Wednesday after the close China Green Agriculture (NYSE: CGA) reported its fiscal fourth quarter and annual results followed by a conference call discussion with the analysts following the company. Notably absent from the call was anyone asking tough questions or demanding management provide a detailed response to the due diligence findings of the International Financial Research & Analysis Group (IFRA) that I summarized and linked to earlier this week.
Yesterday my friend uploaded a copy of IFRA’s latest update. You can download a copy for yourself here.
Here are the key updates from the report along with my comments:
According to SAT records, from July 2008 through April 2010 Jinong paid VAT of only 469,000 RMB (about $67,971). This small amount is completely inconsistent with the large amounts reported on CGA’s balance sheet each quarter as shown above. The difference is nearly $15 million (assuming each quarter ending balance payable was in fact paid according to the regulation, which only gives companies 30 days to pay before serious penalties are applied). We have repeatedly asked CGA management to provide an accounting of this huge shortfall. Where did these funds go? To date management has refused to respond other than stating on their conference call that the records we obtained were “incomplete”.
Comment: Obviously a huge discrepancy and even though going forward this is no longer an issue, management needs to account for $15M in historical taxes they claim they paid that cannot be verified by government records.
B) Greenhouse Land Purchase:
Yesterday, CEO Tao Li claimed on the conference call that the evidence we collected regarding the greenhouse land purchase was, similar to the tax records, “incomplete”. He asserted that in addition to our well-documented costs there was another 54.8 million RMB land use rights transfer payment to an undisclosed SOE. Tao Li did not offer any proof of this payment nor do we think any valid proof exists. From a review of the extensive evidence and PRC law:
1. It is clearly stated in the land use right transfer agreement that CGA subsidiary Yuxing (Yuxing) acquired the land use right from Hu County government's Land and Resource Bureau. There is no possibility of payment made to a 3rd party. The agreement is titled "State-Owned Land Use Right Transfer Agreement" and it clearly stated the seller is the Land and Resource Bureau of Hu County, Xi'an, Shaanxi. In the Notice of Approval of the Land Use Right Sale issued by Hu County People's Government, file number - Notice #16 (2009), it is clearly stated that, on April 3rd 2009, the local government had already taken back the ownership of the Land Use Right that was subsequently sold to Yuxing. The document also indicated the land use right was granted to Yuxing by the Hu County government according to the 26th and 60th meeting by its standing committee. There clearly was no 3rd party involved in this transaction.
2. The same notice clearly pointed out the specified usage of the land is for agriculture. Agricultural use land is much lower price than industrial use land. In fact the “comparable” prices quoted by CGA management on the conference call were for land sold for industrial purposes, a much higher cost use. We are preparing a table of real comparable sales and will circulate in a subsequent update.
3. The designated receipts issued for the payment in the sale each indicate the seller is the government, not the farm that previously owned the land.
4. Calculation of the Deed Tax does not support management’s inflated claim because regardless of whether the land use right was purchased from a 3rd party or the government, deed taxes are required to be calculated and paid based on total sale price. In this case, the deed tax receipt and proof of completion from the Land and Resource Bureau shows the 3% deed tax is applied only to the RMB17.35M recorded purchase price not the RMB73.2M inflated purchase price claimed by CGA management.
5. Finally, the sale price of the land use right was the result of an appraisal by a 3rd party appraisal firm and approved by the Land and Resource Bureau. In the official Confirmation Report of Land Appraisal issued by the Land and Resource Bureau (confirmation file #14 dated August 5, 2009), the bureau acknowledged the appraised value of RMB17.33M properly reflects the real value of the land.
In this case, the overwhelming evidence strongly contradicts CGA’s disclosed purchase price. The difference of $8,181,372 (over 4X) cannot be account for. CGA management has still not provided any valid explanation or proof otherwise. And seriously, who has ever paid over $120,000 per acre for undeveloped farmland? Where did the money really go?
Comment: My farming friends say they would feel they’d hit the jackpot if they could sell their farmland for $120,000 per acre! Even 1/4 of that is still an incredibly high price in most parts of the developed world.
C) Large Sales and Net Income Discrepancies:
On yesterday’s conference call, CEO Tao Li and CFO Ken Ren asserted that the amounts reported to the SEC are correct and that all the SAIC records are “incomplete”. This combined with all the other claims by management that their PRC records are supposedly “incomplete” is nonsense. We remind investors that management signed off on all these records and has yet to offer any additional records to supplement those we collected from reliable sources. We clearly do not believe such records exist, though management might certainly be trying to create some right now in response to our repeated challenges.
Comment: Agreed. CEO Tao Li signed both sets of documents and needs to provide a detailed reconciliation, if possible.
D) Insane valuation paid for Beijing Gufeng:
When queried on yesterday’s conference call, CFO Ken Ren agreed that Gufeng’s 2009 earnings quality was “low”. So we ask: Did Gufeng intentionally shift some revenue from 2008 to 2009? How does Gufeng explain the opposing trends in earnings and cash flow from 2008 to 2009? What value can investors place on these low quality earnings? Most importantly, why would CGA pay such a huge purchase price and where is this money really going? To date management has provided no meaningful response.
Finally, what was the point of acquiring Gufeng when CGA's own facility is at merely 40% utilization? And why is management, in addition to retooling Gufeng, spending $7 million to add another 200k tons per annum production line? And if it only costs $7 million to build 200ktpa capacity why did they value Gufeng’s existing, admittedly outdated, 300ktpa plant at $33M purchase price +$14.7M working capital infusion?
Comment: I get the impression CEO Tao Li thinks his investors are completely stupid. Gufeng didn’t make any money last year, why should CGA value it any higher than the reproduction cost of its assets? If CGA can add another 200k tons capacity for $7 million, then they shouldn’t have paid more than $7X1.50= $10.5 million for Gufeng's outdated and unprofitable 300k ton plant. The total $45M acquisition cost is impossible to comprehend.
I hope CGA management will soon provide some detailed answers to all of these questions. Meanwhile the stock continues to fall under pressure despite the strong reported earnings and low valuation. The market clearly has little confidence in these results or CGA's future. Nor do I.
Disclosure: No position