Glaucus Research: "West China Cement is a Blatant Fraud"
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"We believe that West China Cement Limited ("WCC" or the "Company") is a blatant fraud," starts off Glaucus Research with its report on the company and accompanying sell recommendation for investors.
Glaucus Research is a company dedicated to ferreting out fraud at Chinese companies, which it does well. As an example, it issued a sell recommendation in late April 2011 for Gulf Resources when it was trading at over $6 a share with a target price of $0.00 (yes, zero). Gulf Resources is now selling for around $1.
Utilizing this research and the approach of Glaucus Research are tools that investors should utilize for profit regarding China. These are appropriate not only for selling Chinese stocks, but in buying shares of American companies doing business in the People's Republic. The China market is the focus of economic growth in the future for major American companies such as Apple (NASDAQ: AAPL), Burger King Worldwide (NYSE: BKW), Caterpillar (NYSE: CAT), and Yum! Brands (NYSE: YUM).
For future growth in China, Apple is going to have to rely more on China Mobile (NYSE: CHL). China Mobile is already the world's largest mobile phone company with over 1 billion subscribers. Beijing in not going to allow access to the most profitable mobile phone market in the world without its companies benefiting as much as possible.
The same holds true for the expansion plans of Burger King, Caterpillar and Yum! Brands in the People's Republic. Burger King is planning on building 1,000 new restaurants in China. Caterpillar owns a number of facilities in the country and is developing more. For Yum! Brands, the owner and operator of KFCs and Taco Bells, its units in China are, by far, the most profitable. As such, the business operations of Yum! Brands for the future entail the opening of many new restaurants in China.
The mission statement of Glaucus Research is dedicated, in part, as, "We believe that the temptation of public capital has lured disreputable management teams and over-zealous brokers who seek to take advantage of unsuspecting investors and their appetite for seemingly hot stocks."
It is not just "hot stocks" from China. The recent Bloomberg Businessweek carries an article on Chinese computer operations, "Hackers Linked to China’s Army Seen From EU to D.C.," that sought information to gain business profits from Euro Zone debt negotiations and corporate espionage activities. According to the Bloomberg Businessweek piece, the hackers from China "...take seismic maps charting oil reserves; from patent law firms, clients' trade secrets; from investment banks, market analysis that might affect the global ventures of state-owned companies. Drugmakers and tech companies are also targets."
The activities are not just limited to fraudulent or bogus activities, either. Recently, China attempted to abrogate shipping contracts. Even the most sophisticated of investors and the most successful fall victim. Hedge fund manager John Paulson, who made billions shorting the United States housing market, lost hundreds of millions that was invested in Sino Forest.
Government data cannot be trusted. Since Beijing controls the great majority of Chinese companies, that means corporate financials are suspect. A Chinese report revealed that 89 percent of state-owned enterprises fabricated their incomes and expenditures. Gordon Chang, author of The Coming Chinese Collapse, claimed in his book that the manipulation of data by Beijing will result in severe economic consequences.
If investing in individual stocks, Jesper Madigan, manager of several Asian income funds, for the Mathews group, points out that none of the more than 20 Chinese companies found to be fraudulent paid a dividend. A dividend payment cannot be faked: the check either goes out in the mail or its does not. As Madigan also points out, a solid dividend payment not only reveals sound company management, but also respect for the rights of minority shareholders (i.e., individual investors).
For the American companies that are counting on the Chinese market for much of the future growth, there is no reason to avoid Apple, Burger King, Caterpillar or Yum! Brands. All are above reproach. But do not count on the China market to provide strong economic growth well into the future that is unaltered. Inevitably, there will be "bumps in the road." There is plenty of precedent to indicate that eventually that this will be directed towards the Chinese partners rather than the American shareholders.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and China Mobile. Motley Fool newsletter services recommend Apple, Burger King Worldwide, China Mobile, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.