a random company out of the air -- San Diego-based biotech firm Vical (VICL) is about the same size as Puda, and the CEO Vijay B. Samant made $720,000 in 2009. That's more than Puda's entire board of directors made last year.

We know that $26,000 is not a lot of money in the U.S., and while those dollars might stretch a little bit further in China, it's still a pittance for an executive officer for any publicly traded company.

That's a small part of the problem, of course. The real problem is a lack of transparency -- or rather the illusion of transparency that Chinese executives have figured out how to manipulate to their advantage.

It's not the first time we've encountered this type of obfuscation from Chinese firms. My colleague Tyler Laundon tells me he's run into the same problem, again and again, with firms such as China Green Agriculture (CGA), China Natural Gas (CHNG) and even with another Chinese coal company, L&L Energy (LLEN).

I'm not saying that all of these companies are crooked. I am saying it's really difficult to get an accurate read on these companies just by looking at their "official" filings.

And if there's one thing investors hate more than anything, it's uncertainty. That's reason enough to stay away from Puda today, or to sell your position.

If you're a Chinese CEO and you're reading this, you better make sure your books are not cooked. People like Alfred Little will take you to the cleaners -- and for good reason -- if you're anything but straight with your shareholders. That won't just make it difficult for your firm to access American capital markets, it will make it difficult for any Chinese company to do so.

Oh, and your government will probably execute you when you get caught.

If you have any questions about Puda or any other Chinese company (I hope commodity-related) please drop me a line at editorial@resourceprospector.com.

Kevin McElroy is the editor of Resource Prospector.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs