How to Detect Problematic Chinese Companies

There are many ways to detect problematic Chinese companies that are listed on China's domestic stock exchange or overseas markets.  Here, we only list a few of the ways in which savvy investors can detect and research companies with potential financial scandals.

1. When visiting the company's website, the only major information present is "Investor's Relations"

Rationale: If a company is solid and has potential, the most important image that the company should present will be the company's products, and information about the company's products.  Companies that place "Investor's Relations" as their most important information are aimed at trapping investors' money into companies' managements' pockets.

2. When asking people in China regarding the products that the company develops or produces, very few people have ever heard of them.

Rationale: Many Chinese companies' managers or public relation departments have far more imagination than the American counterparts (in a negative connotation).  They "invent" ideas of potential products that would appeal investors, and make it appear real in their annual reports or company's descriptions.  Investors should verify the products in different cities in China, to see if the products are present, or if local people have ever heard of them.

3. Companies that constantly increase or sell additional shares to investors for the purpose of "expansion".

Rationale: Why dilute existing shares at the cost of present investors instead of borrowing from banks at low interest rates?  Companies that frequently dilute existing shares by selling additional shares more than twice in three years should be marked clearly as such.

4. Companies that sell products in China, but only has an English website serving investors.

Rationale: Why does the company do this?  Why is there no information about the companies' products or services in the market that they are trying to sell?  It might be obvious, but some companies still don't realize that investors might wonder the underlying purpose of the website.

There, of course, are other ways to detect problematic Chinese companies.  Abacus Consulting Services chooses not to reveal them, as average investors have no means to investigate even if the methods were revealed.  Our China Investment Newsletter has more information regarding such.