Chinese Hustle

Scoring

Shares Outstanding

- POSITIVE: less than 30 million shares outstanding (1 Point added)

- NEUTRAL: 30 - 50 million shares outstanding

- NEGATIVE: more than 50 million shares outstanding (1 Point deducted)

New Shares / Dilution (year-ago change)

- POSITIVE: under 10% dilution (1 Point added)

- NEUTRAL: 10% - 30% dilution

- NEGATIVE: over 30% dilution (1 Point deducted)

Cash (including equivalents but excluding restricted cash)

- POSITIVE: more than 30% of current market capitalization (1 Point added)

- NEUTRAL: between 10% and 30% of current market capitalization

- NEGATIVE: less than 10% of current market capitalization (1 Point deducted)

Account Receivables

- POSITIVE: less than 10% of current market capitalization (1 Point added)

- NEUTRAL: between 10% and 30% of current market capitalization

- NEGATIVE: more than 30% of current market capitalization (1 Point deducted)

Account Receivables (Trend)

- POSITIVE: quarterly decrease (1 Point added)

- NEGATIVE: quarterly increase of at least 20% (1 Point deducted)

Long-Term Debt

- POSITIVE: less than 5% of current market capitalization (1 Point added)

- NEUTRAL: between 5% and 20% of current market capitalization

- NEGATIVE: more than 20% of current market capitalization (1 Point deducted)

Revenue Growth (year-ago change)

- POSITIVE: revenue growth of at least 30% (1 Point added)

- NEUTRAL: revenue growth between 0% and 30%

- NEGATIVE: negative revenue growth (1 Point deducted)

Net Income Growth (year-ago change)

- POSITIVE: return to profitability, net income in the year-ago period was negative (2 Points added)

- POSITIVE: net income growth of more than 50% (2 Points added)

- POSITIVE: net income growth between 20% and 50% (1 Point added)

- NEUTRAL: net income growth between 0% and 20%

- NEGATIVE: negative net income growth (1 Point deducted)

EPS Growth (year-ago change)

- POSITIVE: EPS growth of more than 50% (3 Points added)

- POSITIVE: return to profitability, net income in the year-ago period was negative (2 Points added)

- POSITIVE: EPS growth between 30% and 50% (2 Points added)

- POSITIVE: EPS growth between 10% and 30% (1 Point added)

- NEUTRAL: net income growth between 0% and 10%

- NEGATIVE: negative EPS growth (1 Point deducted)

Price/Earnings Ratio (last two quarters)

- POSITIVE: P/E ratio < 6 (3 Points added)

- POSITIVE: P/E ratio < 8 and > 6 (2 Points added)

- POSITIVE: P/E ratio < 10 and > 8 (1 Point added)

- NEUTRAL: P/E ratio < 12 and > 10

- NEGATIVE: P/E ratio > 12 (1 Point deducted)

- NEGATIVE: negative P/E ratio, company is loss-making (2 Points deducted)

Price/Cash Flow Ratio

- POSITIVE: P/CF ratio < 6 (2 Points added)

- POSITIVE: P/CF ratio < 10 and > 6 (1 Point added)

- NEUTRAL: P/CF ratio < 15 and > 10

- NEGATIVE: P/CF ratio > 15 (1 Point deducted)

- NEGATIVE: negative operating cash flow (2 Points deducted)

Price/Sales Ratio (last two quarters)

- POSITIVE: P/S ratio < 1.25 (1 Point added)

- NEUTRAL: P/S ratio between 1.25 and 2.50

- NEGATIVE: P/S ratio > 2.50 (1 Point deducted)

Price/Book Ratio

- POSITIVE: P/B ratio < 1.25 (1 Point added)

- NEUTRAL: P/B ratio between 1.25 and 2.50

- NEGATIVE: P/B ratio > 2.50 (1 Point deducted)

Recent Price

- POSITIVE: current price within 20% of recent high (1 Point added)

- NEGATIVE: current price within 20% of recent low (1 Point deducted)

Forward Estimates

- POSITIVE: Forward P/E ratio < 4 (3 Points added)

- POSITIVE: Forward P/E ratio < 6 and > 4 (2 Points added)

