Acorn International Inc. (NASDAQ: ATV)

Well, Acorn International Inc (ATV) is another mainland chinese orphan stock. My main worry with these Mainland Chinese stocks is simple - Fraud. Is the cash really there? I've heard loads of horror stories about the Chinese and their companies. I just read David Einhorn's Fooling Some People All the Time. Which of course, doesn't engender much goodwill and warm feelings towards management and corporate governance. And I have personally found odd ball accounting practices with one mainland Chinese company (The9 Limited, NCTY). So my approach towards evaluating these stocks is one of skepticism and lots of research.

Acorn is a multi-platform marketing company in China. Basically, they are the equivalent of the Home Shopping Network in China. They sell everything from cell phones to slimming products through their various sales channels. These channels include TV, call centers and distributions to retail outlets.

The reason I'm interested in this company is simple. It's sitting on nearly $167MM worth of cash for a market cap of $117.15MM and notes payable of $3.3MM. Basically, it's selling for less than the cash on its books. Efficient market says that this should not be the case, but hey... don't look at me. It's there.

I'm looking through their income statements right now. For some odd reason SG&A is up quite a bit. Up 31% for the first 6 months of 2009 as compared to first 6 months of 2008. The reason given by the Company is: a 1 time charge of $1.6M for the Liaoning TV lawsuit and increases in salaries and benefits. Somehow I'm skeptical, why are salaries increasing at this point in time? The company lost money in 2008, 1Q 09 and 2Q 09. Why are salaries rising? Compare this to the behavior of the ACTS management who took a 20% cut to their salaries. Totally different approach to running a company.

Finally, the market in China for TV sales and other direct marketing techniques is very volatile. In the sense that the government has the ability and has intervened in the past to ban the sale of certain products. This has material impact on the revenues of the company. The gov banned the company from selling its branded neck massage product. This had a negative impact on the company's revenues.

All in all, ATV is starting to turn the company around but I'm not a big fan of the way the company is being run. Although it might be a viable investment from the stand point of the market cap being less than the cash position of the company, I am not comfortable with the industry or the management. I'm going to pass on this investment.