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From the Great wall to the Wall Street: Investor relations strategies for US-listed traditional Chinese medicine manufacturers

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FROM THE GREAT WALL TO THE WALL STREET:
INVESTOR RELATIONS STRATEGIES FOR
US-LISTED TRADITIONAL CHINESE MEDICINE MANUFACTURERS

by

Qinyuan Chen

A Thesis Presented to the
FACULTY OF THE USC GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
MASTER OF ARTS
(STRATEGIC PUBLIC RELATIONS)

May 2011

Copyright 2011 Qinyuan Chen
ii

ACKNOWLEDGEMENTS
This thesis would not have been possible without the guidance and the help of
several individuals who in one way or another contributed and extended their valuable
assistance in the preparation and completion of this study.
First and foremost, my utmost gratitude to Professor Jerry Swerling, Director of
PR Studies and the USC Annenberg Strategic PR Center whose sincerity and patience I
will never forget. I attribute the level of my Masters degree to his encouragement and
effort and without him this thesis, too, would not have been completed or written. One
simply could not wish for a better supervisor.
I would like to express my deep gratitude to my thesis committee members,
Professor Jay Wang and Professor Steve Harris, for their excellent guidance, caring,
patience, and providing me with an excellent atmosphere for doing research.
I would also like to extend my gratitude to everyone who aided in research for
this project: Bill Coffin, president of CCG Investor Relations, Mabel Zhang, director of
Media Relations at CCG Investor Relations, David Silver, president of Silver Public
Relations, Mark Tobin, Co-Director of Research at ROTH Capital Partners, and David
Zeng, partner and managing director at Junwei Financial Group.
Finally, I would like to thank my family and friends, especially my mother, my
father. Your support really means a lot to me, and I hope I have made you proud.
iii

TABLE OF CONTENTS

Acknowledgements ii
Abstract vi
Chapter One: Introduction
1.1 Background 1
1.2 Statement of the goal 4
1.3 Research outline 5
Chapter Two: Literature Review
2.1 Investor relations 6
2.1.1 Evolution of the definition of investor relations:
a public relations function or a financial function? 7
2.1.2 Historical review of investor relations practices 9
2.2 Investor relations in China 15
2.2.1 Overview of the Chinese stock market 15
2.2.2 Objectives and goals of the investor relations function
in Chinese public companies 16
2.2 Overview of major US stock markets 19
2.2.1 New York Stock Exchange 20
2.2.2 NASDAQ 22
Chapter Three: Research Design
3.1 Research goal 25
3.2 Research design 25
3.2.1 Case study 26
3.2.2 In-depth interview 27
3.2.3 SWOT Analysis 28
iv
Chapter Four: SWOT analysis of US-listed TCM companies 30
4.1 Strength 30
4.2 Weakness 33
4.3 Opportunity 35
4.4 Threat 36
Chapter Five: Case Study - China Sky One Medical, Inc. 39
5.1 Background 39
5.2 The company 41
5.3 The short attacker 43
5.4 The missing points in CSKI’s investor relations efforts 45
Chapter Six: Conclusions and Recommendations 49
6.1 Third party endorsement 49
6.2 Active and regular communication with investors 50
6.3 A strong image of the management and board of directors 50
6.4 An English-speaking CFO 51
6.5 Presence on social media 52
References 53
Appendices
Appendix A: Interview Questions and Interviewees 59
Appendix B: 2010 Chinese IPOs in the United States 62
Appendix C: Glossary of Finance and Investor Relations 65

v

LIST OF TABLES

Table 1: China Deal Flow Hits Record Levels 2
Table 2: Responsibilities of All Respondents 8
Table 3: CSKI’s stock price (March 2010-February 2011) 40
Table 4: 2010 Chinese IPO in the United States 61
vi

ABSTRACT
China’s strong economic growth in 2009 and 2010 makes it home of the most
new public companies in the world. As Chinese entrepreneurs searching worldwide for
listing locations, a great number of them choose the United States, of which NASDAQ
and NYSE are among the world’s largest and most developed capital markets. While
some Chinese companies are flourishing in the United States, others are struggling with
trust issues, failing to woo American investors due to inefficient communications. This is
especially prominent among US-listed Traditional Chinese Medicine (TCM)
manufacturers based in China because of cultural gap.
By means of case study and in-depth interview, this study examines the current
image of Chinese TCM companies in American stock markets, acquires a better
understanding of cultural barriers obscuring understanding of the TCM industry. Based
on the research findings, a SWOT analysis is conducted to explore the constraints and
future possibilities for Chinese herbal manufacturers in American stock markets. At last,
a number of investor relations strategies tailored for Chinese herbal companies, on the
grounds of their listing in the United States, are developed.

1

CHAPTER ONE: INTRODUCTION
1.1 BACKGROUND
China has enjoyed strong growth in GDP and market liquidity in recent years,
which has allowed the country to assume an influential position in global financial
markets. Issuers from the Greater China Area (defined as the mainland, Hong Kong, and
Taiwan) make up over 46 percent of the global initial public offering (IPO) value in 2010.
Last year, this region took in $117.9 billion, a 170 percent increase in total value from the
previous year. Excluding the second-ranked United States, the top six IPO markets in
2010 were all in Asia: Japan, India, South Korea, and Malaysia.
1

In 2009, despite the global financial crisis, Chinese companies raised over $54
billion in total capital, an increase of 150 percent from the previous year.
2
In the first 11
months of 2010 alone, Chinese companies raised $255.3 billion in 1,199 deals worldwide
through IPOs, according to a "Year-end Global IPO Update" report from Ernst &
Young.
3

1
Chinese IPOs Making Waves but Beware of Bubbles, Don Miller, Seeking Alpha, December 16, 2010,
http://seekingalpha.com/article/242191-chinese-ipos-making-waves-but-beware-of-bubbles?source=feed
2
The Frankfurt Stock Exchange is Seeking More Chinese Listings in 2010, BRIC Investors, January 13, 2009,
http://bricinvestors.com/011310TheFrankfurtStockExchangeisSeekingMoreChineseListingsin2010.aspx
3
Chinese IPOs Making Waves in the Market, but Beware of Bubbles, Money Morning, December 16, 2010,
http://moneymorning.com/tag/ipo/
2
As one of the world’s largest and most developed capital markets, the United
States is one of the most popular listing locations for Chinese entrepreneurs. In 2010,
Wall Street saw record listings by newly public companies from China, which raised a
total $4 billion on the New York Stock Exchange (NYSE) and the NASDAQ Stock
Market (NASDAQ).
4
IPOs from China-based companies have attracted attention from
investors who are betting on China’s booming economy.
Table 1: China Deal Flow Hits Record Levels

Some Chinese companies did very well after their IPOs in US stock markets.
Youku, China’s answer to YouTube, saw its shares skyrocket more than 100 percent in
its IPO on December 7, 2010. Shares initially priced at $12.80 were trading at $27.60 on

4
Chinese Companies Among Expected Year-End Flurry Of IPOs, Lynn Cowan, The Wall Street Journal, November
29, 2010, http://blogs.wsj.com/venturecapital/2010/11/29/chinese-companies-among-expected-year-end-flurry-of-us-
ipos/?KEYWORDS=Chinese+IPO
3
the same day of IPO -- a whopping 116 percent jump.
5
Shares for China’s number one
search engine, Baidu.com, accounted for one of the most highflying IPOs in history.
After pricing at $27 per share on August 5, 2005, Baidu.com opened above $60 per share
and traded as high as $151 before finishing the day at $124.88, making for a record one
day gain of over 360 percent. Since the close on its first day of trading, Baidu.com has
rallied an additional 795 percent.
6

However, not all Chinese companies fare as well on American markets,
sometimes due to their own malfeasance: on August 30, 2010, serious fraud allegations
began to surface regarding China-Biotics, Inc, and on November 17, 2010, NASDAQ
halted trading shares of Rino International (RINO), a NASDAQ-traded Chinese maker of
steelmaking emissions gear. Events like these have raised issues of trust in Chinese
equities among American investors.
The trust issue is especially prominent among Traditional Chinese Medicine
(TCM) manufacturers. In June 2007, American Oriental Bioengineering (NYSE: AOB)
reduced the size of its secondary offering from 13 million shares to 8.5 million shares
after America’s premier financial magazine, Barron’s, published a negative story about
the company, criticizing AOB for misrepresenting products and misleading investors.
The company’s stock price dropped 38 percent on the next trading day. Its price-earning

5
Shares Of Youku, China’s YouTube, Double At IPO, Erick Schonfeld, Tech Crunch, December 8, 2010,
http://techcrunch.com/2010/12/08/youku-ipo/
6
Chinese IPO Frenzy, Seeking Alpha, December 8, 2010, http://seekingalpha.com/article/240806-chinese-ipo-frenzy
4
ratio
7
at that time was a relatively modest 18, even though it was growing at better than
30 percent.
8
More recently, China Sky One Medical, Inc., a fully integrated TCM
pharmaceutical company based in China, lowered guidance and announced the
resignation of its CFO due to an accusation of fraud from its investors. Its stock plunged
accordingly.
As a result of inefficient communication and the cultural gap between China and
the United States, scandals like these are ruining investor confidence in Chinese herbal
medicine companies, even though very few of them have been involved in such illicit
activities.

1.2 STATEMENT OF THE GOAL
The main goal of the research is to examine the current image of Chinese TCM
companies in American financial markets. Through this examination, the study aims to
acquire a better understanding of the key elements of influence in US investors’ decision-
making process. Based on the research findings, a number of investor relations strategies
tailored for Chinese herbal companies seeking to be listed in the United States are
developed.

7
Price-earning Ratio: A valuation ratio of a company's current share price compared to its per-share earnings.
Calculated as:
8
American Oriental Bioengineering Stirs Up Controversy, Seeking Alpha, June 28, 2007,
http://seekingalpha.com/article/39619-american-oriental-bioengineering-stirs-up-controversy
5
1.3 RESEARCH OUTLINE
After the introductory section (Chapter One), Chapter Two reviews related
literature on both investor relations as a communication function and the evolution of
major stock markets in the United States. It deals with theoretical and empirical works in
the fields of communications and finance. Chapter Three outlines the research design and
explains why specific research methods are adopted in this study. The section also
demonstrates how the study proceeds from research design to data analysis. Chapter Four
presents a case study of China Sky One Medical, Inc, a US-listed TCM company that
suffered from a credibility crisis last year due to accusations of fraud and ineffective
communication with investors. In Chapter Five, a SWOT analysis on US-listed TCM
manufacturers is presented based on research findings from in-depth interviews. Chapter
Six concludes the paper with a number of key points for US-listed TCM companies in the
current market environment.
6

CHAPTER TWO: LITERATURE REVIEW
2.1 INVESTOR RELATIONS
Investor relations experts see their work as providing investors with timely,
accurate, and complete information about a firm’s business fundamentals and future
prospects (Farragher, Kleinman & Bazaz, 1994). Thus, the investor relations function
provides investors with information that is relevant to investment decision-making. For
the purpose of this research, the definition of investor relations is adopted from Wilson
(1980) as follows:
The investor relations function is the communication function that links
the public corporation with its relevant investment markets. It is the need
and art of financial communication of relevant and timely information to
all relevant investment markets so that investors can make intelligent risk-
reward decisions concerning their prospective ownership position (buy-
hold-sell).

This definition implies that regardless of terminology, the department that fulfills
the investor relations function described above is deemed responsible for communication
between the public corporation and the investment markets. This is an important point
because the department holding such responsibility varies among different Chinese
companies. While some firms have a department specific to the investor relations
function, other companies place this responsibility in the public relations, general
corporate affairs, or finance departments. In this regard, the term “investor relations” is
7
interchangeable with “financial public relations,” “financial relations,” or “financial
communication.”

