Why I will never invest in China

John Hempton has a classic story of his research on an “online” travel agency.

My rule of “Never invest in a jurisdiction that does not have English as its primary language” holds very, very true. I am sure there are a lot of wildly profitable companies in China, just that you can be absolutely sure that minority shareholders’ interests (i.e. the suckers that buy a few hundred shares to have a “China play”) will never be in alignment with the board of directors or management. In this particular case, UTA looks great on paper, but is likely their accounting and reporting is completely crooked.

In their last 10-K filing, you even had the auditors (a firm I’ve never heard of in New Jersey) saying in their audit letter the following:

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses were identified:

The Company’s policy documentation of all controls identified during their assessment and remediation process was incomplete.

Lack of technical accounting expertise among financial staff regarding US GAAP and the requirements of the PCAOB, and regarding preparation of financial statements.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2009 consolidated financial statements of the Company as of and for the year ended December 31, 2009.

Translation: “We have no idea whether these guys were lying to us when they provided us with alledged ‘proof’ of the revenues, expenses and balance sheet items you see here. Good luck!”

Suffice to say, I wonder if Hempton (who has probably made a small fortune shorting this thing earlier when the stock was trading higher before writing this huge article on the company) will be able to single-handedly get the stock delisted when his 2,200 readers (at least according to Google Reader) eventually hammer the stock down to the zero it probably deserves.

Just for full disclosure, I am not long or short the stock, nor do I plan on trading the stock. Trading from other people’s research is a great way to lose money – capturing real value in the market is done by performing independent research when nobody else is watching.

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