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Ex-banker faces off against China bears with hedge fund

By Nishant Kumar and Michael Flaherty

HONG KONG (Reuters) - Paul Conway's eventful career in China included advising companies on stock offerings and overseeing a messy business restructuring -- the latter stint forcing him to hire a bodyguard to fend off harassment from local thugs.

Now the 43-year-old former banker is raising around $60 million for a hedge fund that will invest in U.S.-listed, Chinese companies, another assignment that many would consider not for the faint-hearted after a series of accounting scandals that have battered sentiment towards the sector since 2010.

"I have seen everything: the good, bad and ugly of China," Conway said in one of several interviews with Reuters. "And I am still extremely encouraged."

Short-sellers such as Muddy Waters, the firm run by Carson Block, have made a fortune betting against Chinese firms listed in North America such as Sino Forest Corp. and Longtop Financial Technologies Ltd., which gained notoriety for fraudulent reporting and asset stripping.

Between 2010 and 2012, 70 Chinese companies trading on U.S. markets were targeted by class-action lawsuits. Altogether they lost $26.5 billion in market capitalization, according to statistics compiled by Cornerstone Research.

But Conway reckons that the culling of Chinese companies listed abroad is largely over, with the worst already exposed by Block and others. What's left, he says, are nearly 150 companies that run good businesses and are undervalued.

The launch of the fund comes amid signs of a renewal of interest in Chinese firms raising money on U.S. markets after U.S. and Chinese regulators settled a dispute on information sharing.

U.S. regulators said on May 25 that they had reached a deal allowing access to Chinese companies' audit documents. The deal, only a partial victory for the United States, was meant to open the way to probes of bungled audits that failed to detect fraud.

"A lot of companies went public that shouldn't have," Conway said. He said the quality of overseas-listed Chinese companies has improved since the scandals, while valuations remain low.

BEARS' MARKET

Going long on Chinese shares has not worked well in the last three years, snagging such star investors as hedge fund titan John Paulson and fund manager Anthony Bolton of Fidelity.

But Conway and his team are willing to bet on the sector despite some of the lingering tarnish.

"He has a chance if he chooses the right company," said Andrew Left, one of the most vocal short-sellers of Chinese stocks who runs Citron Research. "You just have to avoid the landmines."

Conway, who doesn't speak Mandarin, is partnering with Chien Lee, 52, a mainland China native and co-founder of Chinese budget hotel chain 7 Days Group Holdings Ltd to launch what will be called the China Revaluation U.S. Fund.

The fund will pick 15 to 20 stocks, with capital locked in for two years.

He has also pulled in Paul Keung, former managing director of Oppenheimer Investments Asia and Eddie Woo, executive director of Mascotte Holdings Ltd <0136.HK> as a member of his advisory board to help him screen the companies.

The fund will focus on the consumer, hotels, travel and leisure, media and education sectors, and be managed by Paul Jackson, a former portfolio manager at Fidelity and Wellington.

CHINA BULL

Conway was a banker at Oppenheimer & Co, part of Oppenheimer Holdings , for 12 years and was among the wave of bankers that took part in the 2006-era of China privatizations.

He then became the CEO of SearchMedia Holdings, now renamed as Tiger Media Inc . According to the press release that announced his CEO role, Conway completed more than 60 transactions worth $12 billion during his time in China.

Conway said that in the past Chinese firms went public often at a 100 percent premium to their Western peers, but that pattern has since reversed.

Picking the hotel sector as an example, he said that chains such as Marriott International and Starwood Hotels and Resorts Worldwide were getting most of their growth from China, but their shares are trading at a large premium to Chinese rivals.

Changyou.com and Home Inns & Hotels Management , one of the most widely covered China stocks by U.S. analysts with buy recommendations, are trading 66 percent and 94 percent below all-time high forward 12-month earnings respectively, data from Thomson Reuters StarMine shows.

One of the Chinese transactions Conway engineered was in 2009, when Phillip Frost, chairman of the world's biggest maker of generic medicines Teva Pharmaceutical Industries and one of his clients, took control of SearchMedia Holdings.

A year later, Conway was sent as chief executive to restructure the company, which restated its financials, fired half the board members and got rid of its management team.

"That is an incredibly courageous thing to do for an American who doesn't speak the language and where every employee is Chinese," said Steve Bernstein, a former colleague of Conway who now runs SinoPac Solutions and Services Ltd in Hong Kong.

In the process, Conway also shut down a subsidiary which fought back to claim that SearchMedia owed it money. Hired hands chased him for the payment for nearly four months, harassing him constantly to the point where he finally hired what he calls "some additional, personal security".

"For someone who thought I really knew China," he said, "this was kind of a crazy experience."

(Editing by Alex Richardson)

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