2.1.1 EVOLUTION OF THE DEFINITION OF INVESTOR RELATIONS: A PUBLIC
RELATIONS FUNCTION OR A FINANCIAL FUNCTION?
In The Body of Knowledge: Task Force of the Public Relations Society of
American (1988), investor relations is defined as one of the seven sub-functions of public
relations. (The other six are: consumer, media, internal, government, fundraising, and
community.)
However, others see investor relations as a financial, rather than communications,
function.. Martin and Petersen (1996) surveyed 200 companies and found that among 57
percent of the responding companies, chief financial officers (CFOs) are in charge of all
the investor relations activities, including information disclosure, road shows, etc; only in
13 percent of all cases are communications/public relations officers responsible for
investor relations activities. They also found that investor relations activities are, by and
large, conducted by financial departments, i.e. among 63 percent of their respondents.
Among only 12 percent of their respondents did public relations departments conduct
investor relations activities (Petersen & Martin, 1996). Thus, they concluded that in most
organizations, investor relations is managed by the financial department, which is largely
due to most CEOs’ belief that investor relations is not a public relations function.
Although this study was limited to Florida companies, it supported the important
8
argument that investor relations management is not consistently integrated into the
overall organizational communication system.
In 2010, in its Sixth Communication and Public Relations Generally Accepted
Practices (GAP) Study, the USC Annenberg Strategic Communication and Public
Relatiions Center surveyed 382 public relations professionals in corporations,
government agencies, and non-profit organizations. Participants were asked to identify all
functions for which they have primary budgetary responsibility. The data suggest that
only 12.2 percent of corporate respondents had budgetary control of investor relations.
Table 2: Responsibilities of All Respondents

The professional organization of investor relations officers, the National Investor
Relations Institute (NIRI), adopted the most current definition of the profession in March
2003. Investor relations is defined as:
9
A strategic management responsibility that integrates finance,
communication, marketing and securities law compliance to enable the
most effective two-way communication between a company, the financial
community, and other constituencies, which ultimately contributes to a
company’s securities achieving fair valuation.
9

This definition is a significant step forward from the previous version adopted by
NIRI in 1996, in which investor relations is labeled “a marketing activity” with the
purpose of “providing an accurate portrayal of a company” in order to influence “a
positive effect on a company’s value.” It moves away from the narrow marketing focus
of sales and promotions and adds finance, communications, and law to the list of investor
relations activities. This is indicative of the changes in securities regulations and investor
relations that came about due to the wave of corporate scandals that took place in earlier
years.

2.1.2 HISTORICAL REVIEW OF INVESTOR RELATIONS PRACTICES
The first shareholders in history can be traced back to the Dutch East India
Company in the 17
th
century (Encyclopedia Britannica, 2007). The Boston
Manufacturing Company, founded in 1814, is believed to be the first public company in
the United States (D. Allen, 2004). The owner sold the company’s stock to his associates
when he wanted to expand the business, thus providing the first example of separation of
management and ownership, which is now a predominant factor of public investor

9
Definition of Investor Relations, NIRI, http://www.niri.org/about/mission.cfm
  10
relations. Yates (1989) elaborates, “The separation of ownership from management (a
separation that was usually physical as well as functional) dictated that the factory
manager communicate the accounts and other information to the owners in writing.”
However, communications between investors and shareholders did not garner
much attention from management until 150 years later (NIRI, 1985, 1989). David Silver
wrote in his book The New Investor Relations: Expert Perspectives on the State of the Art
that “investor relations emerged into its own in the 1960s, often associated . . . with the
so-called dog and pony shows for sell-side analysts and retail investors, usually held at
the offices of securities brokerages.”
Investor relations management experienced a significant turnaround in the late
1980s. NIRI (1985) conducted a survey in 1985 and found that only 16 percent of
Fortune 500 companies had investor relations departments. However, by as early as 1989,
56 percent of these companies claimed that they had established investor relations
departments (NIRI, 1989). This change is believed to have been sparked by the actions of
social activists.
Rao and Sivakumar (1999) analyzed the emergence of investor relations
departments across the country and concluded that organizations developed their investor
relations activities in the late 1980s and early 1990s under pressure from social activists
and financial analysts: “Whereas social movement activists framed shareholder rights as
a problem and compelled organizations to uphold them, professional analysts subtly
coerced organizations to signal their commitment to investor rights by creating boundary-
  11
spanning structures.”
To be more specific, as companies’ shareholder bases continued to grow, due to
the widening acceptance and popularity of stock ownership, social movement activists
recognized the importance of the relationship between management and shareholders, or
in other words, the need for the investor relations function.
In 2002, another group of communications scholars conducted a study of investor
relations practices in Japan and arrived at a similar conclusion: changes in ownership
structures and corporate finance practices necessitated an engagement in communications
with investors (Yoshikawa & Gedajlovic, 2002).
As a result of these developments, corporate leaders came to realize how
important communication is for purposes of managing relationships with investors. The
investor relations function serves to improve the quality of this communication by
forming a relationship, rather than just reporting numbers and charts.
While William Chatlos (1984) notes that communications became the chief
ingredient in all investor relations activities, many others subscribe to the belief that it is a
blend of specialized terms, equations, and jargon provided by the business disciplines (i.e.
finance), and strategies and tactics for delivering highly specialized financial messages
provided by the communication disciplines.
In 2001, the Enron scandal exploded. By exploiting accounting loopholes,
special-purpose entities, and non-transparent financial reporting, Enron was able to hide
billions of dollars of debt from failed deals and projects. Shareholders lost nearly $11
  12
billion when Enron’s stock price plummeted from $90 in 2000 to less than $1 by the end
of November 2001.
The collapse of Enron led millions of investors to question the safety of their
portfolios and retirement plans. In the post-Enron era, the importance of communication
became only more apparent. C. E. Allen (2002) suggests, “The communication skills of
the IR specialists will be more important than ever.” To this end, both areas of expertise,
business and communications, are essential to the successful practice of investor relations.
Rogers (2000) states that investors today clamor for interpretive data that offers
insights into the financial futures of companies. Favaro (2001), an investor relations
practitioner, while assigning responsibility of the investor relations function to the CFO
of a company, recognizes new challenges and pressures that arise as investor relations
evolve. He elucidates, “CFOs have to be able to explain not only the numbers, but also
the nature of the business, its long-term strategy, and non-financial information, as
investors have learned to incorporate these higher-level questions into their buy and sell
decisions.” Hockerts and Moir (2004) of the Centre for the Management of
Environmental and Social Responsibility explain, “Investors increasingly consider non-
financial aspects in their assessment of companies.”
New challenges demand new approaches to investor relations. Strategic skills and
knowledge must be borrowed from strategic communication and public relations
scholarship and practice. Favaro (2001) pointed out that today’s investor relations
practitioners “possess extraordinary public relations skills and understand the
  13
implications of upcoming announcements for all of the company’s major stakeholders—
including employees and the community—and not just the shareholders.”
Hence, investor relations professionals and scholars have come to realize the need
for public relations and communication aspects of investor relations practice and research.
As a result, it became self-evident that organizations should integrate investor
communications into overall strategic communication streams. In today’s information age,
one can barely isolate investors from other stakeholders, such as the community,
employees, mass media, etc. Investors operate within society and all stakeholders must be
accessed as investment information sources.
Social media are also playing an increasingly important role in accelerating
information flow throughout the investor community; 85 percent of financial services
professionals under 50 are utilizing social media, compared with half of their older
counterparts.
10

As organizations look for better ways to manage information flow, it is hugely
important to investor relations efforts that companies speak in a unified and coordinated
voice to all of their audiences while presenting a unified approach to strategic
communication management.
Silver (2002) argues that the convergence of IR and PR has become so important
that failing to combine those functions could have negative consequences for a public

10
LederMark, Despite regulatory impediments, financial services professionals are using Social Media to network and
gain business, March, 2010. http://www.ledermark.com/news.php
  14
company’s share price. Accounting scandals, corporate bankruptcy, and Wall Street
scrutiny might, despite all the negative consequences, potentially benefit the market by
creating a communication imperative that will lead it into the golden era of investor
relations and public relations. Gretchen Morgenson (2002) of the New York Times notes
that everyone agrees that the quality of information by companies has to be improved if
investors are going to regain trust in corporations and the capital markets.
Today, investor relations is not only about numbers; it is believed to be a key tool
for management to facilitate communication with shareholders about strategy, challenges
and opportunities, and the like. Tuominen (1997), studying investor relations practices in
the Finnish stock market, proclaims that success in investor relations requires that
companies extend the scope of investor relations from a mere publication of obligatory
annual and interim reports to more frequent, extensive, proactive, and diversified two-
way interaction and communication. Argenti (2002) recognizes that although investor
relations was traditionally managed by finance/treasury departments, the focus today has
moved from an emphasis on the numbers to an analysis of the way that numbers
communicate to various constituencies. Minow (2002), editor and co-founder of
Corporate Library, states that markets do not run on the money, but on trust. Investor
relations is no longer solely about numbers; today’s investor relations is about building
and maintaining relationships.

  15

2.2 INVESTOR RELATIONS IN CHINA
2.2.1 OVERVIEW OF THE CHINESE STOCK MARKET
Compared to the United States, China has a much shorter history in developing its
stock markets. The Shanghai Stock Exchange (SSE) was established on December 19,
1990. For the first time, Chinese were given the opportunity to invest outside of the state
run People’s Bank of China (PBOC), which provided relatively meager investing
opportunities with low interest rates (Gao, Jin, & Riedel, 2007). The SSE was started and
effectively controlled by the Chinese central government. Many of the securities listed on
the SSE are from state-owned enterprises (SOE). Even today a large portion of SOE
stock is owned and distributed by the government. Because of the strong government
presence, while the Chinese market has many of the same features as stock exchanges
such as NYSE with respect to the buying and selling of securities, the SSE must be
analyzed under different criteria.
11

Many Chinese investors are fairly new to the whole investing process and as
Washington Post journalist Ariana Eunjung Cha (2007) describes, “Until recently, it was
hard to blame the average Chinese investor for assuming that the stock markets only go
up. Since June 2005, the Shanghai composite index has gained about 300 percent.” With
an average of 300,000 new accounts being opened every day and no signs of slowing,

11
The Shanghai Stock Market: The Socialist Stock Market, Alexis Hernandez & Dr. Elliott Parker, June 4, 2007.

  16
these new and inexperienced investors account for the majority of the SSE (Rose, 2007).
Volatility is closely tied to nascent investors and their novice strategies for tackling the
market. Thus, the number of green investors makes the SSE highly susceptible to
volatility and short-term speculation.
The central government’s influence over the SSE is significant and China
arguably manipulates its stock exchange more than any other country in the world. In
2001, the CPC had to discard some of its state-owned shares in order to finance the
massive social security plan for China’s large population. This news caused market
instability and the SSE dropped 25 percent in three months (Gao, Jin, & Riedel, 2007:
147). Eventually the Chinese had to stop selling their shares because their actions
devalued the entire market (Gao, Jin, & Riedel, 2007: 147).

