Chinese Stocks: The Tsunami Of Selling And The Revenge Of The Myth

The grossly overvalued Chinese stocks implode and debunk the penny stock myth

Dear Investors,

Many of you have asked us lately whether we have watched the sell-off in the Chinese stocks and whether we plan to initiate a long position in some of them in the next days.

Specifically, if you are not familiar with the situation, the following examples will give you a good idea about what has been going on with the Chinese stocks since early 2018:

  • Alibaba (BABA) has plunged from $210 to $140 in less than 6 months, a 30%+ drop.

  • China Internet Nationwide Financial Services (CIFS) has plunged from $46 to $3 in less than 9 months, a 80%+ drop.

  • Qudian Inc. (QD) has plunged from $16 to $4.47 in less than 9 months, a 70%+ drop.

  • Newater Technology (NEWA) has plunged from $28 to $8.74 in less than 3 months, a 70% drop.

  • ZK International Group (ZKIN) has plunged from $12 to $3.07 in less than 9 months, a 70% drop.

  • TDH Holdings (PETZ) has plunged from $6 to $1.80 in less than 9 months, a 70% drop.

  • Bright Scholar Education Holdings (BEDU) has plunged from $20 to $10.17 in less than 6 months, a 50% drop.

  • China Rapid Finance (XRF) has plunged from $6 to $2.40 in less than 9 months, a 60% drop.

  • Best Inc. (BSTI) has plunged from $13 to $5.16 in less than 6 months, a 50%+ drop.

  • Fang Holdings (SFUN) has plunged from $5.50 to $2.20 in less than 6 months, a 50%+ drop.

  • Xunlei (XNET) has plunged from $23 to $5.74 in less than 9 months, a 70%+ drop.

  • Bitauto (BITA) has plunged from $40 to $19 in less than 9 months, a 50%+ drop.

  • Jinko Solar (JKS) has plunged from $25 to $9 in less than 9 months, a 50%+ drop.

  • Cheetah Mobile (CMCM) has plunged from $16.50 to $8.37 in less than 9 months, a 50%+ drop.

  • JD (JD) has plunged from $50 to $23 in less than 9 months, a 50%+ drop.

  • YY Inc. (YY) has plunged from $140 to $60 in less than 9 months, a 50%+ drop.

  • Weibo (WB) has plunged from $135 to $57 in less than 9 months, a 50%+ drop.

  • Autohome (ATHM) has plunged from $120 to $64 in less than 6 months, a 50% drop.

  • Concord Medical Services (CCM) has plunged from $4.20 to $2.87 in less than 3 months, a 30%+ drop.

  • NetEase (NTES) has plunged from $365 to $210 in less than 9 months, a 40% drop.

  • Tencent Holdings (TCEHY) has plunged from $60 to $36 in less than 6 months, a 40% drop.

That said, we want to make the following remarks: 

1) The"least-effort" approach and the "easy money": It's an axiom that every bubble bursts (did we say anything about the cannabis hype or the bitcoin bubble at $20,000?) and all these Chinese stocks were irrationally overvalued defying fundamentals in late 2017, so the recent trade war between Trump and China was the spark that made the Chinese bubble burst.

But unfortunately, numerous investors follow the "least-effort" approach and think they can make "easy money". Therefore, they buy stocks on the uptrend or stocks in overhyped sectors, because they think that this time is different, so the bubble will not burst and these overhyped stocks will rise forever.

Actually, they wait to buy the dip ignoring or overlooking valuations and key metrics while also considering themselves to be the smartest guys in the room who don't waste their time digging into balance sheets while trying to uncover out-of-favor, undervalued stocks.

Additionally, they believe that they don't need any financial advisor or Newsletter Editor with a proven track record. They believe that they can make money in the stock markets by just following the trend or the hype, given also that they have been told that "the trend is your friend".

But this time isn't different and the Chinese bubble bursts.

2) The penny stock myth: The sell-off list with the Chinese companies is big and includes exclusively NON-penny stocks from a variety of sectors, as you can easily verify. And actually, many of them are billion dollar companies. As such, the aforementioned sell-off might surprise some investors who remain adhered to the outdated perception that the NON-penny stocks are much riskier than the penny stocks. The aforementioned sell-off might finally make them change their minds. However, this ugly situation doesn't surprise us and we have already debunked the penny stock myth in our free article here.

After all, we will not initiate a long position in any Chinese stock and we will continue to avoid them. We believe that they remain overvalued and more importantly, we don't trust the Chinese companies and the Chinese books, so we consider all the Chinese stocks including the legitimate on the outside Chinese companies, to be extremely risky.

As a friendly reminder, please check the fraud and the accounting scandals associated with numerous legitimate on the outside Chinese companies a few years ago, as shown here and here. Due to this rampant corporate fraud in China that was disclosed in 2010 and 2011, we lost a lot of money, so we learned our lesson. Unfortunately, we trusted the financial reports of the legitimate on the outside Chinese companies and bought a bunch of them in 2009 and 2010.

Two of these legitimate on the outside companies were China Intelligent Lighting Inc. (CIL) that was the official representative of HYUNDAI's lighting products in China, and NIVS IntelliMedia Technology Group (NIV) that was a consumer electronics company that was designing, manufacturing and selling intelligent audio and visual products in big appliance retail chain enterprises in Asia, Europe and North America while also having contracts with China Mobile (CHL), the largest phone carrier in China**.**

NIVS IntelliMedia Technology Group, Inc. was also a company that earned a “AAA” credit rating from China Export & Credit Insurance Corp. The credit risk rating assessment by Sinosure takes place annually and the “AAA” status is the highest award a company can receive. NIV had maintained this status for five consecutive years. As linked above, 188 companies throughout the Guangdong had been rated by Sinosure, but only 14 had attained the “AAA” rating, including NIV. The rating reflects a company’s legal status, business scale, credit history, and business prospect, and the “AAA” rating recognizes an enterprise’s excellence in business operation, credit worthiness, and internal risk management.

Nevertheless, CIL and NIV proved to be ruthless joints with crooks who deceived numerous international investors and stole their money.

Oh, by the way, none of these Chinese stocks was a penny stock in 2009 and 2010.

We mention these facts because we want our life lessons teach you.

Last but not least, from a legal standpoint, the international investors are not protected, if something goes wrong with a Chinese company whose assets are in China. SEC can hardly do anything on this to protect the rights of the international shareholders, as shown here

Disclaimer: The opinions expressed here are solely my opinion and should not be construed in any way, shape, or form as a formal investment recommendation. Value Digger does not accept any liability for any loss or damage whatsoever caused in reliance upon such information. Investors are advised that the material contained herein should be used solely for informational purposes. Investors are reminded that before making any securities and/or derivatives transaction, you should perform your own due diligence. Investors should also consider consulting with their broker and/or a financial adviser before making any investment decisions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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