On Tuesday, Citron research published another article on China-Biotics (OTC:CHBT). Most of it was a rerun of old points that have already been refuted. There was a new allegation, however, claiming that CHBT does not have the cash it shows on its SEC filings. Citron alleged the company does not have the cash because otherwise it would have reported higher interest income on its June 30, 2010 quarterly financials than the $87,876 it reported.
I feel sorry for those who sold on the news, because there was nothing there.
I called the company to find out what kind of interest they were getting on their bank balances. The answer is they receive basically nothing on their dollar deposits, which the reader will know is normal in this interest rate environment. Keep in mind that the $75 million the company raised last year in its secondary offering is still kept offshore and held in USD. The company receives the PRC set rate of 0.36% on its RMB deposits.
Here is a link to the rates HSBC pays on offshore premium banking dollar deposits.
Here, here and here are links to the rates several banks operating in the PRC pay on RMB deposits. The rates on RMB deposits are set by the government, which is why all are quoting the same rates. Savings deposits receive 0.36%, 3 month time deposits receive 1.71%, 6 month time deposits receive 1.98%, and 12 month time deposits receive 2.25%.
Before you grab your calculator, here is the interest calculation. The interest reported adds up.
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The one thing that I do gather from all of this is that CHBT needs to do a much better job with its cash management. Their working capital fluctuations are not that great, so there is no reason why a portion of the $84.7 million held in RMB could not be put in 3 month time deposits. I calculate that if CHBT put the $75 million of the $84.7 million in rolling 3 month time deposits, it could make an additional $1 million in net income. That would create an additional 4.5 cents of EPS per year. I hope CHBT’s CFO gets on this right away. Thanks to Citron for pointing out the additional profit potential.
I would like to extend one more word to the wise reader regarding Citron Research. If you see unusual volume in puts, it probably means that Citron is about to release a research report. We saw unusual put volume Tuesday and before the last Citron report on CHBT also. So before you sell first and ask questions later, keep in mind, short-sellers want you to sell so they can make money on their puts. Do your own research, call the company, and check the allegations thoroughly before you hit the sell button.
Disclosure: Author is long CHBT