The Insight of Short-Sellers’ Hunting, Time for China Concept Stock Bargain-Hunting
In the past ten years, Marcum Bernstein & Pinchuk LLP has evolved from never being interested in China business to being 100% focused on China business. This accounting firm has built up a whole new perception of China with their abundant first-hand experiences.
“As a foreigner, I have been staying in China for a long period of time and I have accumulated rich industry experiences. During these years, I am lucky to have obtained a comprehensive view of China.” Drew Bernstein, co-managing partner of Marcum Bernstein & Pinchuk LLP, was recently interviewed at the Park Hyatt in Beijing, where he spoke with a journalist from China Venture. He deeply analyzed the continuing China concept stock issues and provided several suggestions for how China enterprises can win back the trust of foreign investors.
Yet at the very beginning, this “China expert” was not interested in China at all.
100% China Business
In 1983, Bernstein and others founded Bernstein & Pinchuk LLP. Their clients were mostly based in Europe and Israel and they didn’t particularly intend to explore the market in Asia. In 2000, however, a China based company that was trying to enter the U.S. market approached Bernstein & Pinchuk LLP. Bernstein was not particularly excited about taking this company on as a client. Even when this China based company’s board came to visit the offices of Bernstein & Pinchuk LLP in New York, Bernstein didn’t care to talk much to them.
Bernstein even traveled to China to meet with the China based company, but was still not convinced that Bernstein & Pinchuk LLP would have any long-term business in China. When he was returning back to the U.S., his flight was delayed in Beijing for six hours. He left the airport to take a short tour of Beijing. Bernstein said “at that time I thought that I would never come back to China so I might as well go see the Forbidden City and the Great Wall at least.”
Meanwhile, as China enterprises were developing rapidly, Bernstein realized the huge potential of business in China. In 2003, he started building the firm’s China team and in 2007 Bernstein & Pinchuk LLP opened their first branch office in China. In 2011, to make the team more fully-functional, professional and mature, Bernstein & Pinchuk LLP merged with Marcum LLP, a top 15 accounting firm. The new firm was named Marcum Bernstein & Pinchuk LLP.
“Based on the market situation of the last two years, Chinese companies, especially the public companies, are heavily relying on the work of top accounting firms. Though Bernstein & Pinchuk LLP is a rich and experienced firm, our size is not big enough to meet the public companies’ need of reputation” said Bernstein. “As we all know, the big-four accounting firms are the most famed firms in the industry and their fame is partly built upon their size. We merged with Marcum in 2011 to build up a partnership firm. Marcum is one of the top ten firms in the U.S. especially for SEC related work. We believe this merger will continue to bring our clients great advantages.”
Marcum Bernstein & Pinchuk LLP now has branch offices in Beijing, Shanghai, Guangzhou, and Hangzhou. The firm employs approximately 75 workers in the China region. About 95% of their staff previously worked at a big-four accounting firm for at least three years before joining Marcum Bernstein & Pinchuk LLP.
Bernstein told Chinese Venture’s journalist that now 100% of Marcum Bernstein & Pinchuk LLP’s business is related to China based companies; a huge change considering the firm started with no interest in China business. Of their clients, 25-30 companies have successfully gone public in the international capital markets. “I’ve been working in China for 12 years, I’ve traveled to about 100 cities in China and my wife is also Chinese,” Bernstein said proudly.
Insights of Short-Sellers’ Hunting
Since 2010, China concept stocks have been undergoing the most massive hunting in the U.S. stock market. Even now, these Chinese companies are still trapped in the crisis of confidence.
“Many people think that all of these issues were caused by short-sellers. Yet when we talk about the nature of their hunting, both the short-sellers and the companies are responsible for it,” Bernstein explained. “For Chinese companies, to avoid the attacks from short-sellers, they have to resist the temptation of fictitious financial statements. They should never lie to investors.”
According to Bernstein, the reason why a lot of Chinese companies have been hunted by short sellers is because of their financial fraud and also because of the financial advisors and investment bankers that helped them enter into the U.S. market. “There are some so-called financial consultants that promised to help Chinese companies seeking financing by listing in the U.S. but they didn’t conduct the proper due diligence. They didn’t train and prepare the Chinese companies for going public. These consultants were only interested in making money from the companies. What these consultants did is similar to committing a crime.”
Some intermediary agencies didn’t conduct due diligence when they were helping Chinese companies go public, so now they are unable to verify if their clients capacities are qualified. Additionally, without training, the executives of these China based companies have scarce knowledge of the foreign capital markets in which they now operate. Some Chinese companies also deliberately created false financial statements for going public in the U.S. All of these reasons make Chinese companies vulnerable when the short-sellers start hunting.
