China Sky's Financial Statements: Huge Discrepancies

On August 6th, we first reported on discrepancies between the financial statements of China Sky One Medical, Inc. (CSKI) filed with U.S. and Chinese regulatory agencies. CSKI files consolidated financial statements with the U.S. Securities and Exchange Commission (SEC), and CSKI's operating subsidiaries, all located in China, file financial statements with the China State Administration for Industry and Commerce (SAIC).

Apparently in response to the SAIC controversy, CSKI issued a press release on August 26, stating that "it is contemplated that in future filings there will be no material differences in the information contained in the financial statements filed with the SAIC and the SEC."

At the time of the August 6th report, the 2008 SAIC filings for Harbin Tian Di Ren Medical Science and Techology Co. (TDR), CSKI's main operating subsidiary, were not available. Since then, the 2008 SAIC filings for TDR have been made available, and the discrepancies with CSKI's SEC filings appear larger than in the 2007 filings.

According to the SAIC filings, TDR had revenue of only 6.9 million RMB, or about US$1 million, in 2008, and TDR's revenue decreased 24.7% from 2007 to 2008. By contrast, CSKI's SEC filings show 2008 revenue of US$91.8 million, an increase of 86.2% over the prior year.

TDR shows a 2008 net loss of 779,161 RMB, or about US$114,000, while CSKI reported 2008 net income of US$28.9 million.

Click here for TDR's SAIC-filed financial statements in English, and here for the original Chinese documents.

The website waldomushman.com has posted a comprehensive analysis of the CSKI subsidiaries' SAIC filings, and shows that CSKI subsidiaries' SAIC filings, taken altogether, do not reconcile with CSKI's SEC filings in revenues, net income, or cash balance.

Disclosure: Short CSKI.

Comments

[User 344233]

Short.. ouch! What are you down 30+%?

2009 Nov 24 03:55 PM

[MagicDiligence]

Asensio, save yourself from this one. You are not using logic. Look at it from your point of view. Let's assume the SAIC filings are gospel and TDR is losing $100k a year.

How on earth is CSKI internally funding a $13 million headquarters expansion? They are moving in this month, and it is verifiable.

Why would the company even consider (or be in financial position to) export products to Canada? Yet, that's what they are doing, and it is verifiable.

Even you mention the low revenues of the suppliers (presumably Heilongjiang Kangda Medicine Co. and Harbin Zhongjia Chem) in their SAIC filings - is it conceivable that a lot of Chinese companies under-report revenue?

Finally, if the company does what it says and the 2009 SAIC filing matches up with the SEC filings, you are in big, big trouble with your short position.

This is a dangerous short, and your case against it is not that strong.

2009 Nov 24 10:54 PM

[dharma_bear]

Steve A.:
I am trying to decide what to believe here. You say
>internally funding a $13 million headquarters expansion... They are moving in this month, and it is verifiable
Is it verifiable that they are moving, or that they spent $13mil? If so, how is it verifiable? I don't see that exporting product to Canada takes much cash.

You do raise a good point that the source of the reporting discrepancy may be under-reporting on the other end. However, here is what the last 10K has to say about their auditors:
''All audit and non-audit services performed by Murrell, Hall, McIntosh & Co., PLLP, Sherb & Co., LLP and MSPC, Certified Public Accountants and Advisors LLP during fiscal 2008 and 2007 ''
Odd that they would have 3 different auditors during such a short time.

2009 Nov 25 01:14 PM