ZSTN ZST Digital Networks: Scam or Capitulation?

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	Larry Leviton
	Chicago User since Sep 2009	35
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Scam or Capitulation?

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.

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What People Are Saying...

Josh Warner-Burke said at 4/27/11 11:05 AM Price action was $2.76 0.19 (+7.4%)

Tweeted this article this morning, very interesting stuff Larry.

David Sachdev said at 4/27/11 11:11 AM Price action was $2.72 0.15 (+5.8%)

I will be keeping an eye on this one as well.

Larry Leviton said at 4/27/11 10:44 PM Price action was $2.84 0.27 (+10.5%)

I am closing ZSTN with a small gain (luck more than skill) because there are two red flags that are nagging me.

The first red flag is that ZSTN filed a shelf offering several months ago. A shelf allows ZSTN to sell secondary shares at an undisclosed future date. If ZSTN is swimming in cash, why would they need more money? So they grow a little slower, or in this environment, repurchase shares.

The second red flag is that during Steve Wagener's surprise visit, it was disclosed that the GPS security monitoring station is located in a government run municipal building. I had expected it to be on ZSTNs property. Why would a city government run a nationwide security system? Its economically inefficient and leaves ZSTN with no capital assets other than its office building.

Brett Davis said at 4/28/11 1:00 PM Price action was $2.77 -0.07 (-2.5%)

The problem I have with Seeking Alpha is they are manipulating stock prices on businesses they have shorted. What they have done to Advanced Battery is shameful. Especially since SA posted a story from a completely obscure website call Variant View Research. Here are some details from my investigation about a month ago. I made $1000 on a quick in/out of ABAT from the volatility, but it is Seeking Alpha that is really raising red flags for me.

I was doing DD recently looking at backlinks to the Variant View Research website. Cush Capital Mgmt appears to be based out of Kansas. In fact, almost all 129 of the backlinks from Variant View Research point to aboveaverageodds.com except for several that point to Seeking Alpha and one to Motley Fool (CCME blog post). Here are the Variant View Research backlinks:
http://siteexplorer.search.yahoo.com/search?p=variantviewresearch.com/&bwm=...

Backlinks are used to create subject authority for websites. 129 is not too many to be quite honest and the 500+ for aboveaverageodds.com is just a little better.

Thus, why would a site such as Seeking Alpha who has a PageRank of 7 and 325,000 backlinks pick up a story from a virtually unknown website? In addition, according to Alexa.com, the Variant View Research ranks 19.6 million in website traffic. (Since the posting appeared on Seeking Alpha, their traffic rank is now 3.8 millon) That is pretty darn poor! But, Alexa.com only shows 2 websites linking into variantviewresearch.com...one of them is, you guessed it seekingalpha.com! (http://www.alexa.com/siteinfo/variantvie...

Finally, a few posts mentioned the administrative contact, it is:

WhoisGuard
WhoisGuard Protected
+1.6613102107
Fax: +1.6613102107
8939 S. Sepulveda Blvd. #110 - 732
Westchester, CA 90045
US

What this company does is protect websites from spam attacks by acting as a front to hide the name and contact information for the actual web domain owners. While it is quite common, it still takes some knowledge to think to do this. Why would such an unknown website subscribe for this kind of protection? While it is relatively inexpensive, it still seems a bit odd.

I'd like to see a full investigation into the practices of Seeking Alpha and potential marketing manipulation. Hey, if they can post all these claims against various Chinese companies, they should feel confident of auditors investigating their practices.

Brett

Larry Leviton said at 4/29/11 10:52 PM Price action was $2.94 0.18 (+6.5%)

Brett: Thanks. ZSTN went up 3% today (4/29/11) because the CEO gave a weak response to one of the short sellers arguments. But my article already covered differences between SAIC and SEC earnings.

I already own ZSTN @ $8 and have no plans to sell at a loss (not with a PE of 2!!!). But this is another example of how trying to hold on for a large gain has led to a large paper loss.

Meanwhile my short term trades have been profitable, limited losses, and allow me to sell short.

With markets approaching 2007 highs, perhaps now is not a good time to buy and hold.

Larry Leviton said at 4/29/11 10:55 PM Price action was $2.94 0.18 (+6.5%)

On 4/28/11 GFRE (another beaten down Chinese stock) popped up 50% because of the CEO's strong rebuttal. But on 4/29/11 GFRE pulled back. Apparently the shorts are still in control.