The short-sellers usually use two ways to hunt Chinese Concept stock, said Bernstein. “One flaw they are attempting to catch is the company’s financial fraud. The financial fraud may be intentional or it may be due to basic mismanagement of the company. The difference between these two is huge; however, the short-sellers want to blur the difference.”
“The other flaw that short sellers often take advantage of is the lack of experience or poor management of the company. A short-sellers attack is similar to a heart attack in that they both attack suddenly and fiercely. The short-sellers know the company has to make many decisions in a limited amount of time. When the company has insufficient experience, they will probably make wrong decisions. In many cases, if right decisions are made, the company will get through the crisis. If their decisions are wrong, the company will have great difficulties recovering from their mistakes,” said Bernstein.
In June 2010, Orient Paper was accused of financial fraud and was listed on nine charges. As the chairman of Orient Paper’s audit committee, Bernstein directed the first completed independent investigation. The results of the investigation showed that Orient Paper had been falsely accused and the charges against the company were inaccurate. The investigation saved Orient Paper’s reputation and validated the company’s sound financial performance. The total cost of the investigation was $2 million. “If you know about the U.S. market, you’ll know that $2 million is a small amount for this kind of case,” said Bernstein. Not only did Orient Paper save its reputation by undergoing and successfully completing the investigation, Bernstein also won the trust of the board. Now he is one of a limited number of trusted foreigners.
New Strategies to Win Back Trust
The big storm of short-selling in the U.S. market is calming down and some China concept stocks which had financial fraud have already been delisted. Given these changes, the overseas investors are still hesitant about investing in China concept stocks.
“Now, Chinese companies are faced with the problem of winning back the trust from investors. This is similar to a situation where a child continuously lies to his/her parents. The child has to work hard and take many positive steps to win the trust back,” Bernstein said.
According to Bernstein, to be recognized as a good company by investors, firstly the company must have strong management of their cash flow. Secondly, the company should try to avoid VIE structure and get back to a traditional direct shareholding structure. Thirdly, some reputable intermediary agencies are needed. Finding some strategic investors is also helpful also. “For example, a cell phone company getting a $10 million investment from me is different from getting the investment from Samsung. If I invest $10 million in the cell phone company, its share price might go up a little. If Samsung invests $10 million in the same cell phone company, their share price might be doubled,” Bernstein said. The company should also consider distributing a dividend. “Trust cannot be regained by simply doing one thing. The long-term accumulation of small achievements can lead to a bright and positive result.”
Bernstein added that in the foreign capital market, the market capitalizations of many companies are even lower than their net asset. This is a huge investment opportunity for investors. “Now is the right time to go bargain hunting, but many investment institutions, including some hedge funds, do not buy Chinese concept stocks because they haven’t seen the Chinese companies make considerable effort to win their trust,” said Bernstein. “Usually if a Chinese company’s annual EPS is $1.5, its market capitalization should have $15. But now the share price of many Chinese companies is only $2.”
When talking about the specific industries, Bernstein said investors are passionate about high-tech, education and new energy industries.
About Marcum Bernstein & Pinchuk LLP
Marcum Bernstein & Pinchuk (MarcumBP), a PCAOB-registered firm, provides a full range of audit and assurance, tax and transaction advisory services for clients in a variety of industries throughout the world. With offices in New York, Beijing, Guangzhou, Shanghai and Hangzhou, MarcumBP provides the expertise, cultural understanding and support needed to efficiently serve and advise our clients. MarcumBP currently provides services to over 30 clients in the China market.
About Marcum LLP
Marcum LLP is one of the largest independent public accounting and advisory services firms in the nation. Ranked among the top 15 firms, Marcum LLP offers the resources of 1,000 professionals, including over 125 partners, in more than 20 offices throughout New York, New Jersey, Massachusetts, Connecticut, Pennsylvania, California, Florida, Grand Cayman and China. Headquartered in New York City, the Firm’s presence runs deep with full-service offices strategically located in major business markets. Marcum is a member of the Marcum Group, a family of organizations providing a comprehensive range of professional services including accounting and advisory, technology solutions, wealth management, and executive and professional recruiting. These organizations include Marcum LLP; Marcum Bernstein & Pinchuk LLP; MarcumBuchanan Associates LLC; Marcum Cronus Partners LLC; Marcum Financial Services LLC; Marcum Search LLC; and Marcum Technology LLC.