- POSITIVE: Forward P/E ratio < 8 and > 6 (1 Point added)

- NEUTRAL: Forward P/E ratio < 10 and > 8

- NEGATIVE: Forward P/E ratio < 15 and > 10 (1 Point deducted)

- NEGATIVE: Forward P/E ratio > 15 or negative (2 Points deducted)

Auditor

- POSITIVE: Big Four Auditor (2 Points added)

- POSITIVE: Top 10 Auditor and Market Capitalization under $200 million (1 Point added)

- NEGATIVE: Mid-size Auditor (Rank 11-100) and Market Capitalization over $200 million (1 Point deducted)

- NEGATIVE: Unranked Auditor and Market Capitalization under $200 million (1 Point deducted)

- NEGATIVE: Unranked Auditor and Market Capitalization over $200 million (2 Points deducted)

Source: Trading China (defunct), Rames El Desouki, The Traveller Publishing

Safety/Risk Model

Market Segment (Nasdaq, NYSE, Amex, OTC, Pink Sheets)
Type of Going Public (Reverse Merger, IPO, Direct Offering, SPAC, etc.)
IPO Lead Underwriter (if applicable)
Auditor
Auditor History and Trail (Dismissals, Resignations, Engagements)
Effectiveness of Internal Controls (Management Assessment)
Effectiveness of Internal Controls (Auditor Opinion)
Senior Management Changes (past two years)
CFO History and Trail (Dismissals, Resignations, Appointments)
Ownership (Controlling Shareholder)
Analyst Coverage (Quality of Coverage, Backing)
Shareholder Dilution (past 12 months)
Short Interest
Account Receivables (Balance Sheet)
Delinquency with periodical SEC Filings
Reported Corporate Governance Issues (also Trading Halts)
Recent Short Seller Attacks / Reports
Detailed Fraud Accusations

The Safety Score is translated into a Safety Label which spans a range from "Extreme Risk" (Score under 30%), over "High Risk" (30% - 50%), "Moderate Risk" (50% - 75%), "Moderate Safety" (75% - 90%), to "High Safety" (Score over 90%).

Source: Trading China (defunct), Rames El Desouki, The Traveller Publishing

Outcomes

Looking at 89 companies tracked by Trading China (with available statistics) in April 2011, here's where they are roughly 10 years later:

10% (n = 9) received offers
- 50% (n = 5) of which < $10
61% (n = 54) got delisted
29% (n = 26) still trade
- 50% of which < $1
- 8% (n = 2) of which > $5

Source: Original Research

Buyout Discount Examples

Worked Out: CFSG (8.7%), CPC (10.7%), CSR (46.1%), FTLK (8.3%)

Fell Apart: CISG (29%), PUDA (100%)

Lowered Offer: FSIN (109%) [from $11.50 to $9.50]

Source: China Buyout Discounts (Stone Fox Capital on SA)

Some Exceptions

Even with buyout offers, most investors probably still lose money, given the going price when the deals are made. Take for instance CTC, it went private for $0.18 a share on 17-Aug-16, but was trading at $0.05 the day before. A windfall for investors late to the party (or those in the know), yet an almost complete lost for early investors. Other examples include:

Notes

1 Complicated price based on PACT (aka HSFT)

Source: InvestorHub post by Rames on the board 'China Growth Stocks' (no longer online, but similar post exists elsewhere), augmented with original research.

Deals That Fell Through

WH for $3 per share in cash: Delisted on 16-Sep-14, last price was $0.0016 on 09-Jun-16.

JNGW for $2.20 per share in cash: Delisted on 30-Jan-12 (with shareholder expropriation through 2000 to 1, then 1 to 2000 splits), then 1000 to 1 reverse split on 25-Jan-17, last traded on 06-Jul-20 for $0.12.

AMCF for $4.21 per share in cash: Delisted, last trade on 30-Dec-21 for $0.0001.

CADC for $2.65 per share: Ceased trading on 30-Sep-20 at $0.48.

CISG for $19 per share: Halted by exchange, but still trading as FANH.

PUDA for $12 per share: Halted & delisted, stopped trading at $0.0001 on 19-Jan-22.

Source: Impartial Research

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