I also love finding new stock gems in this space…I’ve had to branch out and make new friends just to expand my networking… Its great when someone else finds something good, does all the DD on it, then recommends it to you. So many bad companies out there, its helpful when you can use other people as filters. Doing it this way, when I do my own DD, i’ve been able to find 1 company I like for every 3 or so i’ve researched. I’m lazy, so that ratio is good for me.

-Fernando

Glen, Fernando, Maestro-
For CYXN, Glen mentions that convertibles didn’t double the shares OS as he originally thought. I’ve looked at the 10Q but I’m not perfectly clear on the actual impact. They needed to do net income of $3M in 07, $4M in 08 and $5M in 09 to be able to convert into 10M shares per year. They made the required net income in 07 & 08 so up to 20M shares could have been converted – I see an increase from 07 to 08 of about 9M shares to 31,186,366 so I assume only another 10M shares may be converted at the end of 09 (though at the 6-mth point, they’ve only made $1.5M net income for 09 and need to make $5M for the year). So we may end up with max 41M shares OS. Is that how you guys see it?

BTW, I ‘ve been in Chinese small-caps for a couple of years now and own many of the same stocks you have on the list. As you stated Fernando, they are a challenge to evaluate but very rewarding. Glen is about the only guy online who specializes in these stocks so your blogs are much appreciated. And the message board comments from the other serious investors are appreciated too – nothing like finding a new lead to do DD on!!

SKBI had two presenters, the first one I found great and the second was decent. He did have a ‘snake oil salesman’ super-polished tone of voice, but I was about 5ft away from him and he came across perfectly fine. It was the best presentation that day at the R&R by far.

JGBO does have that convertible bomb, I wish it did not… I own shares there for the rest of the story, but it is not a huge position.

The way I approach my DD on these China companies is I find the fully-diluted (Warrants, convertibles, common, etc etc) number first thing…Then I look at the rest of the information. Too many times I’ve thought the company was great then found out a hidden little clause in the preferred which threw the investment out the window. Just the other day I had Maj (CEO of GeoInvesting) ask me to take a look at yyin.ob to verify something. Company looked fine until I saw the 10-common-per-PRF information (It was somewhat hidden, you just had the total-face-value of the PRF and the conversion-price…Did not state the conversion ratio anywhere) and suddenly the fully-diluted count jumped from 30M to around 44M. Makes a big difference, huh?

Anyway, if you want to email me sometime I can be reached at fmoraes@nyc.rr.com.

-Fernando

PD: Glenn, here is a beautiful Mexican woman, that saw me watching your YouTube video and wants to meet you. Hey, and she does not know that you are going to be rich some day.

Regarding the DD on these Chinese thanks for the advice. I was watching the R&R presentations and was blown away by JGBO , cash on hand, no debt, low P/E, moat, high double digit growth. Wow, until I got into their 10K and found the convertibles bomb.

And what about the CFOs of these companies. Sometimes it looks like that the only prerequisite is to know English and Chinese. What is the story behind the presenter of LPIH at R&R? I also loved SKBI but the presenter sounded like snake oil salesman. Makes me nervous.

Alot of news on the EROC front since Friday, huh? I’ve seen some of your posts and am not quite that upbeat about the deal… But hey, it does not look like a total disaster either…Although I *hate* buying the subordinate units now when they probably wouldn’t get a penny till 2014+… No big deal either way for us, I guess, given that we bought around the $3 level…Ah well. I think I was the one who pointed out EROC to Glen via email a while ago, he was looking for natural gas exposure.

Regarding the china stocks, we welcome you to the fold…beware, once you go china you don’t go back! Its amazing how many great deals still exist out there, getting companies with huge growth at super-cheap prices, with totally clean balance sheets. I find that american listed China stocks tend to trade at much lower P/E’s than China-Listed China stocks. I believe there is still a *huge* hesitation on the part of american investors in owning China companies, and feel that this bias will lessen in the coming years. That means, even aside from the uplisting+insane growth catalysts, we should experience stable multiple-expansion on many of these stocks…Specially as they grow and get out of the ‘tiny microcap’ category.

One thing you need to be good at, to invest in this sector, is reading SEC filings… Alot of ‘shady’ deals like preferred that convert to 10 common, CEO’s that buy assets from themselves to get more shares, etc etc… If you don’t pay attention, its very easy to be mislead. Given the language problem, the often horrible investor relations, the lack of conference calls on many of them, the lack of transparency in their filings… You need to be able to dedicate the time to call some companies, see their presentations, check the conferences they go to and watch what you can…

So I would call these stocks “High Maintenance”, but definitely worthwhile. For the people who cannot dedicate the time to follow the stocks themselves, I would suggest going with a money-manager like Glen here. At least you get the exposure to the great upside that way. Its too bad Glen isn’t running an ETF which we could all throw money at .

-Fernando

I am new in this site. Crossed paths with Glenn on Twitter when he asked about EROC, realized it was the same guy behind some excellent street.com articles about small cap Chinese that I am reading, and here I am. Just realized that there is a world out there besides CHCG.

Thinking about doing a “Buffett in Korea” with your list. Give me 5,000 of each one.

Regarding Wemu, I still own a small piece of them… But I probably shouldn’t…Opportunity cost, as Glen puts it… I will likely hold till the next quarter report and then get out. The whole solar industry has been going through a rough patch and WEMU has made it abundantly clear that their guidance is more of a ‘wish list’. When you have a backlog that constantly changes, price isn’t fixed, customers don’t have financing in place at all, orders have ‘slippage’, etc… Just not realiable enough for me in an industry with immense competition.

Besides, their orders are not the renewal type, so every year their sales team needs to match and exceed the previous year’s order flow. Too much volatility and risk there for me. Don’t even get me started on them having made a factory, using it at like 25-30% capacity only while still outsourcing most of their production…and now they want to make a new factory 3x as large? Bleh. When I asked the CFO on why the planned expansion, he tells me that they are getting a great deal on the land and in China the land-values appreciate by 20% YoY. I paused at that statement for a little while…Thought about it…Shook my head…and then made the little ‘Is this a land-speculation company’ comment next to WEMU. Somewhat of a joke but land-values really should not be why they are expanding as a solar company.

-Fernando