Glen Doth Know

First, you get an "A" for coming up with the answers. I am sure that was not fun. My comments, in red, below. Bob
I don't pull any punches, the comments are meant to be constructive. I am sure you will take them that way. Bob

On Sat, May 9, 2009 at 10:28 AM , Bradford, Glen Richard wrote:

Here goes with the answers. Looks like I might have bagged a loser in disguise.

You will look like a prudent and thoughtful person if you generate a cautionary note , which says that you have
discovered what appear to be areas which deserve to be explored in more detail, and will let everyone know if you can recomment the stock, in the future. No need to go any farther. If you choose to exit your position, I think that should be disclosed. Bob.


Glen

From: Bob B
Sent: Thursday, May 07, 2009 3:01 PM
To: Bradford, Glen
Subject: RE: CNOA book value, "10 Best Chinese"

Glen,

These are not rhetorical questions, I really would like a response. You are dealing with other people's money here.
A one word answer on each will be appreciated.

Did you know that China Organic financed approx 100% of the Bellissimo aquisition cost? Off hand, No. That is what the internet is for. Google Bellissimo Vinyard and you would have come up with the sales price, and the terms. This would fall in the category of "you should have known."
Did you know that 50% of the $14 M cost was allocated to land, 50% to high end residences? Off hand, No. I found that in the SEC filings.
Did you know that 10 months after acquisition, their FS carries the California Multi-Million housing category assets "At Cost" and reflects no significant impairment of the asset? I assume that this vineyard is worth significantly less than they paid for it, maybe worth $1M. The problem may lie in the vinyard, but it DEFINATELY exists with the housing. California Res Market is rat shit, especially in high end homes, they state $7M of improvements, which is the housing, the earlier buyer folded up, etc, etc. We can figure out a reasonable value on the vinyard portion of the asset a lot easier than the res portion. UNtil we know the history of the property (which is required by USPAP) we are flying blind.
Did you know that FASB requires an asset impairment to be addressed? Yes. Excellent.
Did you know that a US based financial consultant who was taken on specifically to assist with accounting deficciencies for Sorbanes-Oxley purposes has severed his relationship with the firm? I believe that was what the lawsuit was about.
Did you know of the two directors resignations of this week? Nope, haven’t been able to keep up. But now that I know this, I’m going to act accordingly. That was real late-breaking news. A reasonable person would realize that info was probably not in the system when you were forming your opinion.
Did you know there was an appraisal of the property? I did not. If you found that they were financed by a Life Insurance Co, and you had experience in Deeds of Trust, FIRREA, etc, you would know that Life cos always require commercial appraisals. So you're learning. Now you know, and you will never forget it.

Glenn, I am not trying to bust your chops. I don't want you to become a legend for the wrong reasons!
I am trying to understand what you knew when you wrote your article. In my life experience, at the time you submitted your article, either
1. you knew some of these facts, or 2. you should have known, or 3. they are new,breaking news.
Nobody should think poorly of you if you disclosed more.

Bob
PS I got new info of MAIs, there are 5 in China, if you include Hong Kong.
================================================

On Thu, May 7, 2009 at 7:35 AM , Bradford, Glen Richard wrote:

