Chinese Reverse Merger Stocks Walloped

"People are always asking me where the outlook is good, but that's the wrong question. The right question is: Where is the outlook most miserable?"
- John Templeton

Few sectors are as negative as North American-listed Chinese stocks right now - particularly, the US-listed Chinese reverse mergers (CRM).

A reverse merger is a non-traditional way of attaining the listed status. The strategy is simple: A private operating company is merged with a shell public company so that the private firm becomes a public entity without an IPO. This method is favoured by many Chinese firms because the process is less rigorous, cheaper, and quicker. The last few years saw a number of such Chinese reverse mergers (CRMs) in the States, partly due to the strong investor demand.

But following the revelations of a number of fraudulent CRMs, the entire CRM sector collapsed. The Bloomberg Chinese Reverse Mergers Index, for example, plunged 60% since December last year (Figure 1). John Paulson, for example, lost half a billion dollars in Sino Forest, the Chinese timber firm (Figure 2). Understandably, many investors are now adopting the "sell first, ask later" strategy. In a nutshell, the following reasons prompted investors to flee the sector:

David Fuller's view This report may appeal to contrarian thinkers.

If all of these CRM stocks were launched with fraudulent intent, it will be the biggest scam since, well… Wall Street banks a few years ago. Dr Wong has singled out those which purportedly have: 1) Good cash balances; 2) Lowe debt levels, and 3) Reasonable profitability.