By Perry Wu
Sometimes it's just too obvious. While finding the strengths and weaknesses of listed companies often takes a lot of digging, sometimes you run across bad companies that are just caricatures of themselves. You have to laugh when you see their balance sheets. An easy example of this is how some Chinese-related companies try to change their names in the hopes that this will change the perspective of investors.
One of the earliest and most humorous cases was China Tire in the 1990s. China Tire originally debuted in 1994 as one of the first PRC plays on the New York Stock Exchange. But the late 1990s was all about tech and what could be more "old-economy" than selling tires? So faced with an ever-declining stock price in the late 1990s–which was 100% related to the poor management of the company–the company figured it was because it wasn't getting in on the tech boom. Without changing any of its business, the company henceforth became known as "China Tire e-Commerce Limited". But even this wasn't enough to fool even the gullible tech investors–even Mary Meeker–of that time. "China Tire e-Commerce Limited" has now virtually vanished into oblivion.
Now enter a new breed of companies that are trying to cash in on the China technology boom. An obvious example, merely by name, is called "Sino Technology Investments Company Limited" ("Sino Tech") and has been listed in Hong Kong since 2002. This company purportedly adds value by focusing on technology investments in China.
Sino Tech is a classic example of a public company formed merely to benefit the interests of the company's founders and not any other shareholders. Such companies are little more than thinly-veiled attempts to transfer other people's money into the pockets of the company's executives. Oh, but you can't make it too obvious. That would be illegal. What's legal though is to take the money and gradually, by using some surefire techniques, have the cash in a company's coffers gradually dissipate into the executives' pockets. Sure the company's stock price will decrease, but in the meantime the directors and executives make out very well.
If this is something you were thinking of doing, Sino Tech offers some step-by-step pointers you can use as a how-to guide:
Use your company's money to invest in businesses that have no connection to each other. This will leave investors too confused to know what's going on.
Sino Tech's major investments include Jinan Lugu, a biopharmaceuticals company, SNG Hong Kong Limited, an Internet games company, and King Tiger Technology Company Limited, a manufacturer of solder balls. Check out that synergy!
Do complicated transactions involving financial instruments that can obscure the fact that the junk companies you are acquiring don't have real assets to offer you.
Sino Tech acquired a convertible loan note issued by a BVI-incorporated company, China Ibonline, that is itself involved in investment holding. China Ibonline is then supposed to acquire another company once its restructuring is complete, but of course the restructuring has not been completed. Upon maturity of the note–well, you get the picture.
The net result is that China Ibonline already owed Sino Tech HK$556,474 of interest at December 31, 2003 but of course seems to have paid none of it and Sino Tech will probably see none of the interest (there is merely an interest receivable on Sino Tech's balance sheet for HK$644,000 which almost certainly represents this unpaid amount).
Have your company pay management fees to companies that are affiliated with the directors so the directors can enrich themselves at the company's expense.
Sino Tech pays annual management fees to both Hua Yu Investment Limited and China Everbright Securities, both related parties to the directors.
Hire a local auditor, not the Big 4 auditors, who will be much more forgiving of your creative accounting:
Sino Tech hired the local Hong Kong firm of Graham H.Y. Chan to give it a clean opinion on its financial reporting. While Graham H.Y. Chan seems to be a great company that provides great services, international investors can't rely on the same lofty principles that (supposedly) run the large multinational accounting firms.
These are just some ways of doing it. If Sino Tech still doesn't interest you, not to worry. There is no shortage of China tech-related companies that have sprung up in recent years that can show you other ways. And with a new wave of MIT, Stanford, and Harvard MBAs coming back to China to invest in technology, we're bound to see more tech junk business comedy from the halls of Ivy. Good luck to you all.
About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.