> Yep,
>
> Was aware of the lawsuit. Makes things interesting.
>
> I'll probably revisit my investment thesis this weekend to look for more cracks.
>
> Glen
>
> -----Original Message-----
> From: Bob B
> Sent: Thursday, May 07, 2009 4:12 AM
> To: Bradford, Glen Richard
> Subject: RE: CNOA book value, "10 Best Chinese"
>
> more info on the lawsuit. Plus, they are carrying Bellissimo at cost,
> and have not recognized any impairment on the asset. About $7M for the
> structures was their cost allocation. Assume 50 percent depreciation,
> which could be light. another $7 on the land. No grape sales. Life
> Insurance co financed, I assure you it was appraised. Lawsuit says it
> was a classic pump and dump securities fraud.
>
> http://securities.stanford.edu/1041/CNOA_01/
>
> Bob
>
>
>
> On Wed, May 6, 2009 at 4:51 AM , Bradford, Glen Richard wrote:
>
> > Just about to take a final. I think they overpaid. But I am
> > optimistic. Sure, sometime next week we could dig deeper.
> > glen
> >
> > -----Original Message-----
> > From: Bob B
> > Sent: Wednesday, May 06, 2009 3:41 AM
> > To: Bradford, Glen Richard
> > Subject: CNOA book value, "10 Best Chinese"
> >
> > Glen,
> >
> > First, the Appraisal Institute hasn't got back on my inquiry of the
> > number of MAIs in USA vs China, sometimes I think once someone's paid
> > their dues they ignore you.
> >
> > Your summary on CNOA mentions "When you look at the value of a
> > California Wine label in China where China Organic distributes the
> > stuff, you begin to see the big picture profit potential."
> >
> > Okay, I'll bite, what IS the value of a
> > California wine label in China?
> >
> > Bellisimo doesn't produce wines, it grows grapes. Did the sale of
> > Bellisimo involve a California wine label?
> > I think Bellisimo can be viewed as a couple of high end residences,
> > located on a vinyard. Since it is pretty well documented that
> > California high end homes of the multi million dollar variety have a
> > history of drastic percentage decline in value since the date of the
> > Bellisimo transaction, and that market has not recovered, I suggest
> > that the book value should reflect that fact. I am not saying it
> > isn't there, but I don't see it. It looks to me like they paid more
> > than appraised value for it (Is that why suddenly you see blue sky
> > cropping up. . . ) I Suggest you request a copy of the appraisal
> > that was done at the time of purchase.
> >
> > You imply CNOA paid cash and own it free and clear, but I would sure
> > like to know if that is the case, or not. IF not, the implications
> > might be huge. Consider:
> >
> > It makes a big difference if they paid $14M, borrowed $9 million, and
> > now it has a Current Market Value of, say, $6M, doesn't it? Makes an
> > even bigger difference if that has not been properly disclosed, ot
> > maybe it has, and you haven't figured it out. That might lead you
> > to say that CNOA bought Bellisimo for about $14M and is trading at
> > $23M. That would change the net value of their interest in Bellisimo
> > from "14M" to "NEGATIVE 3 Million" that potential swing of 17 million
> > in book value would have a significant impact on Book Value, in your
> > matrix, wouldn't it?
> >
> > If you get a copy of the appraisal, I will be happy to review it with
> > you, no charge, just tell you what I see. It will be real interesting
> > to see how they developed their opinion of the Highest and Best Use
> > of the property. MAIs who do vinyards are very sensitive to the
> > business value, value of brands, the value of lands, the difference
> > between going concern value vs. liquidation value vs Current Market
> > Value, Highest and Best Use, etc.
> >
> > Since you are emphasizing Book Value in your matrix, I thought you
> > would want to zero in on exactly what CNOA's Book Value is? What CNOA
> > bought, what the current value is, or was at year end, and whether the
> > "GAAP accounting" that they say they are in conformance with has
> > recognized the decline in value from when they bought it. I will be
> > happy to put you in touch with an MAI who specializes in values of
> > Vinyards, etc, in that area, if you like. Never set foot on one,
> > myself.
> >
> > Lots to learn here, lots of wealthy people are interested in wines.
> > Doug Casey is into Argentine Wines in the Salta region. Are you
> > familiar with him? Interesting classmate of Bill Clinton's. Lots of
> > Canadian Mining stock experience. Hard money guy.
> >
> > Bob

Labels: CNOA

10 Best Chinese Microcaps
By Glen Bradford

Hi, I’m Glen Bradford. I was only trading my college tuition. As of today I am also trading my roommate’s college tuition. I wrote for TheStreet.com last fall and undertook equivalently 25 Credit Hours of MBA courses at Purdue University. I’m currently in the top 1% of Motley Fool CAPS players. For those of you that want to join me and make something out of nothing, I’m going to introduce you to the most ridiculously undervalued Chinese Companies on the face of the planet.

The requirements for these companies:

1. High Growth.
2. Profitable.
3. Selling less than Book Value.
4. Cheap based on Earnings (incl. Positive Cash Flow From Operations).

I’ll start with the top and work down. The Target value is a calculation composed of 3 parts: 1/3 Book Value + 1/3 P/E of 8 + 1/3 P/E of Growth. I have adjusted some of these numbers to remove 1-time expenditures, the potential of share dilution, intangible equity, etc. To be honest, all of these stocks should trade much higher than their target. This just helps me price companies in the midst of a crisis.