2.2.2 OBJECTIVES AND GOALS OF THE INVESTOR RELATIONS FUNCTION IN
CHINESE PUBLIC COMPANIES
Ultimately, the primary goal of the investor relations function is to maximize a
company’s stock value. In doing so, the company can obtain the maximum amount of
cash in exchange for the fewest number of shares. There are a variety of objectives
required to support the high stock price goal: building a positive image for the company
among investors, increasing analyst coverage, increasing geographic coverage, reducing
stock price volatility, and managing existing investors. Investor Relations Officers (IROs)
  17
must be responsible for all of these activities in order to reach the goal of maximizing
shareholder value.
Nevertheless, most IROs in China are motivated more by the short-term objective
of raising capital. In June 1999, Hisense Kelon Electrical Holdings Company Ltd. hosted
an IPO road show in Beijing and Shenzhen, the first of its kind in China. Road shows are
one of the most effective strategies among advanced investor relations tools. They
usually consist of a series of meetings in which the CEO, CFO, and IRO present the
company to a variety of influential investor audiences. In doing so, the management
benefits from face-to-face interaction with the investment community. After Hisense
Kelon’s first road show, it became routine for every company to follow suit during their
pre-IPO period.
12

However, once they raise enough money for initial expansion, most Chinese
public companies cease active communications with Chinese investors. Shanghai Stock
Exchange conducted a telephone survey of 280 Chinese blue chip
13
companies in 2010.
Researchers tried to reach the IR departments within these companies with the contact
numbers on the companies’ websites and found that 94 of the companies, or 34 percent,
were unresponsive.

12
Huang Xinjiang and Shi Yongjing, Companies Investor Relations Management Level and the Cost of Equity
Financing, Commercial Research, December 2009.
13
Blue Chip: A nationally recognized, well-established and financially sound company. Blue chips generally sell high-
quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate
profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and
reliable growth.
  18
There are two major reasons for Chinese public companies’ lack of long-term
investor relations. Firstly, the state is often the largest shareholder of blue chip companies
in China. In the last 10 years, China has recognized the need to enter the world economy
and as a result, has become more supportive of western business practices. There is little
incentive for Chinese public companies to maintain good relationships with other
relatively insignificant shareholders such as institutional investors and small retail
brokers.
Secondly, the immaturity of the Chinese stock market and the lack of knowledge
among Chinese domestic investors foster a market characterized by its high trading
velocity. Lee, Li & Wang (2010) characterized domestic investors in Chinese stock
markets as mainly individual rather than institutional investors. They tend to over-react to
market shocks and engage in abnormal trading volumes around earnings announcements,
compared with the more stable trading practices of informed institutional investors.
Comerton-Forde and Ridge (2005) notes the high level of retail investors with
Shanghai’s high trading velocity, 118 percent, compared with Hong Kong’s 52 percent
and Singapore’s 74 percent. This feature allows for increased speculation—investors are
more concerned with tracking the ups and downs of stock prices in their portfolios than
communicating with IROs.

  19

2.2 OVERVIEW OF MAJOR US STOCK MARKETS
The history of stock market trading in the United States can be traced back 200
years. In the year 1790, the federal government issued $80 million in bonds to repay
Revolutionary War debt, marking the birth of investment markets in the United States.
Around the same time, private banks began to raise money by issuing stocks, or shares of
the company in efforts to raise their own money. Two years later in 1792, a meeting of
twenty-four large merchants resulted in the creation of the New York Stock Exchange
(NYSE). At the meeting, the merchants agreed to meet daily on Wall Street to trade
stocks and bonds.
In the mid-1800s, the United States was experiencing rapid growth. Companies
needed funds in order to facilitate expansion and meet the new and growing demand.
Companies also realized that investors would be interested in buying stock, or partial
ownership in the company. History has shown that stocks have facilitated the expansion
of companies, and the potential of the recently founded stock market was becoming
increasingly apparent to both investors and companies. By 1900, millions of dollars
worth of stocks were traded on the street market. In 1921, after twenty years of street
trading, the stock market moved indoors.
14

14
Stock Market History, Stock Market Investing Guide, http://www.stockmarketinvestinginfo.com/smi_history.html
  20

2.2.1 NEW YORK STOCK EXCHANGE
The New York Stock Exchange (NYSE) is located at 11 Wall Street in Lower
Manhattan, New York City, USA. It is the world's largest stock exchange by market
capitalization of its listed companies at $11.92 trillion as of Aug 2010. Average daily
trading value was approximately $153 billion in 2008.
In 2007, the NYSE merged with the fully electronic stock exchange platform,
Euronext, to form NYSE Euronext (NYX). On February 15, 2011, NYSE Euronext
announced that it was in negotiations to merge with Deutsche Boerse, with equity valued
at $10 billion after its market share dwindled to 23 percent from 80 percent over the past
six years. The new company would be the biggest exchange ever, handling equities worth
$15 trillion and 40 percent of the US options market.
The NYSE provides a means for buyers and sellers to trade shares of stock in
companies registered for public trading. On the trading floor, the NYSE trades in a
continuous auction format and traders execute stock transactions on behalf of investors.
They gather around the appropriate post, and a specialist broker who is employed by an
NYSE member firm (that is, he or she is not an employee of the New York Stock
Exchange), acts as an auctioneer in an open outcry auction market environment, bringing
buyers and sellers together and managing the actual auction. They do on occasion
(approximately 10 percent of the time) facilitate the trades by first committing their own
  21
capital and then disseminating information to the crowd to help bring buyers and sellers
together.
The auction process eventually moved toward automation in 1995 with the use of
wireless hand held computers (HHC). The system enabled traders to receive and execute
orders electronically via wireless transmission. On September 25, 1995, NYSE member
Michael Einersen, who designed and developed this system, executed 1000 shares of
IBM through this HHC, ending the 203-year history of paper transactions and ushering in
an era of automated trading.
As of January 24, 2007, all NYSE stocks can now be traded via its electronic
hybrid market (except for a small group of very high-priced stocks). Customers can send
orders for immediate electronic execution or route orders to the floor for trade in the
auction market. In the first three months of 2007, in excess of 82 percent of all order
volume was delivered to the floor electronically.
The ability to directly trade shares on the exchange is conferred upon owners of
the 1366 "seats". The term comes from the fact that up until the 1870s, NYSE members
sat in chairs to trade. In 1868, the number of seats was fixed at 533, and this number
increased several times over subsequent years. In 1953, the exchange was limited to
1,366 seats. These seats are a sought-after commodity as they confer the ability to
directly trade stock on the NYSE. Seat prices have fluctuated over the years, generally
falling during recessions and rising during economic expansions. The most expensive
inflation-adjusted seat was sold in 1929 for $625,000, which today would translate to
  22
over six million dollars. More recently, seats have sold for as high as $4 million in the
late 1990s and $1 million in 2001. In 2005, seat prices shot up to $3.25 million as the
exchange was set to merge with Archipelago and become a for-profit, publicly traded
company. Seat owners received $500,000 cash per seat and 77,000 shares of the newly
formed corporation. The NYSE now sells one-year licenses to trade directly on the
exchange (American Stock Exchange Historical Timeline, 2010).

2.2.2 NASDAQ
The NASDAQ Stock Market (NASDAQ) is the largest US electronic stock
market. With approximately 3,700 companies, it lists more companies and on average,
trades more shares per day than any other US market. It is home to companies that are
leaders across all areas of business including technology, retail, communications and
financial services, transportation, media, and biotechnology (NASDAQ Corporate Fact,
2011).
NASDAQ was founded by the National Association of Securities Dealers in 1971,
with the purpose of popularizing the “over-the-counter” securities market. This phrase
refers to stocks that trade on a dealer network as opposed to on a centralized exchange. It
is also used to describe debt securities and other financial instruments such as derivatives,
which are traded through a dealer network. NASDAQ is owned and operated by the
NASDAQ OMX Group, which starting on July 2, 2002, is listed under the ticker symbol
NDAQ.
  23
When the NASDAQ Stock Market began trading on February 8, 1971, it was the
world's first electronic stock market. At first, it was merely a computer bulletin board
system and did not actually connect buyers and sellers. The NASDAQ helped lower the
spread, which is the difference between the bid price and the asking price of the stock,
initially making it unpopular among brokerages who made much of their money on the
spread.
Over the years, NASDAQ became a more significant stock market by adding
trade and volume reporting, and utilizing automated trading systems. NASDAQ was also
the first stock market in the United States to advertise to the general public, highlighting
NASDAQ -traded companies (usually in the technology field) and closing with the
declaration that NASDAQ is "the stock market for the next hundred years." Its main
index is the NASDAQ Composite, which has been published since its inception.
However, its exchange-traded fund tracks the large-cap NASDAQ-100 Index, which was
introduced in 1985 alongside the NASDAQ Financial-100 Index.
In 1992, NASDAQ joined with the London Stock Exchange to form the first
intercontinental linkage of securities markets. Then in 1998, NASDAQ merged with the
American Stock Exchange to form the NASDAQ-Amex Market Group, becoming the
largest electronic stock market (in terms of both dollar value and share volume) in the
United States by the start of the 21
st
century. On November 8, 2007, NASDAQ bought
the Philadelphia Stock Exchange (PHLX) for $652 million. PHLX is the oldest stock
exchange in America, having been in operation since 1790.
  24
To qualify for listing on the exchange, a company must be registered with the
SEC, have at least three market makers (financial firms that act as brokers or dealers for
specific securities) and meet minimum requirements for assets, capital, public shares, and
shareholders.
15

15
History of the American and NASDAQ Stock Exchange, Ellen Terrell, Business Reference Services, August 2010.
http://www.loc.gov/rr/business/amex/amex.html
  25

CHAPTER THREE: RESEARCH DESIGN
3.1 RESEARCH GOAL
The ultimate goal of the research is to provide facts and explore directions for
IROs in US-listed Chinese herbal companies to improve communications quality with the
investor community in the United States. The study is designed to examine the current
situation of US-listed Chinese TCM companies. It shed light on American investors’
perceptions of Chinese herbal companies and reasons behind that. After that, it concludes
by offering recommendations on how to improve current strategic investor
communication strategies for Chinese herbal companies seeking overseas listings in the
United States.

3.2 RESEARCH DESIGN
The study is composed of three phases: case study, in-depth interview, and SWOT
analysis.
There are two reasons why case study and in-depth interview are employed as
major research methods to investigate these issues. Firstly, case study and in-depth
interview allow the researcher to study contextual factors, such as the company’s history,
investors’ personal opinions, and the general market environments. These all exert great
  26
influences on the results of the study. Secondly, case study and in-depth interview
provide a tactical advantage, which is crucial for developing practical investor relations
strategies for Chinese companies. Since the concept of investor relations is relatively new
in China, collecting data by large-sample survey targeting hundreds of companies would
not satisfy the specific requirements of this study.
This research looks at three groups in this issue:
 Investor relations agency professionals that have experience representing US-
listed Chinese TCM companies;
 Investors who are interested and have experience in investing in the Chinese
healthcare industry;
 Management and IROs in US-listed TCM companies.

