I suspect PWC is waiting for the forensic audit to be completed. Although the general public, including many juries in accounting malpractice cases, believe a standard financial audit will detect fraud, auditors disclaim many fraud detection issues in their opinions. This is due to many hard lessons learned by the accounting profession that a well concealed management fraud will likely not be detected by a standard financial audit.
The special audit commissioned by NQ is forensic in nature and should be specifically targeted to address the fraud issues mentioned in the MW report. This is a more detailed review and consequently takes more time. Also, the report is independent so NQ can not call S&S and DT every week and ask is the audit is completed. This would compromise the independence of the auditors, and, of course, trigger an allegation by MW that NQ did not let the special auditors do their job by truncating the review period.
Bottom line, I'm pretty sure PW's risk management department is telling the audit partner to wait as long as possible to issue this year's report, hopefully after the special audit is completed. The last thing PW wants is to issue a clean audit opinion and then have the special report contradict this opinion. I should emphasize that I'm not suggesting the special audit will find anything wrong with NQ. The only folks who can answer that issue are the special auditors. However, from PW's perspective, they are better off reviewing this report if time allows before issuing the audit report.
Time for management to follow up on the quote below. If management thought the company was a good buy at $6.69, they should be salivating at the chance to buy shares at $5.38. Plenty of cash on the balance sheet. If you want to see shorts cover quickly, just announce a buy back commencing immediately and YONG will be back to $6 in no time and start to "maximize value".
"The Board of Directors and management team look forward to working closely together to explore all appropriate opportunities to maximize value for all of our stockholders."
I'm not a subscriber to Benzinga but this came across the wires on my TD account. Assuming this is true, even by the low standards of short hit pieces on Chinese companies, after the Nasdaq halt and subsequent compliance by YONG, preparation and approval of the proxy by the SEC and a real offer at $6.69, this hit piece seems a bit far fetched. The best thing YONG can do at this point is getting their F.S. together promptly, release earnings and schedule their conference call. Management has done enough damage to shareholders the past few quarters. Time to get down to business.
*BZ: Hearing Negative Piece from Prescience Point Out on Yongye (Benzinga)
Good point and a major consideration of mine in staying long today. My hope is Wu and partners take the high road, recognize the message from the vote, and get together and offer $7+ for the company. I would have been happy with $6.69 based on my entry point, but anticipated the stock would not get flushed too badly if the vote failed. At this point, the potential rewards still outweigh the risks I discussed, but I recognize those risks.
I'm familiar with the Chinese discount, but many investors only consider the possibility of "cooked books" when applying the discount (which I don't believe is the case with Yong). Many investors ignore or underestimate the legal risks of doing business in China. Both the VIE and JV structure present that risk not to mention wild cards like CTB's scenario. Yong is an attractive stock based on valuation and growth prospects, but the risks, atypical with most U.S. based stocks, should not be underestimated.That is the gist of my point.
Actually it is an appropriate day in view of the news. I'm assuming YU is not too happy about this result and is weighing his options. He can take the high road and offer more money if he wants to buy the company, or the low road as discussed in my previous memo. Or he can do nothing and just run the company. MS investment in Yong is a vote of confidence, but if YU decides to go rogue, they will be in the same boat as everyone else.
The CTB deal had all the big banks lined up for financing and a lot of the big arb hedgeys in the deal. They all got steamrolled when the deal went South with implicit PRC authority.
Yu can shift assets between companies to his benefit. If he is tight with PRC authorities, they will not intervene. Investors in YONG might want to take a look at CTB. A Chinese sub, majority owned by CTB, single handedly scuttled CTB acquisition by Apollo by locking CTB out of their own plant in China. PRC stood by while all this happened because the CTB's Chinese sub's CEO's was tight with local PRC authorities. Now CTB is negotiating with the sub's CEO to buyout their Chinese facility. A clear victory for the lawless crowd in China.
I'm long YONG so I'm hoping Yu continues to operate the business under Western legal norms. My only point is that he doesn't necessarily have to do so, and the PRC is still the wild west when it comes to legal remedies. Also, the SEC will have no interest in investigating this issue. It is fully disclosed in the annual financials.
The no vote crowd celebrating victory today, might want to read and understand Yong's corporate structure and jurisdiction for any disputes involving this structure (see below). Hopefully, Yong will continue to operate without conflict of interest, but if Mr. Wu decides otherwise, this matter will be adjudicated in the PRC not the U.S.
"All of our operations are conducted through Yongye Nongfeng, and its 100% owned subsidiary Yongye Fumin. Pursuant to the terms of the CJV Agreement, we are entitled to 95% of the profits of Yongye Nongfeng and Inner Mongolia Yongye is entitled to 5%. Zishen Wu, our chairman, president and chief executive officer, owns 95.0% of the outstanding equity interests of Inner Mongolia Yongye and, therefore, is entitled to a portion of the profits of Yongye Nongfeng that are attributed to Inner Mongolia Yongye. In addition, Mr. Wu and Inner Mongolia Yongye are parties to an employment agreement, pursuant to which Mr. Wu is employed as chairman and chief executive officer of Inner Mongolia Yongye……"
"We rely on the cooperative joint venture contract with Inner Mongolia Yongye to operate our business. If Inner Mongolia Yongye fails to perform its obligations under the cooperative joint venture contract, we may have to incur substantial costs and resources to enforce such arrangements and rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief and damages, and we cannot assure you that such remedies would be effective. Accordingly, it may be difficult for us to change our corporate structure or to bring claims against Inner Mongolia Yongye if it does not perform its obligations under the cooperative joint venture contract.
