How does the Chinese “Muddy Waters Research” conduct a Commercial Due Diligence

Published:2014-04-21    Source:HICG

  For the past few years, the American research institution, “Muddy Waters Research”, has launched numerous in-depth researches upon several Chinese companies, which are listed in the stock exchanges in North America. In the view of foreign investors, the researches have substantially wiped the creditability of public information of the Chinese companies. By now, the Muddy Waters Research has investigated in Orient Paper Inc. (AMEX:ONP), RINO International (NASDAQ:RINO), China MediaExpress Holdings, Inc. (NASDAQ:CCME), Duoyuan Global Water Inc. (NYSE:DGW), Sino-Forest (TSE:TRE), and Focus Media (NASDAQ:FMCN). Most of the companies listed above suffered by a great nosedive of their stock prices. RINO International (NASDAQ:RINO) and China MediaExpress Holdings, Inc. (NASDAQ:CCME) have already been delisted; meanwhile, Duoyuan Global Water Inc. (NYSE:DGW) is suspended in the stock market. At this point, Muddy Waters, along with its relevant parties have gained substantial benefit from these falls.

  The Commercial Due Diligence conducted by Muddy Waters were nothing but regular with mature practices. In addition, Muddy Waters invests loads of time into every research. Typically, it takes Muddy Waters 6 ~ 12 months to finish a Commercial Due Diligence report, which obviously tests the tolerance of the international investment institution. The investors are looking forward to comprehend a Chinese target company within a much shorter duration. In fact, the local Chinese Commercial Due Diligence consulting firms have already formed a unique system and research network. Furthermore, the local institution have a better understanding in how to communicate with the Chinese companies and their people, which may enable the local institution to obtain the actual conditions and market positions of the target companies in a shorter research duration (4~8 weeks). The efficiency is helpful for the international investment institution to value the Chinese target companies in a short term.

 I am here to share some of the research methodologies of Shanghai Huaran Consulting as follows:

1.Information gathering. In addition to the public information online, most of the valuable information comes from Huaran’s non-public internal database. The database covers the competition landscape, the historical announcements & news, financial conditions, shareholder structures, litigations, and so on. 

2.Professional interviews. Huaran visits the senior professionals and experts in the targeted industry purposefully. The opinions of the industrial professionals and experts may assist Huaran to assess the competition landscape, industrial features and development tendencies of the relevant industries. The expert network is the intangible asset accumulated by the local research institution.

3.On-site research. The On-site Research is the irreplaceable step of the whole research. The Chinese CDD team would visit the area where the target companies locate. The team would investigate into the scale of the production, the numbers of employees, the operational situations, etc. in order to have a clear understanding of the practical daily operation of the target company.

4.Suppliers and clients. The Chinese CDD team will directly contact the major suppliers and clients of the target company via their own network. The CDD team would investigate the procurement, production and sales conditions of the target companies along with their position of pricing indirectly.

5.Interview with competitors. Huaran team would interview the competitors so as to assess the competition landscape, market position and development space for the target companies.

6.Integration of the information. Regarding the key information, Huaran team would at least check thrice via different channels to make sure the obtained information is objective and useful.

  After all, the local Chinese Commercial Due Diligence consulting firms have already substantially helped the international investment institution to interpret the Chinese compnies.