3.2.1 CASE STUDY
Case study is a research method based on in-depth investigation of an event.
Eisenhardt (1989b) describes the case study as a research strategy that focuses on
understanding the dynamic present within single settings. According to Yin (1981, 1994),
a more technical definition of the case study is an empirical inquiry that investigates a
contemporary phenomenon within its real-life context, especially when the boundaries
between phenomenon and context are not clearly evident. He also suggests that case
methods are more appropriate when the research question is in an explanatory form such
as “how” or “why.” These kind of open questions deal with operational links that need to
  27
be traced over time, rather than with frequency or incidence (Yin, 1994). Thus, a case
study is a research strategy that incorporates contextual issues into the analysis.
Because this is an exploratory study, the study begins with proposing the
following research questions: 1) what are the most influential components in investors’
belief formation process; and 2) how do contextual and firm-specific factors influence
U.S. investors’ decisions of when to buy, sell or short sell stock.
16

3.2.2 IN-DEPTH INTERVIEW
In-depth interview is a qualitative research technique that allows for candid
discussion on a specific issue. Because it is a discovery-oriented method, in-depth
interview is well suited for describing investors’ perceptions on US-listed TCM
companies.
Since the investor relations function gained traction in China just a few years ago,
research specifically focusing on Chinese companies is rarely found. Therefore, in-depth
interviews in this study were designed in accordance with the purposes and methods of
recent research on international investor relations in general. The questions are based on
previous research of IROs (Peter & Martin, 1996) as well as investor relations and

16
Short-selling refers to the selling of a security that the seller does not own. Short sellers assume that they will be able
to buy the stock at a lower amount that the price at which they sold short. Selling short is the opposite of going long.
That is, short sellers make money if the stock goes down in price. This is an advanced trading strategy with many
unique risks and pitfalls. Novice investors are advised to avoid short sales. (Investopedia, 2011)
  28
corporate communications textbooks that review investor relations activities (Argenti &
Forman, 2001: Chatlos, 1984; Marcus & Wallace, 1997; Rieves & Lefebyre, 2001).
Ten in-depth interviews were conducted; four with investor relations practitioners,
three with analysts, and three with management and in-house IROs. The length of each
interview varies from 45 minutes to 60 minutes long. Only open-ended questions were
asked. Each interview follows a pattern of warm-up, information exchange, and wrap-up.
Major issues discussed in the interviews include:
1) Perceptions of the TCM industry in general;
2) Perceptions of US-listed Chinese TCM companies and their executive
management;
3) Interests and concerns of American investors in this sector;
4) Components needed for US-listed TCM companies to build a better image.

3.2.3 SWOT Analysis
The SWOT analysis is the process of analyzing organizations and their
environments based on their strengths, weaknesses, opportunities, and threats. It involves
specifying the objective of the business venture or project, and identifying the internal
and external factors that are favorable and unfavorable in terms of achieving that
objective.
17

17
SWOT Analysis, Wikipedia, http://en.wikipedia.org/wiki/SWOT_analysis
  29
It is crucial for IROs to have a holistic picture in mind of Chinese herbal
companies’ current situation in the financial community before they design and execute
any investor relations activities. SWOT analysis in this study explores the constraints as
well as future possibilities for Chinese herbal manufacturers in American stock markets.
In this study, SWOT analysis is based on in-depth interviews with investor
relations practitioners, financial analysts, and financial journalists. They all have
experience working with Chinese herbal companies listing or seeking listing in the
United States. The main factors considered when choosing the panel members were the
participants’ knowledge of organizational and financing aspects of health care system and
market in China, and their familiarity with both the literature on financial service
institutions in the United States and the herbal medicine industry in China.
  30

CHAPTER FOUR: SWOT ANALYSIS OF US-LISTED TCM COMPANIES
4.1 STRENGTH
Market Demands
Demand for traditional Chinese herbal medicine is growing dramatically both at
home and abroad. According to Chinese customs statistics released in 2010, China's
export value of TCM hit $910 million in the first half of 2010, up 26 percent year-on-year,
with plant extracts, prepared slices and other raw materials accounting for 78.8 percent of
the total volume. Patent medicines took up only 12.9 percent of the total volume. The
export volume of Chinese patent medicines reached $160 million in 2009, up 30 percent
from $125 million in 1996, according to customs figures.
18

In addition, the aging population poses a huge challenge for China, but creates a
huge market for drug makers. As a result of trends in both fertility and longevity, the
elderly share of China's population is steadily increasing, with those ages 60 and over set
to form a rapidly growing share of the population. In 2009, 18 percent of China's
population was between the ages of 35 and 44, versus about 13 percent in the US. More
than 30 percent of the population is expected to be over the age of 60 in 2050. As a result

18
Traditional Chinese Medicine Hopes for Global Approval, China Daily, October 25, 2010.
http://usa.chinadaily.com.cn/epaper/2010-10/25/content_11455398.htm
  31
of China’s aging population, the demographic group of Chinese ages 15-64, which had
previously grown rapidly due to the past few economic boom decades, has now plateaued
and is slated to decline rapidly in the coming years. By 2050, it is projected that the
population over 60 years old and over 80 years old will reach 440 million and 101 million,
respectively.
Traditional Chinese medicine is widely accepted among Chinese consumers,
especially by the older population. With recent improvements in people’s living standards
and a growing interest in health awareness, China’s consumption market of traditional
medicine is likely to see another wave of development.
An interviewee who works as an analyst at a US investment bank said:
“I find the industry very attractive. Chinese medicine is well aligned to
China’s healthcare reform. Despite the tumbling stock price, I have
confidence that it can still deliver growth well above the average of other
industries. It is a market of 1.3 billion people. This is incredible!”

Greater demand in international markets means greater opportunities for China’s
TCM industry. China has maintained a steady increase in the export of traditional
Chinese medicine, and in 2007, China’s import and export of traditional medicine
products reached a record $1,180,000,000, the highest in recorded history (Liu, Xu and
Zhang, 2010).

Patent Protection
In order to safeguard their intellectual creations, the major actors in the TCM
industry strictly regard patent protection as a form of intellectual property. In 2000, the
  32
United States Food and Drug Administration (FDA) introduced draft guidance for
Industry Botanical Drug Products, which recognized that botanicals could be marketed as
prescription drugs in the United States. This marked the entrance of Chinese traditional
medicine manufacturers into the US market, and served as a the first significant step
towards boosting the growth of the TCM industry in China.
According to an interview with an institutional investor based in Los Angeles,
patents play a very important role in terms of the potential competitiveness and
profitability of the TCM manufacturer:
“First, patentee gets the liberty to enjoy monopoly over the patented drug
for 20 years. In additional to manufacturing, it can also monetize his
patented drug by selling of licensing out his rights. None of these will be
threatened by competitors.”

Manufacturing Capability
Because China is indisputably the cradle of traditional medicine, TCM
manufacturers have a great advantage over traditional medicine manufacturers in other
countries. According to the latest statistics on China’s traditional medicine resources,
there are 12,807 types of traditional Chinese medicines, among which 11,146 are medical
plants, 1,581 are medical animals, and 80 are medical mineral resources. Just 320 types
of common medical plants account for a total reserve of 8,500,000 tons of product. Over
700 production bases all over China produce 400,000 tons of traditional medicine every
year. China’s high-quality medicine products and sheer volume create a unique market
incomparable to any other foreign competitors (Zhang, 2010).
  33

4.2 WEAKNESS
Cultural Differences
Traditional Chinese medicine is a holistic medicine system that applies the use of
natural medicine as prescribed by herbalist doctors. In order for the investor community
in the United States to even begin understand traditional Chinese herbal medicine, a
familiarity with Chinese psychology, culture, and the theories of traditional Chinese
herbal medicine is absolutely necessary. Due to differing historical and cultural
backgrounds, the principles and philosophies extolled by Western medicine compared
with those of traditional Chinese medicine could not be more different. Eastern medicine
emphasizes yin-yang and five basic elements: possession with symptoms, bloods and
channels, deficiency and excess, cold and heat, and dialectic treatment. With its complex
ingredients, traditional Chinese medicine emphasizes nature, flavor, and meridian tropism
as well as the respective roles of principal, assistant, adjuvant, and dispatcher herbs. It
differs with Western medicine in that its approach to treatment relies heavily upon
industrially produced medications with a strict adherence to a formal scientific process.
In this regard, it is quite difficult for the American investor to understand traditional
Chinese medicine because precise equivalents for traditional Chinese herbal medicine
concepts simply do not exist in Western science and theory.
Below is an extract from an interview with the CEO of a US-listed Chinese TCM
manufacturer:
  34
“I think we have a long way to go in terms of letting American investors
understand our business. There is a huge cultural barrier here, which
easily leads to misunderstanding and drives panic. As we discussed before,
the case of CSKI showcases that it takes years to build a good reputation,
and only seconds to destroy it. We don’t do a lot of investor relations in
China, only when information disclosure is required. But here, in the
United States, we definitely need to be more presentable and proactive in
communication with the investor community.”

Quality Control
Years of management practice in the Western medicine industry have produced
the well-established quality control standards of today. However, there are no such
internationally recognized standards for traditional Chinese medicine.
An interviewee working in an investor relations agency based in Los Angeles
addressed this issue:
“At present, the standardization process of traditional medicine in China
is still in a preliminary stage: for example, there are no restrictions or
norms for the plantation of herbals for traditional Chinese medicine. Also
some research data from experiments on the evaluation of pharmacology,
medical properties and toxicology are accepted by the world. This poses a
big challenge for US-listed Chinese TCM companies when they are trying
to showcase the legibility of their products to American investor
community. Some of our clients, I means those TCM manufacturers based
in China, are now urging the Chinese government to be more active in
establishing and promoting norms and standards in the TCM industry that
are globally recognized. But it takes time.”

Chinese-style management
In China, management style tends to be very linear: the senior manager sends
instructions to his/her direct subordinate who then passes the message down the line.
Employees are not expected to question the decisions of superiors; rather, this kind of
  35
behavior is considered disrespectful and would result in a superior “losing face.”
In the study, one of the analyst interviewees complained:
“Chinese management is always expecting to receive respect and
obedience from others. This does prohibit them communicating more
openly and establishing good relationships with investors. They are used
to be positioned in the place as a leader. This is OK for private companies.
But as soon as you go public, the ownership partly shifts to investors. All
the shareholders own the company, and your job is to create value for
each of them. I think this is the ultimate reason why so many US-listed
Chinese companies are not very popular here.”

4.3 OPPORTUNITY
Government support
The government is playing a significant role in supporting and expanding the
TCM industry in China. Below is an extract from an interview with the CEO of a US-
listed TCM companies based in Guangxi, China.
“Chinese government has been making efforts to develop the traditional
Chinese medicine industry, and it is very supportive for relevant
enterprises. On December 1, 2002, General Office of the State Council
transmitted The Development Outline for the Modernization Development
of Traditional Chinese Medicine established by eight ministries and
commissions, proposing the guidelines, basic principles, strategic targets,
key tasks and major measures of China’s modernization of traditional
medicine, which has had tremendous impact on China’s modernization of
traditional medicine.”

Economic globalization
It can be gathered from the in-depth interviews that US-listed TCM companies
strongly believe in the merits of economic globalization in regards to China’s economy.
China’s entrance into World Trade Organization (WTO) clearly marks the nation’s
  36
efforts to fully participate in the process of economic globalization. The TCM industry is
one of the most important components of China’s export and domestic healthcare.
Below is extracted from an interview with the in-house IRO of a US-listed TCM
company based in Guangxi, China:
“The entry into WTO helps to bring China’s TCM to the world. We are
definitely benefited from this in terms of absorbing foreign capital,
technologies and management experiences, all of which will improve
China’s TCM industry as a whole.”

More recognition in the Western medicine industry
Interviewees also share the opinion that Western medicine is finally beginning to
acknowledge its debt to Chinese herbal medicine. Centuries-old traditional medicine
practices are now injected into the modern day pharmaceutical conversation. Below is
part of a conversation with an in-house IR from a US-listed TCM company:
“Influenced by the current back-to-earth trend, people began to switch
their attention to natural medicine for health-care needs. Indeed, this is a
fundamental tenet of not just Chinese medicine, but Western medicine as
well. Chinese medicine emphasizes harmony and duality, and this is well-
represented by the increasing cooperation between practitioners of TCM
and their counterparts in the Western medical establishment.”

4.4 THREAT
Political Restriction
The Chinese government has enacted a number of foreign investment laws
pertaining to the assets of Chinese companies, such as restricting and prohibiting foreign
investments in industries that are deemed vital to the Chinese economy.
  37
An IR agent interviewee with an understanding of the Chinese-style corporate
structure explained the regulation barrier that US investors face:
“Historically, Chinese companies wanting to access the international
markets went public through a ‘round trip’ investment in which they
transformed themselves into offshore holding companies, typically
headquartered in the British Virgin Islands, which then acquired the
Chinese onshore business. In 2006, the Chinese government enforced
what is commonly referred to as ‘Circular 10’, a group of regulations that
require government approval for these types of round trip investments.
Since government approval is extremely difficult to obtain, a number of
alternative corporate structures have been developed that fall outside the
scope of Circular 10. For investors who are unfamiliar with the regulatory
context, these corporate structures appear unnecessarily complex and
risky. Therefore, management teams need to be well versed in these issues
and be able to clearly explain the reasons behind their corporate
structures to investors.”

