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Baidu, Inc. Message Board

  • hmmm26 hmmm26 Oct 19, 2011 10:00 PM Flag

    Chinese Regulators - Quick Analysis I Hope is Wrong (link)

    First, thanks to citi for finding this huge piece of news. I outline below my initial reactions, which are all negative, so I hope are all wrong. All are invited (nay, begged!) to show many, many errors in the following analysis. Click here to see my hometown newspaper turn traitor: http://www.chicagotribune.com/business/sns-rt-us-china-accountingtre79i164-20111019,0,49420.story

    IMHO, this is terrible news for short term share prices. It implies the Chinese motivation is to make it harder (read: less transparent) for US auditors and investors to get financial information.

    Since the subtext of this whole thing is the D&T/Longtop Financial dispute, here's the quick facts: in May, D&T resigned as Longtop's auditors, claiming Longtop was cooking its books; Longtop maintains their numbers are sound. The SEC's trying to find out who's lying, so it's asked for the financial records from D&T. D&T claims China won't allow them to forward that data to the SEC. The SEC has asked a US court to order D&T to turn over the documents. http://www.sec.gov/news/press/2011/2011-180.htm

    In this article, China appears to be reiterating that it won't allow those documents out of the country for Longtop and, by extention, for any other company, even those not currently alleged to be fraudulent (like Bidu). If that's truly China's intent, 1. How do we verify future revenue and profit numbers for any Chinese company (except just to trust the companies themselves, some of which have already been shown to be cooking their books)? And 2. Wouldn't China be establishing a perverse incentive for Chinese companies that have been accurately reporting their numbers to 'stretch' those numbers in future reporting, since the SEC would no longer command the authority necessary to (get the proper docs) to catch them?

    Here's the rub: we all count on the SEC to be the referee, making sure the companies we buy really have made the revenue/profits/etc. that they claim. This article makes it sound like China's saying "maybe Longtop's real, maybe it's a scam, but we're not going to let the SEC get the documents it needs to find out." And the Chinese demand to the Big 4 to name any other Chinese companies they've sent data to the SEC for makes it sound like any accounting firm that did this might be in trouble with the Chinese govt. That seems to imply that China wants to apply the Longtop prohibition on financial documentation to every Chinese company. In other words, China seems to be creating a situation where we, the investing community, lose our guarantee (the SEC as financial cop) that Chinese numbers are true. If investors can't verify that the documents they're reading are actually true, they're not going to invest further and they're going to sell what they own.

    I hope to heck I'm overreacting, but this news seems like it's going to massacre Bidu's price tomorrow. Agree? (Hopefully) disagree? If it's bad, how bad on the share price, do you figure?

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