Got into a discussion today on another board regarding Ming Zhao and his coal Barron status in China. It's not something I was ready to write about but I got frustrated and put it out there anyway. I am starting this topic to expand my thinking regarding something that has been rattling about in my thoughts for over two years.
In China, Ming Zhao is considered to be one of the Coal Barron's. Numerous articles have been written about this but they only look at the surface of the lake, never under the water to see why and how it's done.
To begin with, it takes a very confident and smart individual to pull this off, In US history we went through a period where these people could thrive and gain immense power in their fields. The Rockefellers, the Kennedys, the Duponts the Astors. Not to forget the Rothchilds in Europe.
We call this old money, not because it's old, but because we have not seen this since, at least not the way they did it. You see, in a established western economy, the methods these people uses would now be illegal and subject to prosecution by the US justice department. Same thing in much of Europe except for Eastern Europe where they do not have the ability to build a case legally. They do not have this ability in China now, and I do not see it coming in the near future or perhaps ever. And this is why people like Zhao can do what they do.
In this country we have a legal term or terms for it. It's often called influence peddling. Unfair trade practices and a few others but in China it's a normal day at the office. One of the first impressions I had of Puda Coal when doing my DD work prior to buying stock was to remark about the low payrolls the executive offices had. They barely paid the minimum needed to retain talent and there was not a lot of stock options or anything to lead one to believe that the company was anything but straight up honest and working hard to build a successful enterprise. I would have argued this point to infinity and defended Puda's apparent fairness to investors....but that was on the surface. I never looked underneath for answers as to how a business could possibly be run this way and keep good people loyal to the company.
The answer to the question is that underneath that calmness and fairness were quid pro quo's and promises..... favors and obligations to repay later......all done as a normal way of business in China and not spoken of in public of often even in private because everyone had their own deals working...
Now lets go up the flag pole and see what the CEO and Chairman was doing. Mr. Ming Zhao.
Before the stock collapsed fully I had researched another Zhao investment into a company called Kingstone Energy. It was a HK listed miner with the claim that it mined Nickle and other rare earths and was getting into the Coal business through acquisitions. Zhao at the time owned a controlling interest and as I dug deeper I saw that he owned a large percentage of a trust fund that had facilitated the purchase of some coal properties that were in the offer stage, not yet closed deals and some of it was either owned in part or in full by guess who? Ming Zhao himself.....the investor/owner manager of the trust with a State owned Citic subsidiary and venture Capital firm as the other primary owner and manager. The fund is called "Beijing Juxin Taihe Energy Investment Fund".
About the same time frame as the SEC charged Zhao with fraud, Zhao began to exit his positions at KSE and the fund. He sold the fund investment to KSE. he sold his KSE common stock to the Chairman of KSE and somehow Simsen Intl, a nother venture capital firm magically showed up and bought his convertible notes after they were temporarily recalled by KSE then immediately sold to Simsen.
Over the last two years, KSE essentially went bankrupt, losing tons of stockholder equity and suffered from a severe lack of cash to pay current debt service.
Simsen Intl, lost a pile of money on the notes, and in fact It appears that they asked KSE to redeem a decent sized 50 mil chunk of them to bail them out on a acquisition they had made, even though they had to sell them back early and take additional losses.
So how does this happen? How is it that two companies essentially doused themselves with gasoline and self destructed to please the needs of one man.
I'll get into this more in another post on this subject where I will explain what I think happened here and why they did this voluntarily at the request of Zhao....This should be enough to chew on for now. It was for me which is why I have not commented until now.