China Electric Motor Hits the Street (a)

Abstract

This case is used in Darden's Global Executive MBA core Accounting for Managers course. In January 2011, an independent registered investment advisor has noticed that in the previous year 300 Chinese-owned companies had launched initial public offerings in the United States. A number of U.S. investors had purchased broad market exposure through exchange-traded funds and mutual funds to capitalize on China's growth. With reports of the Chinese economy overheating and a possible bubble in the housing market, some of those investors had asked the investment advisor whether they should be more selective and pick individual growth companies instead. While casting his eyes over the list of companies from his favorite research report, one in particular caught the investment advisor's attention—China Electric Motor, Inc. (China Electric). But in his research, the investment advisor uncovered mixed results about China Electric. Excerpt UVA-C-2338 Rev. Jan. 24, 2013 CHINA ELECTRIC MOTOR HITS THE STREET (A) It was the last day in January 2011. Throughout the month, John Cotter had received numerous phone calls from investors inquiring about putting their money to work in individual Chinese companies. Before his retirement from a large U.S.-based international bank, Cotter had spent three years on a bank assignment in Hong Kong and had developed a keen interest in China's developing market. After retiring, Cotter earned the required licenses to work as an independent registered investment advisor, which he had been doing for the past four years. Within the previous year, over 300 Chinese-owned companies had launched initial public offerings (IPOs) in the United States—a trend that captured Cotter's attention. A number of U.S. investors had purchased broad market exposure through exchange-traded funds and mutual funds to capitalize on China's growth. With reports of the Chinese economy overheating and a possible bubble in the housing market, some of those investors had questioned whether they should be more selective and pick individual growth companies instead. And while casting his eyes over the list of companies from his favorite research report, one in particular caught Cotter's attention—China Electric Motor, Inc. (China Electric). Following a successful offering of 5 million shares at $ 4.50 on January 28, 2010, the company was listed on the NASDAQ (it had not traded on an exchange before then). Throughout the year, the stock price had risen to a high of $ 9.44 before essentially falling back to the initial offering price on daily volume averaging 182,000 shares (Exhibit 1 shows stock prices). . . .