Chinese business culture
“Guanxi” ( 关系), a term which loosely translates to business connections or
business networks, uniquely describes Chinese business culture and IROs often find it
difficult to convey its meaning and importance to foreign investors.
Deeply imbedded in Chinese culture of the millennia, “guanxi” consists of family,
relatives, former classmates, coworkers, members of organizations, former or current
military cohorts, and all the connections made through these contacts. Below is an
excerpt of a conversation with an account manager of a local IR firm:
“In the West, having connections, although very important, is usually not
a sufficient condition on its own, nor even necessary in some
circumstances. Sound business fundamentals would be prerequisite to
doing a deal. A good pre-existing relationship only helps to facilitate a
transaction. When China launched the economic reforms in the late 1970's,
there was no existing market-driven system to guide the economic flow
  38
and most transactional entities were state-owned. Therefore, business was
predominantly initiated through the “guanxi” system. That was the only
proven channel for one economic entity to interact with another that had
not been a contact under the old system of government mandate.
Unfortunately, a number of Chinese TCM companies, listed in the U.S.,
are still following this pattern when presenting themselves to American
investor community.”
  39

CHAPTER FIVE: CASE STUDY - CHINA SKY ONE MEDICAL, INC.
5.1 BACKGROUND
China is currently on track to become the largest consumer healthcare products
and services market in the world. According to Bloomberg, China’s $16.7 billion
healthcare market has grown 11 percent per year in the past five years, surpassing
Germany to become world’s second-largest market after the US.
19
Meanwhile, the
Chinese Food and Drug Administration reports that Traditional Chinese Medicines
(TCM) account for 36 percent of the total market, with estimated annual sales exceeding
$2.5 billion.
With the TCM industry’s booming spending power and fast-growing economy
creating such a strong demand for better medical care, there should be a great demand
and a wealth of investment opportunities, yet almost all the US-listed Chinese herbal drug
manufacturers are suffering from low valuations in American capital markets. This is a
highly contradictory situation in which companies generating earnings growth of 40 to 50
percent are trading at only five or six times forward earnings and one to two times book
value, which is well below the multiples typically associated with growth companies.

19
Phil Serafino, Sanofi-aventis to buy bmp sunstone to expand in china, Oct 28 2010, Bloomberg
  40
Frustrated by this lack of interest from US investors, some companies are looking to
other options, such as going private or relisting on the A-Share or Hong Kong market.
China Sky One Medical (NASDAQ: CSKI), which made its debut in the United
States in 2006, was considered one of the major success stories of the TCM industry.
However, in 2010, John Bird, an independent investor from Texas who is known for
profiting from shorting stocks in public companies
20
, accused CSKI of fraud and
launched a private investigation into the financial situation of the company. Bird hired
legal counsel to go to China to look into matters and meanwhile created the website,
Waldomushman.com. On the home page of the website he declared that “China Sky One
Medical does not deserve the confidence of their stockholders…I have come to believe
that China Sky One Medical is actively committing fraud.”
Under Bird’s short-selling pressure, CSKI's stock, which had peaked above $18.6
in 2010, eventually tumbled to $5 a share.

20
Short selling: In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually
securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets
back at a later date to return to the lender. It is a form of reverse trading. Mathematically, it is equivalent to buying a
"negative" amount of the assets. The short seller hopes to profit from a decline in the price of the assets between the
sale and the repurchase, as the seller will pay less to buy the assets than the seller received on selling them. Conversely,
the short seller will incur a loss if the price of the assets rises.
  41
Table 3: CSKI’s stock price (March 2010-February 2011)

Source: Bloomberg
What caused this crisis? Is China Sky One Medical guilty of committing fraud, or
is there some “missing point” that it failed to address? Was CSKI’s lack of transparency
meant to intentionally mislead its investors? Was there anything they could have done to
offset Bird’s short selling pressure? And most importantly, what can investor relations
professionals learn from this case?

5.2 THE COMPANY
China Sky One Medical, Inc. (NASDAQ: CSKI) is a China-based manufacturer
of traditional Chinese medicine. It develops and manufactures traditional Chinese
medicines, western medicines, diagnostic kits, and cosmetics through its wholly-owned
subsidiaries, Harbin Tian Di Ren Medical Science and Technology Company, Harbin
First Bio-Engineering Company Limited, Heilongjiang Tianlong Pharmaceutical, Inc,
  42
and Peng Lai Jin Chuang Company Pharmaceutical Company. China Sky One Medical
distributes its products though a network that covers 4,500 retail stores and hospitals in
22 provinces and 125 municipalities in the People’s Republic of China. In addition, it
exports its products to over 20 countries and regions including the United States,
Germany, Denmark, Switzerland, Hungary, South Korea, Singapore, Australia, Malaysia,
Taiwan, and Hong Kong.
Energized by profits in both domestic and overseas markets, China Sky One
Medical decided to go public to fund its expansion in 2006. The process of going public
is a tedious one that requires time-consuming regulatory filings. In addition, when a
foreign firm wants access to the US capital market, there is more paperwork relating to
the creation and maintenance of American Depositary Receipts (ADRs). ADRs are the
instruments that actually trade in the US, and each receipt is made equivalent to a specific
number of actual company shares.
21
For these reasons, CSKI chose to go public through a
reverse takeover (RTO), which occurs when a privately held operating company acquires
a publicly traded entity. The latter essentially becomes a corporate shell. In early 2006,
China Sky One Medical found its shells in California: Comet Technologies Inc. and
American California Pharmaceutical Group Inc.
The shares of the newly merged company finished 2006 at $8 and climbed 75
percent in 2007 to $14. In 2008, Sky One moved from the OTC Bulletin Board to trade
on the American Stock Exchange, and then on the NASDAQ.

21
Marc Gerstein, Reverse Takeovers: The Poor Man’s IPO Deserves Some Respect, Forbes, February 2, 2011
http://blogs.forbes.com/investor/2011/02/02/reverse-takeovers-the-poor-mans-ipo-deserves-some-respect/
  43

5.3 THE SHORT ATTACKER
John Bird is a 60-year-old retired entrepreneur from the hill country outside of
Austin, Texas. His varied business endeavors encompassed everything from movie
theaters to fried chicken restaurants. Using this business experience, Bird became an
amateur corporate detective, and later, a profitable short seller.
By August 2009, Bird was ready to place a serious bet on China Sky One Medical.
He short sold 30,000 shares at $15.70. The next natural step for a successful short sale
was to get the word out.
Bird claimed that he found “the short seller gold.” The investigators he hired went
to China and pulled the corporate records of China Sky One Medical’s various operating
subsidiaries. Bird’s investigators came across Chinese-language credit reports and
statutory filings that painted an entirely different picture than had been previously
reported to the SEC. For instance, several key units were reporting revenues more than 75
percent lower than what was stated in their SEC filings.
China's State Administration of Industry and Commerce (SAIC) is the Chinese
government agency responsible for market supervision, regulation, and enforcement.
According to a filing of CSKI with SAIC, one of the companies’ operating units, Harbin
Tian Di Ren, had 2008 sales of 6.93 million yuan, roughly $1 million at 2008 exchange
rates. Yet to the SEC, China Sky One Medical reported 2008 sales of $91.8 million, of
which Tian Di Ren accounted for at least 65 percent, or $59.7 million.
  44
Bird immediately launched a website featuring these reports.
22
On the site, Bird
notes point-blank that he had “come to believe that CSKI is actively committing fraud.”
He also took to the company’s Yahoo! Message Board and angered numerous investors
by arguing his case.
23

CSKI’s stock price, however, did not go down as Bird had expected and in
January 2010, he suffered some sharp losses of roughly $90,000. Unfazed, Bird hired a
law firm to further investigate CSKI’s patents all the while ordering more reports to trace
China Sky One Medical’s customers and suppliers. He was convinced that the paperwork
showed companies too small to generate the orders or inventory China Sky One Medical
had reported. Bird sent his evidence to the SEC and claimed on his blog that an SEC
official in Los Angeles and a NASDAQ enforcement officer called him regarding the
SAIC documents. This however could not be confirmed, as the NASDAQ spokesman did
not respond to exchange officials’ requests for an interview.
SEC launched investigation into the company, which generated a lot of negative
press. Under this pressure, in September 2010, China Sky One Medical lowered its
annual revenue forecast from somewhere between $160 million and $164 million to the
range of $128 million and $136 million, citing the loss of major distributors. The
distributors did not want their business information disclosed in public SEC filings,
which would lead to increased scrutiny by the Chinese government.

22
http://www.waldomushman.com/Intro.html
23
Roddy Boyd, CGA and CSKI: Lost in Translation?, June 22, 2010, The Street Sweeper,
http://thestreetsweeper.org/article.html?c=3&i=837

  45
As a result, the stock dropped 31 percent before the claims could be examined in
any depth. Not surprisingly, John Bird found himself with more than $1 million of pure
profit.

5.4 THE MISSING POINTS IN CSKI’S INVESTOR RELATIONS EFFORTS
Obviously, China Sky One Medical lost the battle against the short attack even
before SEC completed its investigation—stock price plummeted and rumors flew back
and forth, both online and offline. In review of causes of this crisis, there are several
missing points to the company’s investor relations efforts.
Missing point in messaging: failing to clarify some of the major aspects in filing
system disparity between China and the United States. One of Bird’s fraud accusations
against China Sky One Medical was that some of the key units in its revenue report to
SEC were significantly lower than those reported to the SAIC. However, this is a result
of the difference between Chinese and American reporting systems.
China's SAIC is primarily responsible for business registration and business
licenses. The SAIC is the Chinese government registrar for official documents such as
articles of incorporation, legal persons, registered capital, and company ownership.
Financial reports that Chinese companies file with SAIC are not verified or audited by the
  46
SAIC. The agency is primarily concerned with legal compliance issues and not with
operating data or taxes.
24

As a matter of fact, companies’ filings made with another Chinese government
agency, the State Administration of Taxation (SAT), have much more in common to SEC
filings than those submitted to the SAIC for business licenses. Financial statements to the
SAT are audited and hence more reliable than SAIC filings. However, these reports are
not publicly accessible and unavailable to investors and research analysts.
Another legitimate reason for inconsistent financial statements between China and
the United States relates to overseas activities. SAIC filings only reflect business
activities in China, while SEC filings must reflect worldwide financial data for the
consolidated US-listed company. Revenue that is generated overseas or assets held
outside of mainland China (including Hong Kong), is included in the SAIC filings.
However, China Sky One Medical failed to address either of these reasons when
combating its short attack response.
Missing point in strategies and tactics: failing to obtain third-party endorsement.
Third-party endorsement increases a story’s "newsworthiness" when presented in the
media. Guth and Marsh (2006) state, “The appearance in an uncontrolled news medium
lends credibility to a story, because the media are neither the sender nor the receiver but
an independent third-party.” Swann (2008) states that unlike advertising, information

