China Jitters: Macro & Micro
Investors in Chinese stocks were jolted last week by both macro and micro events, including a RINO International sell recommendation.
INVESTORS IN CHINESE STOCKS got spooked last week by events large and small. On a macro scale, government data Thursday showed that China's consumer-price index had jumped 4.4% in October, from the prior-year period. Predictions of inflation-damping moves by the nation's central bank, like an interest-rate hike, seem to have then spurred investors to rake in some winnings from the past few months' run of luck on Chinese bourses. The Shanghai Composite Index slid 5.2% Friday, to 2985, the biggest one-day drop in more than a year. The Hang Seng Index in Hong Kong slipped a couple of percentage points Friday, too.
China stock traders were scared by small things, too. Micro-cap things, in fact. Wednesday, a two-man Hong Kong investment firm called Muddy Waters put out a Strong Sell recommendation on RINO International (ticker: RINO), a Nasdaq-listed maker of pollution-control gear in the northeastern port city of Dalian. The report alleged that RINO's bosses have lied about the company's sales and diverted cash to buy a luxury home in California. By week's end, RINO's stock was some 30% lower, at 11 bucks.
The pall spread over other U.S.-listed China stocks that, like RINO, have arrived on the NYSE and Nasdaq by reverse-merging into an American shell company. That universe of several hundred China reverse-mergers had been recovering from a chill summer punctuated by a sharply critical survey of the stocks in Barron's ("Beware This Chinese Export," Aug. 30). That Barron's story mentioned that RINO had gone through three auditors and four CFOs in four years.
Last week's report by Muddy Waters said regulatory filings in China show RINO reporting $11 million in 2009 revenue, not the $193 million that RINO reports in its filings at the Securities and Exchange Commission. The report said that companies listed as big customers by RINO had told the investment researchers that RINO wasn't their supplier. In a news release, RINO said it was reviewing Muddy Waters' allegations and would respond in its conference call on the September quarter, on Nov. 16.
This is the second time Muddy Waters has stirred China's reverse-merged stocks. "Because of people like Muddy Waters, I'm not inclined to invest in China any longer," grumbles a longtime fan of the reverse-mergers. In July, Muddy Waters alleged that Orient Paper (ONP) overstated its revenue. The papermaker issued a denial and its outside directors commissioned an investigation whose results are expected soon. The paper company's chief executive claimed the Sell recommendation followed his refusal to pay a huge fee demanded by Muddy Waters associates, a charge that the researchers deny.
Carson Block says he started Muddy Waters with factory expert Sean Regan after the pair visited Orient Paper to conduct due diligence for Block's father, Bill Block. The elder Block has a long history of touting terrible stocks like Cott, the 1990s Canadian soft drink disaster, and ACLN, one or the last decade's worst frauds. Companies give him stock for his Strong Buy recommendations. Carson Block was so dismayed by his visit to Orient Paper that he started Muddy Waters, whose name alludes to the Chinese predilection for opacity.
The younger Block says his critical research puts him at odds with his father's optimism. "We have no connection now on a business level," says Carson. "And on a personal level we're both somewhat sad about that."
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