Tuesday, January 10, 2012

Research: ZA Zuoan, My Stupid Mistake

I recently got into ZA, Zuoan, a Chinese fashion company. I had been very cautious, but not cautious enough. Chinese companies have been boobie trapped with fraud. After going through ZA's 10K, I did not find any red flags and decided that ZA was not run by crooks. With a high return on equity and good positive cash flows, I had somehow forgot to take notice of its account receivables.

Today's big drop without any sign of news made me double check the financials and that's when I noticed how big ZA's account receivables were. This is completely my fault. I am far from perfect. I guess I'm grateful that I only bought 1300 shares of it, a $5K investment. I will be looking for an exit point when possible.

Unlike the previously mentioned FUQI's account receivables scam, ZA actually has a positive cash flow. As a result, I don't think ZA will collapse in the same manner as FUQI. I think I can safely hold it for a better exist point than today.

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