24
On SAIC and SEC Filings, Trading China, January 27, 2010, http://china.fixyou.co.uk/2010/07/on-saic-and-sec-
filings.html
  47
placement is “free” when published in a news story. “Depending on the publication's
circulation or audience reach, this could produce significant return on investment.”
In this case, Bird defeated China Sky One Medical by obtaining major financial
media endorsement in Bloomberg (Lawrence, January 2011). The company unwisely did
not take the opportunity to respond and defend itself: executives refused to comment on
Bird’s criticism and investor relations staff did not reach out to any media outlets. CSKI
instead tried to shift focus by issuing a press release stating how its wholly owned
operating subsidiary was named “Top Ten Branded Company Trusted by Consumers” by
China Pharmaceutical Association. Ultimately, this strategy was found to be
unsuccessful.
25

Missing point in strategies and tactics: failing to respond quickly using social
media. China Sky One Medical did not take into account that social media is vastly
changing the definition of corporate communications. Traditional media outlets are
shrinking, while social media channels are multiplying. In this new media environment,
individuals are becoming more empowered and for the first time, have a connected
platform to share their thoughts and knowledge on a global scale.
On the other hand, the short seller John Bird understood the power of social
media and it served as a major vehicle for disseminating his findings. After sending
investigators to China, he set about creating an online presence at Waldomushman.com,
and posted regularly on the China Sky One Medical Yahoo! Message Board. Using these

25
China Sky One Medical Receives Medical Industry Awards, PR Newswire, January 27, 2011.
  48
platforms, he single-handedly managed to influence a high concentration of analysts and
individual investors while CSKI did nothing to reassure its investors or halt the spread of
rumors. It did not have a corporate blog or a presence on Facebook or Twitter. China Sky
One Medical did not even attempt to respond on its own Yahoo! Message Board, missing
the timely opportunity to win back investors and analysts by giving a quick response to
clear up any misunderstandings.
Missing point in strategies and tactics: failing to establish a Chinese website for
information disclosure. A corporation’s official website is one of the most credible
sources of information for investors who are doing research when buying or selling
stocks. China Sky One Medical has an official website, but it is in English only. The
glaring absence of a Chinese-language website left some investors to speculate whether
the website was created specifically for American investors. Without a Chinese-language
website to verify the results and reports on the English website, investors questioned the
company’s transparency and were left to wonder whether CSKI could indeed be
committing fraud by reporting fake financial results to the investor community in the
United States.

  49

CHAPTER SIX: CONCLUSIONS AND RECOMMENDATIONS
With US-listed Chinese TCM stocks currently priced with unreasonably forward
multiples, the only possible explanation for the low share price is that the market simply
does not believe the numbers. There is undeniably a higher degree of risk involved with
investing in the TCM industry in China than with the average US companies.
Some key points are concluded based on the research findings above. The focus
lies in fostering management credibility and building trust in the reported facts and
financial results.

6.1 THIRD PARTY ENDORSEMENT
It is widely believed that a strong third party endorsement is crucial to US-listed
TCM companies’ ability to win confidence and trust from investors. An ideal third party
will enlist side analysts from well-respected investment institutions. Having two or more
analysts covering a stock greatly enhances a company’s transparency and investors
benefit from the due diligence of the institutional investors. Management will then get
valuable feedback from analysts about deficiencies and possible problems, and gain
insight into what institutional investors want to see in regards to transparency,
communication, and earnings quality.
  50

6.2 ACTIVE AND REGULAR COMMUNICATION WITH INVESTORS
The easiest way to communicate with investors is through regular press releases
with updates of business outlooks along with timely reports of material events. The very
minimum should be a press release for quarterly earnings, preferably followed by a
conference call. It is important for the management or investor relations firm to respond
to shareholder questions, but this type of passive communication alone is insufficient;
management must actively communicate its story with investors. IROs should also report
financial results and file quarterly/annual reports in a timely manner. Failing to do so
reflects poorly on the standards of a company. Repeatedly requesting extensions to the
SEC for quarterly or annual reports garners unwanted negative attention from investors.
There might be special circumstances that justify the one-time delay of an earnings report,
but repeat offenses indicate that a company is ill-prepared in their financial reporting,
which could shake investors’ confidence in a company and raise questions of deep-seated
structural problems.

6.3 A STRONG IMAGE OF THE MANAGEMENT AND BOARD OF DIRECTORS
Many US-listed TCM companies are controlled by just one or two majority
shareholders. According to the research findings, while many investors view high insider
ownership as a plus for a stock, it is still imperative that the company has a strong and
  51
influential independent board and audit committee. This helps to assuage investors’
concerns about the “guanxi” system in Chinese-style management.

6.4 AN ENGLISH-SPEAKING CFO
Investing in a high-caliber Chief Financial Officer helps foster investor
confidence in the company, the management team, and the financial results. A highly
qualified CFO with a strong background in the US accounting system will greatly reduce
the risk of financial records being challenged by investors. This type of CFO allows the
company to build credibility and interact easily with US investors at investment
conferences, earnings calls, and road shows. Unfortunately, this is an area in which many
US-listed TCM companies miss the mark. Some hire relatively inexperienced, non-
English speaking CFOs in an effort to keep costs down. Others select CFOs that are
fluent in English but have limited US accounting experience. Also, if a CFO is based in a
different city or country from the company’s operations or has limited access to the rest
of the senior management team, this often results in a frustrated CFO who feels
disconnected from the company. All of these factors contribute to high levels of turnover
in the CFO position. TCM companies would be wise in spending the necessary time and
resources to hire a highly qualified, English-speaking Chief Financial Officer who is a
good cultural fit for the company.

  52

6.5 PRESENCE ON SOCIAL MEDIA
The case of CSKI showcases just how powerful social media is in both building
and destroying relationships with investors. Since July 2010, when the SEC announced
the recognition of corporate blogs as forums for public disclosure, PR, marketing, and
advertising professionals have effectively utilized social media to their
advantage. However, IR practitioners are still discovering the risks and opportunities
inherent in the recent outline of SEC guidelines. Issues of disclosure and adherence to
legal compliance must be considered when integrating blogs and other social media
platforms into an IR program. The scope of social media’s influence on the investor
relations function is constantly evolving and has yet to be fully realized.
  53

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APPENDIX A: INTERVIEW QUESTIONS AND INTERVIEWEES
Interview with investor relations practitioners:
1. How long have you been representing US-listed Chinese TCM companies?
2. What is your perception of traditional Chinese medicine industry in general?
3. Do you find it difficult for American investors to understand? Why?
4. What is your perception of American investors’ attitude towards US-listed
Chinese companies in general?
5. What is your perception of American investors’ attitude towards US-listed
Chinese TCM companies?
6. Do you think Chinese TCM companies understand how to communicate with
American investors? If not, why?
7. Do you find it easy to work with the management team of Chinese TCM
companies? If not, why?

Interview with analysts:
1. How long have you been covering this sector?
2. What is your perception of traditional Chinese medicine industry in general?
3. Do you find it difficult to understand? Why?
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4. Overall, do you find the industry attractive or not? Why?
5. What is your perception of US-listed Chinese companies in general?
6. What is your perception of US-listed Chinese TCM companies?
7. What sets a TCM company apart when you choose to initiate coverage on it?
8. What is your biggest concern in investing in Chinese TCM companies?
9. Do you find any difficulties in collecting first-hand information from the
companies?
10. How would you describe the management team in those Chinese TCM companies
that you cover?

Interview with management and in-house IROs:
1. How long have you been working in this industry?
2. How long have your company been listed in the United States?
3. How much time of a year do you spend in the United States? / How often do you
visit the United States?
4. What do you do, on a regular basis, to communicate with American investors?
5. Do you have a Chinese website for information disclosure? If not, why?
6. Do you find it difficult to communicate with American investors?
7. What do you think is the most important advantage to convince investors of the
value of your company?
8. Do you have any comments on CSKI being short attacked last year?
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Interviewees:
Chen, Jessie Jiang, Douglas Lu, Hongbo
Tchaikovsky, Bennet Tellier, Kate Tobin, Mark
Townsend, Allison Wang, Mark Silver, David Zeng, David
  62

APPENDIX B: 2010 CHINESE IPOS IN THE UNITED STATES
In 2010, there were 52 Chinese companies completing overseas Initial Public
Offerings (IPOs) worldwide. Among the 52 Chinese companies, 38 of them listed in the
United States: 22 on the New York Stock Exchange, 17 on the NASDAQ Stock Market
and one on the American Stock Exchange. According to data from Dealogic, Chinese
companies raised a total of US$4 billion in the year 2010.
26

The following is a list of Chinese IPO stocks in 2010 with IPO prices and returns
of 2010.
27

Table 4: 2010 Chinese IPO in the United States
Company Ticker IPO date IPO price
Price on
12/31/10
2010 Return
China Hydroelectric CHC 01/24/10 $14.80 $7.39 -50.07%
Andatee China Marine Fuel AMCF 01/25/10 $6.30 $5.50 -12.70%
IFM Century 21 China CTC 01/27/10 $7.00 $5.00 -28.57%
China Electric Motor CELM 01/28/10 $4.50 $4.55 1.11%%
China Lodging Group HTHT 03/25/10 $12.25 $21.78 77.80%

26
Lynn Cowan, Chinese Firms Had Big Year in U.S. IPO Market, The Wall Street Journal, December 19, 2010,
http://online.wsj.com/article/SB10001424052748704034804576026100383507210.html
27
2010 Chinese IPO Stocks Performance, iStockAnalyst, January 04, 2011,
http://www.istockanalyst.com/article/viewarticle/articleid/4782565
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Table 4: Continued
Company Ticker IPO date IPO price
Price on
12/31/10
2010 Return
Charm Communications CHRM 05/04/10 $9.50 $19.86 109.05%
JinkoSolar Holding JKS 05/13/10 $11.00 $20.12 82.91%
Kingtone Wirelessinfo KONE 05/13/10 $4.00 $3.40 -15.00%
China New Borun BORN 06/10/10 $7.00 $10.40 48.57%
China Intelligent Lighting CIL 06/17/10 $3.00 $2.72 -9.33%
HiSoft Technology Int'l HSFT 06/29/10 $10.00 $30.20 202.00%
AutoNavi Holdings AMAP 06/30/10 $12.50 $16.03 28.24%
Camelot Information
Systems
CIS 07/20/10 $11.00 $23.92 117.45%
Ambow Education Holding AMBO 08/04/10 $10.00 $13.92 39.20%
China Kanghui Holdings KH 08/10/10 $10.25 $18.51 80.59%
SouFun Holdings Limited SFUN 09/16/10 $42.50 $71.52 68.28%
Country Style Cooking
Restaurant Chain
CCSC 09/27/10 $16.50 $23.00 39.39%
China Ming Yang Wind
Power
MY 09/30/10 $14.00 $11.50 -17.86%
ChinaCache International CCIH 09/30/10 $13.90 $20.80 49.64%
Daqo New Energy DQ 10/06/10 $9.50 $10.16 6.95%
Global Education &
Technology Group Ltd.
GEDU 10/07/10 $10.50 $9.54 -9.14%
TAL Education Group XRS 10/19/10 $10.00 $16.10 61.00%
Mecox Lane Limited MCOX 10/25/10 $11.00 $7.41 -32.64%
Le Gaga Holdings GAGA 10/28/10 $9.50 $8.04 -15.37%
  64
Table 4: Continued
Company Company Company Company Company Company
Xueda Education Group XUE 11/01/10 $9.50 $11.27 18.63%
Noah Holdings NOAH 11/09/10 $12.00 $19.55 62.92%
RDA Microelectronics RDA 11/09/10 $9.00 $14.61 62.33%
Bitauto Holdings Limited BITA 11/16/10 $12.00 $8.84 -26.33%
China Xiniya Fashion XNY 11/22/10 $11.00 $9.16 -16.73%
Bona Film Group Limited BONA 12/08/10 $8.50 $5.46 -35.76%
E-Commerce China
Dangdang
DANG 12/07/10 $16.00 $27.07 69.19%
Youku.com YOKU 12/07/10 $12.80 $35.01 173.52%
China Shengda Packaging
Group
CPGI 12/09/10 $4.00 $3.97 -0.75%
Sky-mobi Limited MOBI 12/09/10 $8.00 $5.34 -33.25%
iSoftStone Holdings ISS 12/13/10 $13.00 $18.17 39.85%
Ossen Innovation OSN 12/20/10 $4.50 $4.74 5.33%
  65

APPENDIX C: GLOSSARY OF FINANCE AND INVESTOR RELATIONS
10-K
A report similar to the annual report, except that
it contains more detailed information about the
company's business, finances, and management.
It also includes the bylaws of the company, other
legal documents, and information about any
lawsuits in which the company is involved. All
publicly traded companies are required to file a
10-K report each year with the SEC.
10-Q (Quarterly Report)
Unaudited document required by the SEC for all
US public companies, reporting the financial
results for the quarter and noting any significant
changes or events in the quarter. Quarterly
reports contain financial statements, a discussion
from the management, and a list of "material
events" that have occurred with the company
(such as a stock split or acquisition).
A
Asset Turnover, TTM
This value is calculated as the Total Revenues
for the trailing twelve months divided by the
Average Total Assets. The Average Total Assets
is defined as the Total Assets for the 5 most
recent quarters divided by 5.

