FFHL Case Study: risks of investing in China

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(Update June 25) Fuwei has a news release regarding this today.

(Update June 19) The stock (FFHL) got a big lift (18%) today. Major’s rule No. 2: stock moves when Major mentions it at stlplace, e.g., EDU (mentioned in June 9) and FFHL. Some speculative Chinese stocks got big move too, e.g. EFUT is up 30% today.

Seriously I am not saying Fuwei is a bad company. Its previous owner got big problems though. Do your own research before jumping in.

(Original June 18) I’ve paid attention to Fuwei Film Holding Limited (FFHL) since its IPO, as you may notice I’ve mentioned it couple times in my blog. Obviously things have take a turn lately, if you checked its stock price. I did not follow all the details until read this Chinese news. Let me summarize it because the aricle is in Chinese and it’s a bit long. In simple words: the owners and founders of Fuwei are suspected in “transfer state owned assets to personal pockets” through a bunch of “financial engineering activities”; they are under “Shuang Gui” (arrest in a better name) right now.

So how was this being discovered? It turns out those guys pissed off some big guys in Beijing by trying to get away from huge debt. Remember the old saying “what goes around, comes around”.

As one can imagine, there are lots of loop holes during this transformation period in China’s economy and legal system. Some “smart guys” made money sole by finding those loop holes. They are not creating value for the economy and society in any means. On the other hand, if you looked at companies like New Oriental (EDU), Home Inns (HMIN) and Mindray (MR), you will know they are different. Those companies found real opportunites in market, worked hard and brought products or services to meet customers’ need. Eventually they both make money (for the founders, employees, share holders), and bring value to society.

So the lesson for us investors is: tell solid companies from bad ones. This is a bit hindsight, but when I was reading the F1 prospectus for FFHL (page 34, management discussion), I did found they got the assets from state owned enterprise very cheap (virtually free) when the latter one declared bankruptcy.

Disclosure: I hold HMIN and MR at this time.

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