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.
Oh, I almost forgot: I received permission over the weekend to post a source for the numbers I originally posted without one. You'll notice the numbers in the Reuters article are identical to those I posted. Here's the Google search list. The "Update 2" version of the story's the most complete: https://www.google.com/#hl=en&sclient=psy-ab&q=reuters+U.S.+probe+into+Chinese+client+deals+fresh+challenge+to+Deloitte&oq=reuters+U.S.+probe+into+Chinese+client+deals+fresh+challenge+to+Deloitte&gs_l=hp.3...1891.5473.0.67184.108.40.206.220.127.116.117.888.4j2j0j1.7.0...0.0...1c.KbKH98IBHAg&pbx=1&bav=on.2,or.r_gc.r_pw.r_qf.&fp=4a9f891eb1c200d7&biw=1280&bih=635
I also received permission to finally outright report what I'd previously only been allowed to hint at: that the word on the street is that what Gurnee was really doing during his so-called "road show" in the US was giving his deposition on Longtop to the SEC in Washington.
Unlike the Big 4 data, that one's only a rumor, but my source is the same source that first informed me about Gurnee and Paluschuk getting their immunity-for-testimony deals.
Still, it's hard to imagine that his deposition could've taken a full three weeks, so it's my feeling he probably did tack on some XIN related, US stuff (DD on a building purchase, perhaps?).
@harley, I found that article for you. In the reply on this thread dated August 6, you'll find a LINK to the article that gives the Big 4 accounting firms' Chinese fraud rates at an aggregated 13%.
Each of the Big 4's stats are laid out there (also in the top post to this thread), if int.
Totally agree, hmmmm., getting harder and harder to find someone not "zapped" by a Chinese company these days. Gosh, let's hope XIN does not turn out to be another. I guess I am just venting, but all the tea leaves here smell pretty bad what with this epic undervaluation. The only thing that lets me sleep at night here is the dividend.
So far you have found one company on the NYSE that was a fraud. I don't know whether it was a reverse merger or not. I have not turned ANYTHING on its head. I have simply made a flat out statement that I don't believe you can find significant fraud on the NYSE among Chinese companies. So far you have not and I doubt very much that you will.
At this point, I'm not sure. That would assume that the rate of delistings is linear in nature, and I don't think that is the case. The surge in the first half of this year could be from effort that took place last year.
I think what would be more telling would be to understand the "work in process" being done on companies not currently delisted. In other words, the 19 from this year could be from a pool that started last year, but there could be little or no remaining companies that are in process to be delisted this year. Not sure if one can find that or not...probably pretty confidential.
Hey, congratulations! Tell him that you and I are doing everything in our power to make sure he'll have a nice, snug safety net in life.
That pink sheet thing's pretty meaningless. They have virtually no reporting requirements down there and actually no audited financial statement requirements, so frauds can linger for a long time. My own costly nightmare, CCME, still trades down there for a few pennies a share.
That is exactly what we are looking for. And yes, I would agree that some of #3 could overlap, but there would be no overlap on #1 and #2.
I think we also may want to differentiate the ones that were delisted AND had the auditor resign vs. just delisting (driven by SEC or local exchange) vs. those that had auditors resign, but have not delisted as yet.
What I found interesting is that in many of these cases, the companies they are saying are delisted still show up on the pink sheets.
Anyway, I understand about the time. We have day jobs to do. Luckily, today was a bit easier for me. I will be tied up tonight visiting my new grandson, so I will not have a lot of time.