China Agritech: Broken Promises and Empty Words

Oct.11.10 | About: China Agritech, (CAGC)

On Friday, October 8, China Agritech (OTCPK:CAGC) surged 15%, supposedly on the back of wo pieces of news. The first was a report from the US Department of Agriculture that this year’s US corn crop would be worse than expected. This news was good for all fertilizer manufacturers, however it seems odd that CAGC’s stock would react so positively to such news. CAGC is a producer of organic fertilizer in China, basically the last fertilizer stock that would be fundamentally affected by this news. Nonetheless, to some extent perhaps a rising tide may lift all boats, even those with holes.

Corn production consumes large amounts of nitrogen-based fertilizers, this means that North-American producers of these products such as Agrium (NYSE:AGU) and Mosaic (NYSE:MOS) may make good investments in times like these. Regardless of the corn crop, China Agritech is not a good investment. This is because, as I have documented based on entirely public information here, here, here and here, management of this company is corrupt and does not have shareholder interests at heart.

The second piece of news was a press release by CAGC itself. In the first part of the release, CAGC revealed that they broke their promise to engage a top-tier auditor one month after their annual shareholders meeting. They made this promise back on September 8, yet one month later, they still have not engaged a top-tier auditor. They claim that they are committed to the process and will now engage one after releasing their third-quarter results. What they are saying is that shareholders must wait another month before they will have this engagement in place. Didn’t they already say that a month ago? CAGC broke their promise to shareholders to engage a top-tier auditor within a certain timeframe.

The second part of the release, which no doubt came as a response to my earlier articles, stated:

Regarding the recent market rumors, the Company believes such statements are intended to damage China Agritech's corporate image and the credibility of its management. The Company believes it has not been involved in any improper related-party transactions and management has not taken part in activities against their professional integrity. The Company considers the reputation and integrity of China Agritech to be of utmost importance to its future success and thus intends to vigorously defend it.

There is not a single substantive rebuttal of any of the arguments presented by my articles in this statement. It should be plainly obvious to anyone who has read CAGC’s 10-Ks and done a bit of homework that the related-party rent situation is improper. I have made a very complete argument, based on public information here, and will not rehash it in entirety, but readers should keep in mind, in 2009 the public company CAGC paid CEO Yu Chang and Director/ex-COO Xiao Rong Teng north of $10 per sq. ft. for industrial real estate in Harbin, China. This is clearly an above market-value rate and an improper related-party transaction.

Regarding management “not taking part in activities against their professional integrity”, this is obviously the crux of the problem for shareholders. This statement indicates that CFO Yau Sing (Gareth) Tang does not believe that taking part in separate pump and dump schemes in the US and Hong Kong and the illegal sale of unregistered stock in the US goes against his public integrity. This is a problem. Management does not believe that manipulating net income figures in their Q1 2010 10-Q and then selling millions worth of stock before correcting the error goes against their professional integrity. This is a problem. Different individuals may have different standards for professional integrity. I clearly hold management of a US publicly traded company to a certain level of professional integrity that is inconsistent with the level of professional integrity held and displayed by CAGC’s management.

In conclusion, the press release from China Agritech should not give shareholders any additional comfort about the state of affairs at the company. To begin with, they have not stayed true to their earlier commitment to engage a top-tier auditor within one month of their annual meeting.

Furthermore, in my previous articles I made a solid, detailed case, based entirely on publicly available information that: CAGC’s CFO has engaged in multiple pump and dump schemes; CAGC’s CEO and Director/ex-COO are siphoning money from the public company via above-market price related-party leases; and insiders sold stock while withholding material information. CAGC has not made a single rebuttal of substance to any of the arguments that I presented. Their press release represents nothing more than broken promises and empty words.

Disclosure: Author is short CAGC