updated 10/14/2010 3:45:12 AM ET 2010-10-14T07:45:12

ORLANDO, Fla., Oct. 13, 2010 (GLOBE NEWSWIRE) -- RedChip Companies, Inc. announced today that its president and CEO Dave Gentry has published a position paper, titled "Are Chinese U.S.-Listed Reverse Merger Companies Defrauding American Investors?," in response to the recent criticism surrounding Chinese companies that have become publicly listed on U.S. exchanges via reverse merger.

Dave Gentry is president of RedChip Companies, an independent small-cap research firm and financial public relations firm focusing on U.S. listed China small-cap companies. He has traveled extensively in China, met with hundreds of CEOs, and visited dozens of factories and facilities of companies that have used the reverse merger process to go public in the U.S. RedChip Companies has also used the reverse merger process to take two of its own companies public.

The following is an excerpt from Mr. Gentry's position paper:

Over the last several months, a number of articles have appeared casting doubt on the validity of the financial statements that Chinese reverse merger (RM) companies are reporting to the SEC.

The article that appeared in Barron's on August 30, 2010, titled: Beware This Chinese Export , in which Bill Alpert and Leslie P. Norton advise investors to steer clear of Chinese companies that have gone public in the U.S. via reverse merger, has been followed by a flurry of negative blogs on China RM stocks over the last few weeks. The article and the blogs are often tainted by logical fallacies and a tone that is as much ideological as analytical. Hedge funds are making millions shorting U.S.-listed China stocks using innuendo and unsubstantiated allegations as they pay writers to spread their allegations on chat boards and financial sites. While some concerns are legitimate, those writing about these stocks like Leslie Norton and Bill Alpert have little if any working experience with the China small-cap RM sector. To use a biblical phrase, "they see through a glass darkly."

The writers of the Barron's article, hedge fund shorters, and China bashers, deploying a host of logical fallacies, implicitly and explicitly attempt to move investors to the following conclusions regarding RM Chinese companies:

  1. Reverse merger advisors should not be trusted.
  2. Investors should not trust the financial reporting of Chinese RM companies.
  3. Accounting firms auditing the financials of such companies should not be trusted.
  4. Investors have a high probability of losing money if they invest in Chinese reverse merger companies.

Consider the sweeping generalizations and hyperbole used in the article to describe the sector and those involved:

'The group has been a minefield of revenue disappointments and earnings restatements.'

'China companies use a 'back-door maneuver known as a reverse merger to go public in the U.S.'

'These companies fall between the cracks of market regulation.'

The problem is that the bashers are often long on story, but short on facts and proof of wrongdoing. The Barron's article mentions seven China stocks, but only one of those companies was sanctioned by the SEC. Alfred Little, who again, like the writers of the Barron's article, has no real-world experience in the China small-cap sector, gives 13 reasons in a recent blog for investors to avoid China RM stocks. But again, he sideswipes the entire China small-cap sector but gives only one example of alleged wrong-doing: China Green Agriculture, which reported revenue to the Chinese State Administration for Industry and Commerce (SAIC) different than what was reported to the SEC in its recent 10-Q.

The companies that make up the universe of China RM stocks are the backbone of the Chinese economy. 70% of China's GDP is generated from companies with less than 2000 employees, the sweet spot of the RM sector. And while there have been financial discrepancies, restatements, and in a few cases intentional fraud perpetrated by some of these companies, it is clearly not the norm, but the exception, just as it is among U.S. companies. Most cases involve violating rules, such as China Natural Gas not reporting a related-party transaction properly, and a few cases have been reported of companies reporting revenue to the SAIC that was different, lower than what was reported to the SEC.

The paper also addresses the allegation that Chinese RM stocks tend to underperform the overall market by comparing the price performance of 10 Chinese RM stocks, including Longwei Petroleum Investment Holding Ltd. (Amex:LPH), China Education Alliance, Inc. (NYSE:CEU), China Gengsheng Materials, Inc. (Amex:CHGS), and ZST Digital Networks, Inc. (Nasdaq:ZSTN), with the Russell 2000 index over the past two years. During the two-year period ended October 8, 2010, these 10 stocks generated returns of approximately 185% on average, compared to a 33% return for the Russell.

A graph comparing the performance of these ten Chinese reverse merger stocks with the Russell 2000 is available by clicking HERE.

Mr. Gentry's full position paper is available by clicking HERE.

About RedChip Companies, Inc.

RedChip Companies is an international, small-cap research and financial public relations firm headquartered in Orlando, Florida; with affiliate offices in Beijing, China; Paris, France; and Seoul, Korea. RedChip delivers concrete, measurable results for its clients through its extensive national and international network of small-cap institutional and retail investors. RedChip has developed the most comprehensive platform of products and services for small-cap companies, including: RedChip Research™, Traditional Investor Relations, Digital Investor Relations, Institutional and Retail Conferences, RedChip Small-Cap TV™, Shareholder Intelligence, Social Media and Blogging Services, Webcasts, and RedChip Radio™. To learn more about RedChip's products and services please visit: http://www.redchip.com/visibility/productsandservices.asp .

"Discovering Tomorrow's Blue Chips Today"™

The RedChip Companies, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=2761


None of the materials issued by RedChip Companies, Inc., constitutes a recommendation for any investor to purchase or sell any particular security or that any security is suitable for any investor. Any investor should determine whether a particular security is suitable based on the investor's objectives, other securities holdings, financial situation needs, and tax status. RedChip Companies, Inc. is currently engaged by the companies mentioned in this release to provide investor awareness services and receives compensation in the form of cash and/or stock for these services. Investor awareness services and programs are designed to help small-cap companies communicate their investment characteristics. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures on RedChip clients, visit http://www.redchip.com/disclosures.asp?src=rcv .

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