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Investing in Chinese ADR, the Good, the Bad and the Ugly!

It’s common knowledge there is extraordinary growth in China. So, it’s not surprising to see many Chinese ADR’s among the leaders of growth stocks in the U.S. market. However, there are more shark infested waters along the shores of these equities, buyer beware!

Image representing Baidu as depicted in CrunchBase
Image via CrunchBase

We all want to find the next BIDU! If you bought BIDU at its IPO price of $27 in August 2005, you’d have a fortune on your hands, despite its recent pull back. It has gained over 4400 percent from its IPO price to the closing price on June 10, 2011. Another recent Chinese ADR winner is LFT (Longtop Financial Technologies) which was an IPO in October 2007. It went south with the Bear Market of 2008, losing more than 70 percent of its value. Yet from its bottom (near the turn-around of the Bear Market), it rose over 300 percent to its all-time high at $42.86. For our last example, we’ll take a look at CCME (China MediaExpress Holdings, Inc.).  CCME began trading on the U.S. markets in December 2009. In 2010 it more than doubled in price, hitting a high of $23.97 in January 2011.

Where are they now? Both LFT and CCME have been delisted from U.S. markets. BIDU, as we all know, is still in the U.S. spotlight as a Market Leader.

What happened? Both LFT and CCME were targets of Blog Attacks, a new phenomenon where sometimes false and misleading information create a lot of negative feelings among investors.

What’s the issue? There are several issues and it would be an oversimplification to point to just one. Since the most damaging blog attacks cite “accounting irregularities” or even outright “fraud,” I’m led to believe the process for Chinese companies to comply with Sarbanes-Oxley accounting rules may not be strictly adhered to.

The underlying message for U.S. investors is this: due diligence is the key to identifying strong fundamental companies. Every company isn’t going to be like the Chinese ADR BIDU!

Emilu Bailes
OptionsANIMAL Instructor

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