Average Primary Shares Outstanding
This is the number of weighted average shares
outstanding for the period.

B
Beta
Beta is a measure of a company's common stock
price volatility relative to the market.

Book Value Per Share, MRQ ($ per share)
This is defined as the Common Shareholder's
Equity divided by the Shares Outstanding at the
end of the most recent fiscal quarter.

Book Value, MRQ ($ millions)
Also referred to as Common Shareholder's
Equity, this is the Total Shareholder's Equity as
of the most recent quarterly Balance Sheet minus
Preferred Stock and Redeemable Preferred Stock.

Business Summary
This field of information will give the investor a
brief description of what the company's line of
business is. It also gives information regarding
the current period's revenues and earnings vs. the
prior periods results.

C
Capital Spending, 5 Year Growth Rate (%)
This is the compound annual growth rate of
Capital Spending over the last 5 years. Capital
Spending is the sum of the Capital Expenditure
items found on the Statement of Cash Flows.

Cash and Equivalents
This represents cash and all securities that can
readily be transferred into cash as listed in the
current assets section.

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Cash Flow Per Share, TTM ($ per share)
This value is the trailing twelve month Cash
Flow divided by the trailing twelve month
Average Shares Outstanding. Cash Flow is
defined as the sum of Income After Taxes minus
Preferred Dividends and General Partner
Distributions plus Depreciation, Depletion and
Amortization.

Cash From Financing
The sum of all the individual financing activity
cash flow line items.

Cash From Investing
The sum of all the individual investing activity
cash flow line items.

Cash From Operations
The sum of all the individual operating activity
cash flow line items.

Cash Per Share, Quarterly, MRQ ($ per
share)
This is the Total Cash plus Short Term
Investments divided by the Shares Outstanding
at the end of the most recent fiscal quarter.

Common Dividends Per Share
This is the Common Stock Cash Dividends Per
Share for the selected time period.

Complete Financials Date
This date indicates the last quarter or annual
update with a complete set of financial records.

Cost of Goods Sold
Also called the Cost of Revenue, this is the cost
of all raw materials plus the work in process and
the cost of producing the finished goods.

Currency
The code used to identify the currency in which
the financial statements are reported.

Current Ratio (MRQ)
This is the ratio of Total Current Assets for the
most recent quarter divided by Total Current
Liabilities for the same period.

D
Depreciation
This reflects the depreciation for all capital
goods.

Dividend, 5 Year Growth Rate (%)
This growth rate is the compound annual growth
rate of cash dividends per common share of
stock over the last 5 years.

Dividend Declared, Last Quarterly ($ per
share)
This is the amount of the last quarterly dividend,
if one has been declared by the company.

Dividend Ex-date, Last Quarterly
This is the first date on which a person
purchasing the stock is no longer eligible to
receive the last announced dividend. If a
prospective dividend payment has been
announced, this may be a future date. The format
for this variable is MM/DD/YY (12/31/95).

Dividend, Indicated Annual ($ per share)
This value is the total of the expected dividend
payments over the next twelve months. It is
generally the most recent cash dividend paid or
declared multiplied by the dividend payment
frequency, plus any recurring extra dividends.

Dividend Payment Date, Last Quarterly
This is the date on which payment for the last
dividend declared will be made to the
shareholders. The format for this variable is
MM/DD/YY (12/31/95).

Dividend Rate ($ per share)
This value is the total of the expected dividend
payments over the next twelve months. It is
generally the most recent cash dividend paid or
declared multiplied by the dividend payment
frequency, plus any recurring extra dividends.

Dividend Yield (%)
This value is the current percentage dividend
yield based on the present cash dividend rate. It
is calculated as the Indicated Annual Dividend
  67
divided by the current Price, multiplied by 100.

Dividend Yield, 5 Year Average (%)
This value is the average of the dividend yield
over the last 60 months.

E
Earnings Announcements
This is the company's preliminary operating
results. This variable includes the most recent
quarterly date announced as well as revenue,
earnings, and EPS information for that quarter.

Earnings Announcements Date
This date indicates when an Earnings
Announcement was announced.

Earnings Per Share, 5 Year Growth Rate (%)
This growth rate is the compound annual growth
rate of Earnings Per Share Excluding
Extraordinary Items and Discontinued
Operations over the last 5 years.

EBITD Margin, 5 Year Average (%)
This value is calculated by determining the
annual EBITD Margins for the 5 most recent
fiscal years and then averaging the values.

EBITD Margin, TTM (%)
This value represents the trailing twelve month
Earnings Before Interest, Taxes and Depreciation
expressed as a percent of trailing twelve month
Total Revenue.

Employees
This is the total number of full time or full time
equivalent employees as reported by the
company in its 10-K report.

EPS Excluding Extraordinary Items
This is the adjusted income available to
Common divided by the primary weighted
average shares outstanding.

EPS Growth Rate, 3 Years (%)
This growth rate is the compound annual growth
rate of Earnings Per Share Excluding
Extraordinary Items and Discontinued
Operations over the last 3 years.

EPS Percent Change, Most Recent Quarter vs.
Prior Quarter (%)
This is the most recent quarterly EPS minus the
preceding quarterly EPS divided by the EPS for
the preceding quarter, multiplied by 100.

EPS Percent Change, TTM vs. Prior TTM
(%)
This is the percent change in the trailing twelve
month EPS as compared to the same trailing
twelve month period one year ago.

EPS Percent Change, Year Over Year (%)
This is the percent change in annual EPS as
compared to the same period one year ago.

EPS, Primary, Excluding Extraordinary
Items, TTM ($ per share)
This is the Adjusted Income Available to
Common Stockholders for the trailing twelve
months divided by the trailing twelve month
Primary Weighted Average Shares Outstanding.

Equity
This gives the company's leading class of stock,
insiders control, institutional ownership, IPO,
and debt information.

Exchange
This is a four character field indicating the
primary trading market for the company's
common stock. The following are the valid
codes:
NYSE = New York Stock Exchange
AMEX = American Stock Exchange
NASD = NASDAQ Market
OTC = Pink Sheet or OTC Bulletin Board

F
Float (millions)
This is the number of freely traded shares in the
hands of the public. Float is calculated as Shares
Outstanding minus Shares Owned by Insiders,
5% Owners, and Rule 144 Shares.
  68

Free Cash Flow Per Share, TTM ($ per share)
This is the trailing twelve month Free Cash Flow
divided by the trailing twelve month Average
Shares Outstanding found on the income
statement.

Fully Diluted Shares
This is the number of shares of Common Stock
that would be outstanding if all convertible
securities were converted to Common.
G
Gross Margin, 5 Year Average (%)
This value is calculated by determining the
Gross Margin for each of the 5 most recent fiscal
years and then averaging the values. Gross
Margin is Total Revenue minus Cost of Goods
Sold divided by Total Revenue and is expressed
as a percentage.

Gross Margin, TTM (%)
This value measures the percent of revenue left
after paying all direct production expenses. It is
calculated as the trailing 12 months Total
Revenue minus the trailing 12 months Cost of
Goods Sold divided by the trailing 12 months
Total Revenue and multiplied by 100.

I
Income After Taxes
Also known as After Tax Income for the most
recent quarter, this is the money remaining after
all expenses and taxes have been paid, but before
any adjustments have been made.

Income Before Taxes
Also known as Pretax Income and Earnings
Before Taxes, this is Total Revenue minus Total
Expenses plus Non-operating Income (Expenses).

Income for Primary EPS
This is the dollar amount accruing to common
shareholders for dividends and retained earnings.
Income Available to Common Shareholders is
calculated as Income After Taxes plus Minority
Interest and Equity in Affiliates plus Preferred
Dividends, General Partner Distributions and US
GAAP Adjustments.

Indicated Annual Dividend ($)
This value is the total of the expected dividend
payments over the next twelve months. It is
generally the most recent cash dividend paid or
declared multiplied by the dividend payment
frequency, plus any recurring extra dividend.

Insider Net Shares Bought (millions)
This is the net difference between the number of
shares of company stock purchased by officers
and directors and the number of shares sold by
officers and directors during the preceding six
months.

Insider Ownership Percent (%)
This is the percent of common stock held by all
the officers and directors of the company plus
beneficial owners who own more than 5 percent
of the subject company's stock as disclosed in the
most recent proxy statement.

Insider Shares Purchased (millions)
This is the number of shares of company stock
purchased by officers and directors in the last six
months.

Insider Shares Sold (millions)
This is the number of shares of company stock
sold by officers and directors in the last six
months.

Institutional % Shares Outstanding Owned
This is the percent of common stock held by all
the reporting institutions as a group. It is
calculated as total shares owned by institutions
divided by total shares outstanding multiplied by
100.

Institutional Net Shares Purchased (millions)
This is the net difference between the number of
shares of company stock purchased by
institutions and the number of shares sold by
institutions in the last three months reported by
each institution.

Institutional Number of Shareholders
  69
This is the number of institutions (pension funds,
mutual funds, etc.) that currently report an
investment position in the company's stock.

Institutional Number of Shares Owned
(millions)
This is the total number of shares held by all
institutions (pension funds, mutual funds, etc.)
that report their holdings to the SEC.

Institutional Percent Owned, Prior Quarter
(%)
This is the percent of common stock held by all
the reporting institutions as a group during the
last three months. It is calculated as Total Shares
Owned by Institutions divided by Total Shares
Outstanding multiplied by 100.

Institutional Shares Purchased (millions)
This is the number of shares of company stock
purchased by institutions in the last three months
reported by each institution.

Institutional Shares Sold (millions)
This is the total number of shares of company
stock sold by institutions in the last three months
reported by each institution.

Interest Coverage, TTM
Also known as Times Interest Earned, this is the
ratio of Earnings before interest and taxes for the
trailing twelve months divided by the trailing
twelve month interest expense.

Interest Expense
This is the Total Operating and Non-Operating
Interest Expense.

Inventories
This consists of direct materials, work-in-process,
and finished goods ready for sale.

Inventory Turnover, TTM
This value measures how quickly the Inventory
is sold. It is defined as Cost of Goods Sold for
the trailing twelve months divided by Average
Inventory. Average Inventory is calculated by
adding the inventory for the 5 most recent
quarters and dividing by 5.

L
Long Term Debt & Capital Leases
This is the sum of all Long Term Debt and
Capitalized Lease Obligations.