1. China Finance (CHFI) was sold down 50% on record breaking volume Monday while I was backing up the truck of bullishness. China Finance is responsible for helping small to medium Chinese enterprises go public in the United States. What makes this case unusual is China Finance’s assets are highly liquid --- they could sell them in the market at the current price. Monday, their largest position Jade Art was unchanged, 2nd largest position Gulf Resources was up 8.3%, 3rd largest China Organic Agriculture (also covered in this article) was up 6.9% on higher volume. It’s not surprising that a company responsible for taking podunk Chinese companies public struggled through 2008. My estimates on this stock put it in 100-bagger territory from its 52-week low of $0.04. China Finance also helped two other of my picks --- China 3C Group (CHCG) and Oriental Paper (OPAI). At $0.10, China Finance is selling at less than it’s highly liquid securities, especially after you take into account their price appreciations since December 31, 2008.

2. Gold Horse International (GHII) ran 44.44% Monday on above average volume. An Investor Village page was put up this weekend and had over 300 visitors in the first 24 hours. Not bad for a Chinese Wind Power play that’s profitable and has a P/E under 1 and is selling at 26% of Book Value. Their forecast for 2009 is 30% growth. That was before they announced they are headed to NYC to raise capital for even more growth!

3. Asia Cork (AKRK) manufactures “green” building materials in China. I took the liberty of visiting several local flooring places here at Purdue and confirmed that Cork Flooring is in high demand and is durable. Asia Cork is thinly traded at $3.57M, but at a P/E of 1 when it grew last year by 30% and is adding to production capacity leading into 2009.

4. Oriental Paper (OPAI), as mentioned earlier under China Finance, is growing 30% a year by manufacturing and distributing paper and paper products in China. Cramer recently indicated that things are looking good in the world of Corrugated Paper. This makes Oriental Paper is look even better.

5. China Organic Agriculture (CNOA) bought the Bellisimo Vineyard in California for about $14M and is trading at $23M. Compare this to their revenues in 2008 at $112M. Granted, they paid to much for Bellismo if you are looking at present discounted cash flows. When you look at the value of a California Wine label in China where China Organic distributes the stuff, you begin to see the big picture profit potential.

6. Lotus Pharmaceuticals (LTUS) just ditched their part time CFO Adam Wasserman (who still works for Gold Horse). Management forecasts growth between 30% to 40% and has so much in the pipeline and in progress for a $14.1M company that it’s ridiculous.

7, 8. Qiao Xing Universal Telephone (XING) is trading at $65M. Qiao Xing Mobile Communication (QXM) is trading at $140M. Seeing as how I already like QXM, and how XING owns 70%+ of QXM, shouldn’t XING be valued at least at $100M?
7.
8.
9. China Energy Corp (CHGY) is enormously undervalued when you take into account the various reasons they have been unable to produce at maximum capacity, for example --- the expansion of capacity by 60%, the Olympic Games, and most recently the increase in safety standards. They produce and process raw coal for heating and power generation in Inner Mongolia. My earnings estimates are adjusted to reflect what I’d consider to be normal operating conditions.

10. China Agri-Business (CHBU) is probably one that I shouldn’t tell you about. I keep buying it at around $0.21 and selling at $0.40 (on a daily basis). Remember, that secret cash loop that only exists in video games that you wished existed in real life? This is it. Right now the entire company is priced at $2.59M. Their latest reported cash balance is $8.3M and their liabilities are $561M. Yes --- they are selling at less than half of net cash (cash – total liabilities). But, now that you know I can say bye-bye to my infinite money loop.

I’m the kind of guy that questions everything and is willing to take a stand until empirically proven otherwise. So far, my allocation decisions empirically prove that I know what I’m doing --- so much for that efficient market hypothesis.

Disclosure: Glen and his investors own chfi, ghii, akrk, opai, cnoa, ltus, xing, chgy, qxm (through xing), chbu, chcg.

Labels: AKRK, chbu, CHCG, CHFI, CHGY, CNOA, GHII, LTUS, OPAI, QXM, XING