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China-Biotics reported record sales Wednesday. It finished the day with a 5% loss on heavier than usual volume.

CEO Jinan Song made a statement on behalf of the company: "We are pleased to report a solid third quarter as our successful strategic shift from retail to bulk products continues to show positive results." And what a shift that was. China-Biotics claimed it grew revenue by 39% -- despite having closed 95 retail outlets in the quarter ending September 2010. There are only 15 outlets remaining in operation. Miraculously, bulk sales saved the day, increasing 142%.

Investors were unimpressed as five serious issues have been left unresolved.

1. Last summer, China-Biotics claimed to have more than 100 retail outlets and published a list of addresses.

  • Official websites by the real tenants of many of these locations were found, proving that the addresses in question were not China-Biotics retail outlets. (See here.)

  • Photos by investigators in China verified that a majority of the China-Biotics retail outlets were "missing." (See here.)

The company later changed its introduction to the list of outlets, stating that there had been an error and that these addresses merely represented places where its products could be found. To this day, the company has not provided another list of addresses to account for the majority of outlets claimed in 2010. (See here.)

2. During the conference call, the question was raised again about the small amount of interest earned on such a large cash balance. The caller ended his question with "... low interest makes people nervous."

Those of us who have been following the company have asked ourselves, Was there a good reason why the company earned such low interest? Many answers have been proposed by investors and bloggers. However, the company's response to the caller's concern was, "We are in a process of implementing a program."

Investors may have been hoping for a good reason. What they are left with is a choice between two less attractive questions. Has the company been negligent with cash? As bad as that may sound, it is nonetheless better than the alternative question: Does the company really have the money?

3. The audited Chinese filings do not match the audited SEC filings...and yes, key numbers in consolidated SAIC filings and consolidated SEC numbers should match.

In a recent article in Bloomberg, we find new emphasis on SAIC documents, "... as Roth Capital’s due diligence procedures 'evolve,' it checks SAIC filings now too."

TheStreet:

The notion that SAIC filings are largely meaningless finds little support among some experts. The Shanghai-born-and-raised Gerry Wang, CEO of a containership company in Vancouver, says his extensive network of friends and colleagues in China view accuracy in SAIC filings as an imperative.

And Peter Humphrey, a forensic accountant and corporate due diligence investigator in China, puts it bluntly: 'The apologists for the fraudsters in the U.S. like to down play the importance of SAIC filings because doing so serves their purposes.'

Still, many do not trust the idea that the Chinese numbers should reconcile with the US numbers. Fortunately, China-Biotics is not dealing with hair-splitting criticisms at this point. The company is either a fraud or it is not. We can restrict our attention to cash. A bank balance is a bank balance and numbers are a universal language. A comparison of the filings, with English translations, can be found here.

4. Noted Chinese forensic accountant, Zheng Zhaohui, doubts the company's cash balance and its tax claims. His nickname is Xia Cao, which translates into english as "Summer Grass." He is an author of several books and articles on detecting financial scams.

He concluded:

This confirms that the Company’s bank cash balances still mismatch its cash balances on its own balance sheet. In fact, the most common technique used by Chinese company listed overseas to inflate its assets is to inflate its cash balances. It’s extremely easy to fabricate bank statements and bank letters, especially the 'corporate fixed term bank deposit certificate'.
Overall, the author believes CHBT is involved in fabricating its five years of
reported profits, causing massive tax liabilities, and also massively inflated cash balances as a result.

Full translation: here (.pdf)
Original blog in Chinese: here
His books on Amazon.com can be found here.

5. An investigative news reporter in China picked up Xia Cao's lead and wrote a widely distributed news article.

Here are some excerpts from a translation:

A manager responsible [for] administrative matters by the last name of Li was surprised by the over 100 store[s]. ‘From what I know, we don’t have that many stores’, he said.

Tesco stated to us they used to carry some probiotics by Shining, but the sales volume was too low and therefore stopped taking delivery from the company in July 2010. Tesco recently took a small delivery of the product.

[People] at the headquarters marketing department of Danisco China located in Guangzhou stated that compared to Danisco, the amount of probiotics that Shining ((OTCQB:CHBT)) provides to dairy companies is miniscule. Also, the above mentioned marketing person expressed that he could not possibly understand how CHBT could sell over 80 million USD probiotics products.

But a journalist at our newspaper got the response from Mengniu : 'Shining or CHBT is not our supplier, we purchase from the two biggest manufacturers in the world, Danisco and Hansen.' Also, people at Bright Dairy stated that they do not know about the company because Bright Dairy mostly use its own probiotics.

In a Lianhua Supermarket on Xinzha Road, the journalist saw Shining protein probiotics on the shelf, but the manufacturing date was January 2nd, 2010, over a year from the date of visit. The shelf employee said: ‘almost no one buys this product.’

Translation: here (.pdf)
In Chinese: here (use Google translator to compare)
The same Chinese article, but with Baidu.com results showing its wide distribution here.

Some of these issues are relatively recent; others were brought to light last summer. Whether this is "old news" or new information, depends upon the reader's perspective. The accusation that short sellers and news reporters are "beating a dead horse" seems to have adequately substituted for a rebuttal. We begin to wonder if validity doesn't die with age.

Hmm. Just after takeoff the tower radios a pilot. His landing gear has fallen off. He is in a sweat and shaking for about three hours, after which he grows calm again.

Co-pilot: What are we going to do?
Pilot: About what?
Co-pilot: About the missing landing gear!
Pilot: What missing landing gear? That's old news.

What's the expiration date of a critical failure in a company's claims? This should sound fairly silly at this point. It really should.

Disclosure: I am short OTCQB:CHBT.