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Thursday, May 19, 2011

COGO group the next possible chinese short candidate?

I am really amazed by all these flagrant chinese frauds out there. I made a list of all the possible short candidate in the chinese RTO space. You can check out my crappy excel file here

COGO could be the next short candidate. It's cash opex & net income don't make any sense. It also does a lot of share buy backs but might be done through "negotiated transactions" It might be

Here is a screenshot of COGO's financials, and you'll see what I mean.

[caption id="attachment_58" align="aligncenter" width="1024" caption="COGO selected financiald ata"][/caption]

Management also has an incentive for manipulating numbers since they have an incentive to do so in their compensation plan.

Compensation of Chief Executive Officer

In December 2007 the Compensation Committee met to review the salaries that seven PRC-based companies listed on US exchanges with market capitalizations ranging from under $20 million to greater than $147 billion, paid to their chief executive officer.  The companies included SORL Auto Parts, Inc., Sohu.com Inc, Netease.com Inc., Huaneng Power International Inc., Guangshen Railway Col, Ltd, e-Future Information Technology Inc. and Asiainfo Holdings Inc.  The Compensation Committee’s intent was to target the chief executive officer’s base salary near the median of the range of salaries for executives in a similar position and with similar responsibilities, in line with our compensation philosophy. The Compensation Committee determined that the median base salaries for persons acting as chief executive officer for the above companies were approximately $93,000.

On December 21, 2007, the Compensation Committee of our Board of Directors approved the following compensation package for its Chief Executive Officer: a base salary of $100,000 per year, which was not materially different from the median base salary of the chief executive officers listed above; the grant of 20,000 shares of the Company’s common stock for each of 2008, 2009 and 2010 (for a total of 60,000 shares) that vest quarterly; the potential grant of a bonus on a yearly basis of up to an additional  (i) 40,000 shares of the Company’s common stock if the Company’s pro forma earnings per share CAGR is at or above 30% and (ii) 40,000 shares of the Company’s common stock if the pro forma earnings per share is 40% or more above the previous year’s pro forma earnings per share. The bonus shares would vest in three equal yearly installments beginning immediately after the filing of the Form 10-K for the applicable year.  The Compensation Committee based the level of compensation for our Chief Executive Officer on its belief of what is typical for public companies of our size and type and the fact that the Compensation Committee was satisfied with the performance of the Chief Executive Officer. No executive officer participated in the determination of the salary for the Chief Executive Officer.

Highlights are mine, of course. Here is the link to their proxy statement.

This all might mean nothing, and it probably is. I am no Muddy Waters, Citron Research, or Bronte Capital.  I am also currently not short nor do I have options is this company. What I seen isn't a smoking gun, but a possible place for fire. Also COGO has a big named auditing firm KPMG, but of course big name accounting firms haven't stopped the frauds yet.

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