A reliable friend once told me that in his opinion 50% of Chinese ADRs are fraud. He then explained to me that since companies are generally valued at much higher multiples in domestic stock markets in China, all Chinese companies will seek to get listed domestically first. The problem is that domestic listings are limited and unless you are a stellar company and have connections to the SEC-of-china, your best bet is to list as ADR in overseas market. That is, the lesser quality stocks actually get listed abroad; a reversal of what it used to be earlier in this decade.
Betting against these stocks seem to be a sure-win…. the timing, however, is difficult to gauge. Let’s say you are 75% sure that a company is fraud, when will they get exposed is unpredictable. The stock can rally on fake information for a long period of time. When there is an opportunity, there are people monetizing – just came across this site: Muddy Waters, who claim they can “sees through appearances to a Chinese company’s true worth.” With services like this being publicized, I’m guessing the ADR bubble will burst pretty soon.