So, will the Gumshoe be wrong again? I was very skeptical of J. Christoph Amberger’s plan to buy in to stocks before they IPO in China, as a way of riding the wave of the Chinese stock market’s incredible growth. And the one time I saw a specific teaser that advocated this, I didn’t see the logic.

Still, it worked. Last time around it was Lenovo that they were touting, as the stock that was already publicly traded in the US and in Hong Kong, but should see significant gains once it also IPOd on the Shanghai exchange. You can refer back to my comments on that previous one, too cautious though they were, if you’re interested. Lenovo is one of the top ten performers in the Gumshoe Spreadsheet, just to reinforce the fact that I was wrong.

But a sample of one is, to be frank, uninspiring in its predictive power — so I wouldn’t guarantee that this second “pre-IPO” teaser is also going to outperform significantly. Still, it’s worth a look, don’t you think?

So what are we told about this “China IPO Backdoor Strategy” that could be, in Amberger’s words, the”Most Profit-Rich IPO of the Season?”

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Well, he also talks quite a bit about the most popular pre-IPO company, Alibaba, but that’s going public (in part, at least) only on the Hong Kong stock exchange. There is sort of a backdoor way to get in on this one, because it’s something like 30-40% owned by Yahoo, but it’s not what Amberger’s talking about here.

No, I’m assuming that this refers to a second teaser ad that’s making the rounds, this one for a company that, much like Lenovo, is already publicly traded but that is about to make an IPO offering on the domestic Chinese markets to raise more cash (and become exposed to mainland Chinese investors for the first time).

And this is a coal company. Amberger calls it China’s “premier coal company,” and says that they desperately need cash to expand and build capacity in time to supply all the electricity needs of the Olympic games.

The hyperbole is laid on with a trowel — this could “double or triple in the first day,” and “People are going to stand in line to get shares of the upcoming issues. Most will be turned away disappointed.”

So … are you ready for the bad news?

I suspect that this company, if I’m feeling charitable and want to give Amberger credit for catching the first one of these transactions, is probably …

Shenhua Energy (traded on the pink sheets at CUAEF)

The bad news? The Shanghai IPO already happened, last week — the ad is still circulating around, but the company listed in Shanghai a few days ago. On September 14, the day Amberger said he pulled his data, the shares were a little over $5 on the pink sheets, and they’re up over $7 now. This also trades in Hong Kong, which also saw a bump in the share price, and of course the Shanghai IPO had a dramatic return, from an offering price of about 36 to the current price above 90.

Of course, US investors can buy either the pink sheets or the Hong Kong shares, so those two are moving more or less in unison — the Shanghai shares are restricted, for the most part, to mainland Chinese, and therefore are trading at a substantial premium. As expected.

Now, it’s possible that this isn’t the stock Amberger was talking about — there is another substantial coal producer that has also filed to go public in Shanghai but has not yet gotten regulatory approval (as far as I know — haven’t dug too deep on this one).

This is the second largest coal producer, China Coal Energy (CCOZF on the pink sheets, 1898 in Hong Kong).

So, it’s quite possible that this is the stock Amberger’s talking about — it did file about a week before he started sending this email, and you can buy it on the pink sheets or in Hong Kong, substantially reducing the friction of getting shares.

But take a quick look at the recent charts (pink sheet prices for both, to be fair) of Shenhua, which has already had a Shanghai IPO, and China Coal Energy, which has just filed for one (that’s China Coal on the top, Shenhua on the bottom):

If you’re thinking the same thing I am, you might be wondering whether these two are just trading in tandem, and whether the potential Shanghai IPO boost is already baked into the shares of both. Do note that thanks to some oddities with Bloomberg, the two charts don’t cover exactly the same time period, which further accentuates the slightly steeper curve of Shenhua (sorry!) — the key, in my opinion, is that both have doubled in the past month, largely on the Shanghai IPO mania associated with Shenhua’s actual listing and China Coal’s application to list. Do they have further to run in the near term?

I don’t know, of course, what will happen — and my track record at predicting how non-Chinese shares will react to the IPO of shares in the same company in Shanghai is poor so far. But still, I’m a bit stubborn, and I’m not expecting a huge bump up in shares of the pink sheet or Hong Kong shares of China Coal in the days following their sale of shares in Shanghai.

I think it’s important to note two things, especially for those who aren’t already very familiar with Chinese investing and the strange setups of their various exchanges:

First, that the Shanghai and Shenzen markets (the domestic stock exchanges in China) are still separated from the rest of the world — most shares (the A shares … there are also B shares that are available to some foreign investors) are available almost exclusively to Chinese citizens, and on the flipside, Chinese citizens generally don’t have the legal right or ability to invest overseas.

And second, that this framework might be changing — gradually. The Chinese government is trying to slowly open up a trial program whereby qualified Chinese investors will be able to send some of their money abroad to invest in the Hong Kong stock exchange. And there is also some talk, albeit probably very nascent talk, about merging the Hong Kong stock exchange with the Shanghai and Shenzen exchanges and creating a true pan-Chinese market (well, as long as you are one of those people who still considers Taiwan a separate country … meaning, essentially, that you’re not in the Peoples’ Congress).

My opinion is this, and it is based on my feelings and intuition as much as anything else: In the long run, the disparities between the mainland and Hong Kong/US markets will probably erode. But the long run might be many, many years — the Chinese aren’t likely to open the spigots quickly and let a lot of money leave the country, or do anything to cause a crash in their domestic exchanges; and on the flip side, the Hong Kong regulators, though extraordinarily dependent on Chinese companies for growth, probably don’t want to sacrifice the integrity and listing transparency that enabled them to build a stock market that is often compared favorably to New York and London.

There is also no way of knowing now whether the Shanghai A Shares premium will disappear because of falling stocks on the mainland, or of rising stocks in New York and Hong Kong.

And all of this also assumes, of course, that individual Chinese investors want to leave the country — and it ignores the fact that the government holds a majority of the shares of many of the firms that are listed domestically.

I’ve written before about the A Shares market and the possibility of a bubble bursting over there, but if you’re counting on the bubble bursting because domestic Chinese investors want to diversify overseas, you’re also, in part, counting on investors making a decision to leave a high performing investment and enter a lagging one. Did Nasdaq tech investors yearn to invest in Europe or South America in 1999? Or even in US insurance companies, oil companies, or REITs? Maybe they should have, but they could have and did not.

Oh, and just FYI: these companies might be great values in the long run, and Amberger say’s he’ll guarantee that the shares will double in the next year (of whichever one he ultimately recommended, of course), but they’re already priced, in all markets, for the extreme growth that many expect. One analyst boosted his HK$ price target for China Coal from 16 to 26 less than two weeks ago, but within a couple days the shares were over that target price again. I have no idea what is reasonable for these shares, to be sure.

But anyway, if you were looking for the next “backdoor IPO” company, it looks like China Coal Energy is likely to hit the market before too long — whether it will have a post-IPO runup in Shanghai that also influences foreign shares to move significantly is, of course, a matter for you to judge. I recommend fish entrails and tea leaves.

Happy investing — and if I’m wrong on this one, too, feel free to let me know.

full disclosure: I do own shares of the Morgan Stanley China A Shares closed end fund, which is one of the only ways for US investors to buy A shares (my past writings about this are on my other blog, here, though I’ve also bought more since the last writing in that space, when the discount went over 20% again recently), and I own several other Asian and Chinese investments not mentioned here by name, but that trade on the broader markets I’ve written about.