China Green Agriculture (CGA) investors who call its IR firm, HC International, this week will discover that HC and CGA are parting ways after weeks of turmoil over questions raised by the International Financial Research & Accounting Group, a summary of which I originally wrote here.
CGA is expected to hire a new IR firm to replace the well-respected HC in the near term. HC representative Ted Haberfield is telling inquiring investors that they weren’t happy with CGA’s slow and tepid response to the questions raised. Nor are investors likely to be happy with CGA’s two press releases issued Monday in an attempt to explain itself.
Before I review those press releases, I’d like to first point out to investors that a friend made a recent site visit to CGA’s 88 acre “R&D greenhouses” project and took this very revealing photo of a CGA’s banner at the site promoting the project.
The picture clearly shows 30-40% of the land will be developed as a large scale real estate project, complete with what appear to be lakes, condos, villas and large facilities one of which is designated “science center”, while the others appear to be entertainment related. The Chinese characters at the center of the billboard clearly translate “Tourism/Relaxation Zone.”
Now, the last time I saw a project like this, and it was hardly this large scale, was American Oriental Bioengineering’s (AOB) Beijing real estate splurge that reportedly cost $70 million to develop and managed to alienate just about every institutional investor. CGA management should have considered that investors don’t like companies that mix their focus up, be it on real estate or Chairman Li Tao’s failed Kingtone Wireless IPO.
Regarding Monday’s dual press releases, they served only to point out why Chinese companies need an experienced CFO and solid IR. The two press releases are full of errors and omissions. Consider first the disclosure of CGA’s corporate income tax (CIT) paid for calendar years 2008 and 2009:
More specifically, Jinong paid RMB 14,466,731.61 (approximately $2.1 million) in March 2009 for the CIT incurred for calendar 2008. It paid RMB21,040,562.21 (approximately $3.1 million) in March 2010 for the CIT incurred for calendar 2009.
Anyone with a basic understanding of the Chinese tax system knows that Corporate Income Tax has to be filed and pre-paid to the SAT within 15 days after the end of each month or quarter. By the end of the 5th month after a calendar year ends, the enterprise must file a final tax return along with all adjustments to prior pre-payments and its audited financial statements. So it is simply impossible for CGA, as it claims in its press release, to have paid each calendar year’s income taxes in a lump sum in March of the following year. In fact, CGA’s own SEC filings prove its claims in the press release to be inaccurate. In the Cash Flow Statement within the 10-Q filed on Feb 10 2010 (link here), CGA disclosed income tax cash payment of $621,367 during the 6-month period ending December 31, 2009.
CGA then proceeds to try to explain its value-added tax (VAT) accounting. The explanation is hopelessly wrong and as a former licensed CPA myself, I will explain the proper accounting to readers myself, in simple form.
First of all, VAT is not expensed in the Income Statement. In fact, there's no such thing as a VAT expense. The way VAT is accounted for under GAAP is as follows:
The following VAT related accounting entries are made only to the accounts on the Balance Sheet:
1. Sale of goods: An increase in Cash (or Accounts Receivable) and VAT Payable for the amount of the VAT sales output tax
2. Purchase of goods: A decrease in Cash and the VAT Payable for the VAT purchase input tax deductible
3. VAT payment to the SAT: A decrease in Cash and VAT payable
In other words, the balance of VAT Payable on the balance sheet is the net difference between the sales output tax payable and the purchase input tax deductible. The VAT amount does not enter or touch the Income Statement as any cost or expense. The explanation given by CGA in its press release is totally incorrect.
CGA’s explanation of the amount of VAT Payable also completely fails to mention the fact that VAT is required to be accrued and paid on a monthly basis. Any amount of VAT Payable that CGA reports on its balance sheet must be paid within 30 days (to avoid severe penalties). It is therefore entirely reasonable to add up all the quarter ending VAT payable balances for the 8 quarters in question, equal to $14.99 million, and conclude that CGA must have paid have at least that amount to the SAT. But the official tax records obtained by IFRA here show only RMB 469,000 VAT paid during this period. CGA described those records as “incomplete” on its fourth quarter conference call but as we have seen it has since failed to provide any evidence to support its position.
Regarding the inflated 88-acre land purchase, CGA has still not explained the payment of RMB 54.83 million to an unnamed SOE. In fact, according to an additional government record obtained by IFRA that you can download here (within footnote 22) is titled “Notice of Approval for the Land Use Right Sale from Hu County Government”. It explains very clearly that the government took back the usage rights to the land from the previous owner on April 3, 2009 before reselling it to CGA subsidiary Yuxing. It is also clearly stated in the land use right transfer agreement that Yuxing acquired the land use right directly from Hu County government's Land and Resource Bureau. The agreement is titled "State-owned Land Use Right Transfer Agreement" and the seller is the Land and Resource Bureau of Hu County, Xi'an, Shaanxi. Therefore, there is absolutely no possibility of the RMB 54.83 million payment CGA claims it made to the unnamed SOE to purchase the land use rights.
In addition, the Deed Tax Receipt showed a tax payment of RMB 520,534.78, an amount CGA also confirms in their press release. According to the Deed Tax Regulation from website of Shaanxi provincial government here, the applicable deed tax rate for such transactions is 3% according to Section 5 of the regulation. Section 6 (1) clearly explains that 3% shall be calculated on the contracted price of land usage rights and properties, including all forms of payments made in monetary considerations, tangible, intangible assets and economic interests. The land usage right sale price based on the RMB 520,534.78 and 3% deed tax rate is RMB 17.35 million. CGA therefore paid no Deed Tax on the balance of RMB 54.83 million it claims it paid to the unidentified “selling SOE”, in clear violation of the Deed Tax law. Once again it strongly appears this money went somewhere else unrelated to the land purchase. There can be no other conclusion.
Note: I would like to thank the solid work done by the team at IFRA and I also salute HC International, one of the best IR firms for Chinese companies, for its bold decision to part ways with a client that refuses to adequately and timely address investor concerns. More IR firms need to follow this example to pressure Chinese U.S. listed companies to be more accountable to their shareholders.
Disclosure: No positions