The cooperative joint venture contract is governed under PRC law. Accordingly, this agreement would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal
I cancelled my Barron's on-line subscription based on the KMI story. I welcome good independent research even if it is contrary to my position in a stock, but the Barron's article on KMI was lazy journalism at best and agenda journalism at worst. Both S&P and Morningstar, two independent well known rating services, have buy ratings on KMI with $39 and $40 price targets. No mention of these entities in the article. Instead, we get Hedgeye as the primary source of opinion on KMI. Similarly, we get negative analyst comments from MS and Jeffries, but no mention of Credit Suisse which labeled KMI "One of the most undervalued GP's" when KMI was at $34.32. The real clincher was putting a six month old story, fully responded to by KMI, on the cover of Barron's as if it were breaking news.
The only language Dow Jones understands is voting with your feet and $'s. To that end, a Dow Jones representative got back to me shortly after my note to Barrons looking for my feedback on Barrons. Suffice to say, I gave the representative plenty of opinions on this matter.
My experience is the same as your experience. Most of my investments are in merger arbitrage situations. I have received about a half dozen notices after the merger closes that plaintiffs' counsel received additional disclosure from the company as consideration for dismissing the class action. Of course, there is also disclosure that plaintiffs' counsel received legal fees as additional consideration for resolving the matter. I have never received a penny in compensation as a shareholder, and I am not looking for any additional compensation from these so-called "shareholder rights protectors".
Some have argued against purchasing the warrants and instead purchasing the JAN 16 options currently selling for around $1.40. You also could purchase KMI stock outright and receive the dividend. However, the warrants expire May 25, 2017, they have much greater liquidity than options (over 1 million traded today for example) KMI is buying back warrants along with KMI stock and the warrants give me a lot more leverage compared to KMI stock. After considering all of the above, the extra $1.10 for the warrants seems like a better deal than the options and the $2.50 warrant price gives me much more leverage than a $34 stock purchase. I own a lot of warrants from the El Paso deal and I recently purchased some more on the dip. Barring a market meltdown, and considering projects in the pipeline, KMI should be able to at least move $9 in the next 3 years and 3 months.
I suspect someone is doing a complete claim file audit to determine if any more case reserve strengthening is necessary. These take time, but is a lot more accurate than actuarial projections. Anyone that has worked in the P&C business knows actuarial projections are almost always wrong by a wide margin and the error is typically biased toward under reserving as opposed to over reserving for losses. I doubt a buyer would finalize a deal without an independent review of likely claim development.
Audits by the Big Four in China are not meaningless. The Big Four used the same audit procedures in China that they do world wide. The dispute is not about the quality of Big Four audit work. It is about what auditors must disclose to the SEC when it is investigating a Chinese firm while still complying with Chinese law.
"Elliot, an SEC judge who operates independently, sided with the SEC and said the companies "willfully" failed to give U.S. regulators the audit work papers of certain Chinese companies under investigation for accounting fraud. Auditors have refused to turn over such papers for fear of violating Chinese secrecy laws. They argue that it is up to Washington and Beijing to resolve the dispute."
Currently, if any Big Four firm turned over documents guarded by Chinese secrecy laws, the head of the firm's Chinese office would be arrested. Suffice to say, you do not want to get arrested in China. It should also be noted, this decision was made by an SEC ALJ. The ALJ's are the busboys of the judiciary. They set the table for real judges. As noted in the article, the decision has no immediate effect and the appeal will take years. I suspect most folks trading NQ will be out of this holding well before a final decision is rendered.
"The decision is not expected to be disruptive to U.S.-listed Chinese companies relying on these firms to review their 2013 books as the ruling does not go into immediate effect. However, if the firms are unsuccessful in their appeal, which could last years, then companies would need to find a new auditor during the suspension period or else be unable to file accounts, a move likely to see their shares suspended."
While it is true MS can buy or sell shares when they please, MS has been a strategic investment partner in China for the past 20 years. MS has acted as M&A adviser and M&A fund raiser for several go private transactions in China. Typically when they take a position in a Chinese company, they are looking at much fore than a "quick buck" in that company. It would certainly not be surprising if, after the audit report, NQ goes private, especially at current, still depressed pricing, when compared to historical price averages.
"In 1993, Morgan Stanley was one of the first western investment banks to establish a presence in China. Two years later, the Firm co-founded China International Capital Corporation, the first Sino-foreign securities JV in China, together with China Construction Bank. In 2006, Morgan Stanley became the first foreign bank to own a wholly-owned commercial banking license in China, now called Morgan Stanley Bank International (China). In 2008, the Firm announced the formation of a trust joint venture, Hangzhou Industrial and Commercial Trust. In the same year, Morgan Stanley partnered with Huaxin Securities to jointly invest into a fund management company, Morgan Stanley Huaxin Fund Management Company. In addition, Morgan Stanley is active in other China-related businesses, including M&A advisory, offshore capital raising, fixed income and merchant banking."