As part of my due diligence before I buy a company recommended by one of my ports, I came across a company that is in the Russell 3000 and headquartered in Rockville, Maryland called Synutra International, Inc.
Here is a description from their website:
Synutra International, Inc. (Nasdaq: SYUT) is a leading infant formula company in China. It principally produces, markets and sells its products through its operating subsidiaries under the “Shengyuan” or “Synutra” name, together with other complementary brands. It focuses on selling premium infant formula products, which are supplemented by more affordable infant formulas targeting the mass market as well as other nutritional products and ingredients. It sells its products through an extensive nationwide sales and distribution network covering all provinces and provincial-level municipalities in mainland China.
So even though the Russell 3000 is supposed to have US companies in it and the company says they have a US headquarters, they certainly look Chinese to me. The Rockville, MD operation must be a shell company. To try to get rid of it, I added a universe buy rule to filter by country of domicile but it still did not catch it. I now use a restriction list and that did the trick.
Another good reason to look at the port picks before buying. I guess I cannot trust the Russell 3000 universe to filter for Chinese, Russian, etc shell companies - I went to the Russell website and checked the current R3000 constitution list and yes, it was there. I guess they don’t do any real in depth due diligence.
In fact, the most troublesome Chinese companies will pass a county(“us”)=true rule since they are in our market as a result of the reverse merger, where they acquire a US-based corporate shell.
The best way to exclude Chinese companies is to create a list. Start by searching descriptions for the words China and Chinese. Often, Chinese firms will be easy to spot among the results, but in many cases, you’ll need to investigate manually.
Remember what fraud is all about; a deliberate attempt by clever and careful people to conceal. Do not expect to counter it with any sort of simple steps – because perpetrators design their actions in such ways as to dodge simple steps. That means if you want to exclude a large group of potential practitioners, you’ll need to do some serious grunt work. Similarly, if you want to model for earnings quality, expect to take some time to develop a complex model. Simplicity and elegance is not the way to stay ahead of these people. Failing that, you really do need to be serious about diversifying.
Yes, it would be good to have a Forum area where one can comment on these as we find them. I thought of going through the whole R3000 myself but just decided to put on my Restriction Lists (in my Settings) as I come across them. It is a good P123 feature to have this universal filter that works across all custom universes. Nice.
I’ll continue to post in the Forum too.
Hopefully R2G developers act on this so subscribers benefit as well (I use two). it would improve the quality of the R2G.
I’d use that as a starting point only and would still recommend description-text search and elbow grease. the list says it’s of Chinese ADRs, but I see a lot of names there that are not ADRs but regular US listed stock. ADRs may actually be more likely to legit. Most of the problems involve reverse merger situations. I don’t know the company that put the list together (bricadr.com) but it appears that whoever did it might not understand what ADRs are or what the China problem actually is.
As much as I agree that one should be cautious and screen for high quality companies, I don’t understand this perception that chinese or other foreign shell companies are prone to fraud.
Remember Enron who wiped out billions in pension savings? Or Global Crossing and Adelphia Communications, whose CEOs abused as their personal piggy bank to build private gulf courses? All happening in US corporations under the eyes of the SEC…
The problem is that there is effectively no SEC (for guidelines, reporting and enforcement) or Generally Accepted Accounting Principals (GAAP) for countries like China and Russia. You are absolutely right that fraud can happen anywhere and it does. The difference is in the regulatory, standards and enforcement environments. China and Russia, from that perspective, are pre-1900. Very opaque. Caveat emptor on steroids.
I totally agree with davidbv. I made a lot of money in 2009 on small China stocks. I even started a group devoted to them. I sold all of them in Jan. 2010, due to deteriorating technicals. What followed, I could not have foreseen: All but one turned out to be fraudulent!