A few weeks ago a hedge fund manager, Steve Wegener, burst into ZST Digital Networks' offices in Zhengzhou City, China, and demanded to see the CEO, which he did. Mr. Wegener's fund owns 10,000 shares of ZSTN. It also owns 10,000 shares of CCME, another Chinese stock, which was declared a fraud and trading halted.
You can Google Wegener's visit, which shows pictures of his visit and concludes that ZSTN is also a fraud. Last Friday, Seeking Alpha published a story that elaborated on Wegener's visit and the stock plunged. It is currently trading slightly above its cash value and has no debt.
The problem is that Wegener's accusations were misleading and the Seeking Alpha article was an outright lie.
Fact is, Mr. Wegener did not understand ZSTN business. ZSTN is a systems integrator. They put together cable TV and GPS tracking systems for municipalities (i.e. the Communist Party). Steve expected to be given a phone number where he could buy one cable TV box.
Fact is, normally when a Chinese company changes auditors, it is because fraud has been committed. But ZSTN upgraded auditors to an internationally accredited auditor, BDO China, part of BDO International.
Fact is, normally when a Chinese CFO quits, its is because fraud has been committed. But ZSTN's CFO didn't quit. He stepped aside so that a Chinese American CFA could replace him. The former CFO is still on the board of directors. The new CFO is fluent in Mandarin, English, and SEC filing standards.
It is still possible that ZSTN is a fraud. The main culprit is their unbelievable earnings growth. So don't load up on this stock.
But downside volume has been tapering off from unsustainable levels. The float is relatively small, making the stock vulnerable to price swings in either direction.
Other misunderstandings are trying to reconcile Chinese SAIC filings with American SEC earnings statements. SAIC filings are the equivalent to a small business annual report to the state they are incorporated in. All the state wants is their annual filing fee. It is not an income tax document.