Long Term Debt To Total Equity (MRQ)
This ratio is the Total Long Term Debt for the
most recent fiscal quarter divided by Total
Shareholder Equity for the same period.
M
Market Capitalization ($ millions)
This value is calculated by multiplying the
current Price by the current number of Shares
Outstanding.

MRQ
Most Recent Quarter.

N
Net Change In Cash
It is calculated by adding cash from operating,
investing, and financing activities and foreign
exchange effects from the Statement of Cash
Flows.

Net Income Per Employee, TTM
This value is the Income After Taxes for the
trailing twelve months divided by the number of
employees at the end of the last reported fiscal
year. The number of employees is defined as the
number of full-time equivalent employees
reported on the Company's 10-K report.

Net Profit Margin, 5 Year Average (%)
This value is calculated by determining the Net
Profit Margin for each of the 5 most recent fiscal
years and then averaging the values. Net Profit
Margin is the Income After Taxes divided by
Total Revenue, expressed as a percentage.

Net Profit Margin, TTM (%)
Also known as Return on Sales, this value is the
Income After Taxes for the trailing twelve
  70
months divided by Total Revenue for the same
period and is expressed as a percentage.

Net Revenue
This is the sum of all revenue (sales) reported for
all operating divisions.

O
Officers
This is a listing of the names and positions of the
company's executive officers.

Operating Margin, 5 Year Average (%)
This value measures the percent of revenues
remaining after paying all operating expenses. It
is calculated by first determining the Operating
Margin for each of the last 5 fiscal years and
then averaging the values.

Operating Margin, TTM (%)
This value measures the percent of revenues
remaining after paying all operating expenses. It
is calculated as the trailing 12 months Operating
Income divided by the trailing 12 months Total
Revenue, multiplied by 100.

P
Payout Ratio, TTM (%)
This ratio is the percentage of the Primary
Earnings Per Share Excluding Extraordinary
Items paid to common stockholders in the form
of cash dividends during the trailing twelve
months.

Pretax Margin, 5 Year Average (%)
This value is calculated by determining the
Pretax Margin for each of the 5 most recent
fiscal years and averaging the values. Pretax
Margin is defined as the Income Before Taxes
divided by the Total Revenue. Also known as
Return on Sales, this value is the Income After
Taxes for the trailing twelve months divided by
Total Revenue for the same period and is
expressed as a percentage.

Pretax Margin, TTM (%)
This value represents the trailing twelve month
Income Before Taxes expressed as a percent of
Total Revenue for the same period.

Price ($)
This is the Closing or Last Bid Price. It is also
referred to as the Current Price. For NYSE,
AMEX, and NASDAQ traded companies, the
price is the previous Friday's closing price. For
companies traded on the National Quotation
Bureau's "Pink Sheets", and OTC bulletin boards,
it is the bid price obtained at the time the report
is updated.

Price, 52 Week High ($)
This price is the highest price the stock traded at
in the last 12 months. This could be an intraday
high.

Price, 52 Week Low ($)
This price is the lowest price the stock traded at
in the last 12 months. This could be an intraday
low.

Price to Book Ratio (MRQ)
This is the Price divided by the latest quarterly
Book Value Per Share.

Price to Cash Flow Per Share Ratio (TTM)
This is the current Price divided by Cash Flow
Per Share for the trailing twelve months. Cash
Flow is defined as Income After Taxes minus
Preferred Dividends and General Partner
Distributions plus Depreciation, Depletion and
Amortization.

Price To Earnings Ratio (TTM)
This ratio is calculated by dividing the current
Price by the sum of the Primary Earnings Per
Share from continuing operations BEFORE
Extraordinary Items and Accounting Changes
over the last four quarters.

Price To Free Cash Flow Per Share Ratio
(TTM)
This is the Price divided by the trailing twelve
month Free Cash Flow Per Share. Free Cash
Flow is calculated from the Statement of Cash
Flows as Cash From Operations minus Capital
  71
Expenditures and Dividends Paid.

Price to Sales Ratio (TTM)
This is the Price divided by the Sales Per Share
for the trailing twelve months. If there is a
preliminary earnings announcement for a quarter
that has recently ended, the revenue (sales)
values from this announcement will be used in
calculating the trailing twelve month revenue per
share.

Price to Tangible Book Ratio (MRQ)
This is the Price divided by the latest quarterly
Tangible Book Value Per Share. Tangible Book
Value Per Share is defined as Book Value minus
Goodwill and Intangible Assets divided by the
Shares Outstanding at the end of the fiscal
quarter.

Q
Quick Ratio (MRQ)
Also known as the Acid Test Ratio, this ratio is
defined as Cash plus Short Term Investments
plus Accounts Receivable for the most recent
fiscal quarter divided by the Total Current
Liabilities for the same period.

R
Receivable Turnover, TTM
This is the ratio of Total Revenue for the trailing
twelve months divided by Average Accounts
Receivables. Average Receivables is calculated
by adding the Accounts Receivables for the 5
most recent quarters and dividing by 5.

Receivables
This represents money owed to the company by
customers for goods sold or services rendered,
but not yet collected. This includes the trade
receivables, finance receivables, and sales
receivables.

Retention Rate, TTM (%)
This represents the percent of trailing twelve
month earnings that have been ploughed back
into the company. It is calculated as 100 minus
the trailing twelve month Payout Ratio.

Return On Assets, 5 Year Average
This value is calculated by first determining the
annual return on assets for each of the 5 most
recent years and then averaging the resulting
values.

Return on Assets, TTM (%)
This value is the Income After Taxes for the
trailing twelve months divided by the Average
Total Assets, expressed as a percentage. Average
Total Assets is calculated by adding the Total
Assets for the 5 most recent quarters and
dividing by 5.

Return On Equity, 5 Year Average
This value is calculated by determining the
annual Return on Average Common Equity for
each of the 5 most recent years and then
averaging the resulting values.

Return On Equity, TTM (%)
This value is the Income Available to Common
Stockholders for the trailing twelve months
divided by the Common Equity and is expressed
as a percentage. Average Common Equity is
calculated by adding the Common Equity for the
5 most recent quarters and dividing by 5.

Return On Investments, 5 Year Average
This value is calculated by determining the
annual Return on Investment for the five most
recent fiscal years and then averaging the values.
The return on investment is the annual income
after taxes divided by the average total long term
debt, other long term liabilities and shareholders
equity and expressed as a percentage.

Return on Investments, TTM (%)
This value is the trailing twelve month Income
after taxes divided by the average total long term
debt, other long term liabilities and shareholders
equity, and expressed as a percentage.

Revenue Percent Change Year Over Year
This is the percent change in annual Revenue as
compared to the same period one year ago. It is
calculated as the revenue for the most recent
  72
fiscal year minus the revenue for the same period
one year ago divided by the annual revenue one
year ago, multiplied by l00.

S
Sales (Revenue) Per Share, TTM ($ per
share)
This value is the trailing twelve month Total
Revenue divided by the Average Primary Shares
Outstanding for the trailing twelve months.

Sales Growth Rate, 1 Year (%)
This is the percent change in annual sales as
compared to the same period one year ago.

Sales Growth Rate, 3 Years (%)
This growth rate is the compound annual growth
rate of Sales over the last 3 years.

Sales Growth Rate, 5 Years (%)
This growth rate is the compound annual growth
rate of Sales over the last 5 years.

Sales Per Employee, TTM
This value is the trailing twelve month Total
Sales divided by the number of employees at the
end of the last reported fiscal year. The number
of employees is defined as the number of full-
time equivalent employees as reported in the
company's 10-K report.

Sales Percent Change, Most Recent Quarter
vs. Prior Quarter (%)
This value is calculated as the most recent
quarterly Sales minus the Sales for the preceding
quarter divided by the Sales for the preceding
quarter and multiplied by 100.

Sales Percent Change, TTM vs. Prior TTM
(%)
This is the percent change in the trailing twelve
month Sales as compared to the same trailing
twelve month period one year ago.

Shares Outstanding
This is the number of shares outstanding at the
end of a fiscal period as reported in the Balance
Sheet. This is the number of shares issued minus
the shares held in Treasury.

Shares Outstanding, Current (millions)
This is the number of shares of common stock
currently outstanding, less the shares held in
treasury. This field reflects all offerings and
acquisitions for stock made after the end of the
previous fiscal period.

Short Interest Ratio (days)
This represents the number of days it would take
to cover the Short Interest if trading continued at
the average daily volume for the month. It is
calculated as the Short Interest for the Current
Month divided by the Average Daily Volume.

Short Interest, Current Month Position
(millions)
This is the number of shares currently borrowed
by investors for sale, but not yet returned to the
owner (lender).

Short Interest, Previous Month (millions)
This is the number of shares borrowed in the
prior month by investors for sale, but not yet
returned to the owner (lender) during the prior
month.

Short Term Debt
This is debt that comes due within one year.

Short Term Investments
The sum of all investments that mature within
one year.

SIC Code - Primary
The Standard Industrial Classification (SIC)
Code is a four digit code that indicates the
company's line of business.

SIC Code - Secondary
The Standard Industrial Classification (SIC)
Code is a four digit code that indicates the
company's line of business.

T
  73
Tax Rate, Effective, 5 Year Average (%)
This value is calculated by determining the
Effective Tax Rate for the 5 most recent fiscal
years and averaging the values.

Tax Rate, Effective, TTM
This value is the income taxes (credit) for the
trailing twelve months divided by the trailing
twelve months' income before taxes and
expressed as a percentage. If the income tax is a
credit, i.e. <0, the result is an NM.

Total Assets
This is the sum of all short and long term asset
categories.

Total Current Assets
This value is the sum of all current assets
reported for the most recent time list.

Total Current Liabilities
This value is the sum of all current liabilities
reported for the selected time period.

Total Debt
Total Debt is the sum of Short Term Debt, the
Current Portion of Long Term Debt and
Capitalized Lease Obligations, Long Term Debt
and Capitalized Lease Obligations.

Total Equity
This is the sum of all the individual equity line
items on the quarterly Balance Sheet.

Total Liabilities
This is the sum of all current and long term
liabilities reported.

Total Debt To Total Equity (MRQ)
This ratio is Total Debt for the most recent fiscal
quarter divided by Total Shareholder Equity for
the same period.

Total Operating Expenses
This is the total of the individual operating
expense line items.

TRM
Trailing Twelve Months.

V
Volume
Volume can be used to gauge the intensity of
investor attitudes towards a security. It is normal
for volume to increase on rallies and to decrease
on declines. Any observation to the contrary is a
good warning signal of a trend reversal.

Abstract (if available)

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Asset Metadata

Creator Chen, Qinyuan (author)

Core Title From the Great wall to the Wall Street: Investor relations strategies for US-listed traditional Chinese medicine manufacturers

School Annenberg School for Communication

Degree Master of Arts

Degree Program Strategic Public Relations

Publication Date 05/02/2011

Defense Date 04/01/2011

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag investor relations,OAI-PMH Harvest,Public Relations,U.S.-listed Chinese Companies

Place Name China (countries), USA (countries)

Language English

Contributor Electronically uploaded by the author (provenance)

Advisor Swerling, Gerald (committee chair), Harris, Steve (committee member), Wang, Jian (Jay) (committee member)

Creator Email opheliach@gmail.com,qinyuanc@usc.edu

Permanent Link (DOI) https://doi.org/10.25549/usctheses-m3833

Unique identifier UC1275280

Identifier etd-Chen-4513 (filename),usctheses-m40 (legacy collection record id),usctheses-c127-457307 (legacy record id),usctheses-m3833 (legacy record id)

Legacy Identifier etd-Chen-4513.pdf

Dmrecord 457307

Document Type Thesis

Rights Chen, Qinyuan

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Repository Name Libraries, University of Southern California

Repository Location Los Angeles, California

Repository Email cisadmin@lib.usc.edu