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Xinyuan Real Estate Co., Ltd. Message Board

  • hmmm26 hmmm26 Aug 1, 2012 4:52 PM Flag

    Quantifying Chinese Fraud: A Thread You Should Read

    I. Hogging TT's Credit (Again).

    Whenever possible, I like to quantify investment risks.

    A while back, TT and I put together a XIN pricing model through which we ran many different assumptions related to XIN's discounted future earnings, potential real estate bubble risks, and potential earnings miss assumptions. Here, if int: https://docs.google.com/document/d/1QCeO1indASaF7qfE78fbquqiY2v-CTN7PraAMi-NgtQ/edit


    II. Surprising Results.

    I think we were both surprised by the fact that no matter what the assumptions we cranked through the model, it always revealed that the market was pricing in a HUGE fraud risk for XIN, something like 30% to 60%.

    While that still seems too high to me, today I received some sobering data that may indicate why the market's so jumpy.


    III. Woodward and Bernstein, Eat Your Heart Out.

    According to a well placed source (sorry to sound like I'm quoting Deep Throat, but the permission I received made it clear I could reveal the data, but not whether I could reveal the source; I've written back, requesting clarification, but I'm not making this up) -- so, again, according to a well placed source:

    The Big 4 Accounting firms currently audit approximately 118 US listed China stocks. In the last 18 months, they've resigned from 17 others. If we make the (entirely likely) assumption that those resignations were over fraud, it produces the depressing result that 13% of the Big 4's Chinese clients over the last 1.5 years have turned out to be frauds.

    The math on that: 17 / 135 = 12.6%


    IV. 13%? Say It Ain't So.

    With 13% of the Big 4's clients already revealed as frauds, the market is being haunted by the question "is that just the tip of the iceberg?"

    Breakdown, by firm:

    1. D&T. 44 clients. 7 resignations. 14% fraud rate.

    2. PwC. 31 clients. 5 resignations. 16% fraud rate.

    3. KPMG. 25 clients. 3 resignations. 11% fraud rate.

    4. E&Y. 18 clients (including XIN). 2 resignations. 10% fraud rate.

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XIN
2.50+0.20(+8.70%)Dec 19 4:09 PMEST

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