China Integrated Energy: Investigators and KPMG Begin Sorting Through Evidence

| About: China Integrated (CBEH)

Charles J. Landy, of Pillsbury Winthrop Shaw Pittman LLP, contacted me to announce that he has been engaged as counsel to the Audit Committee of the Board of Directors of China Integrated Energy (NASDAQ: CBEH) to investigate my allegations. He stated the he appreciates my offer to help find the truth and asked that I send him copies of all of the evidence against CBEH. I referred him first and foremost to the key video evidence (viewable here) proving CBEH has not produced any meaningful quantity of biodiesel in the last four months, despite management’s repeated public claims that their plants are running at 100% of capacity. I plan to spend the next several days walking Mr. Landy through the documentary evidence, all of which is available by clicking the hyperlinks in my updated report available (here).

Pillsbury’s investigation appears to be progressing very quickly. I believe Pillsbury can conclude by next week that the videos and Chinese audit report together conclusively show there has been no meaningful production and sales of biodiesel proving management fabricated of $22 million of gross profit from biodiesel sales in 2010 as well as grossly exaggerated wholesale and retail division profits. CBEH’s historical financials clearly can no longer be relied upon.

The March 10th Investor Tour video also conclusively shows management staging phony production at the Tongchuan plant to deceive investors (also viewable at the same link above). Once Pillsbury confirms the truth of the videos the Independent Board Members will have to take swift action to terminate Chairman Gao and his management team as the first step toward preserving shareholder value. Then the Independent Board Members will have to find new honest management to sort out what remains of CBEH and determine whether or not there is any viable future for the company.

KPMG Audit and Q1 Preview

International Financial Research & Analysis Group ("IFRA") investigators handed over all their documented evidence late last week to KPMG, CBEH’s independent auditor. I encourage institutional investors and analysts to contact KPMG audit manager Ryan Guo in the Beijing office (main line: +86 10 8508-5000) to share their concerns. Ryan’s assistant is Pingping Cen (direct line: +86 10 8508-5517, email: pingping.cen@kpmg.com).

Given the video evidence clearly shows no material production of biodiesel in the first quarter of 2010, I expect CBEH will be forced to report a loss on it biodiesel operations for the quarter just ended. The loss could be large if CBEH is forced by KPMG to write down biodiesel asset values and goodwill attributable to its Chongqing Tianrun biodiesel acquisition.

More importantly, since KPMG is now aware that CBEH’s historical biodiesel production was likely all a hoax, it is only a matter of time before KPMG pulls its 2010 audit opinion resulting in the delisting of CBEH. The former auditor, Sherb & Co., LLP, should likewise pull its 2008 and 2009 audit opinions. I don’t expect CBEH to trade on NASDAQ much longer.

More Videos Uploaded

I have now uploaded a total of 64 days of Tongchuan and Chongqing surveillance video to Vimeo (viewable here). The videos span February 10th to March 24th. In addition to proving CBEH has no meaningful biodiesel production activity, the highlights of the videos include:

  • Tongchuan 3/10/11 – Management hosts a group of 20 Rodman & Renshaw investors on a tour of the idle Tongchuan plant. During the tour management staged production activity including the fake filling of five biodiesel tanker trucks from the factory’s storage tanks. During four months prior to the tour, investigators saw only one other tanker truck (see below). The Tongchuan plant requires at least 18 large tanker trucks per day to enable it to run at 100% of capacity as management claims.
  • Tongchuan 3/24/11 - A sea container load of heavy equipment is delivered to the new 50,000 ton production line. Management previously announced in a January 31, 2011 press release (here) the completion of construction of the new production line stating that “the facility is expected to be operating at 25% - 30% capacity in the first quarter of 2011”. This is impossible since equipment was still being delivered as recently as March 24th and the surveillance videos show no meaningful production of biodiesel throughout the first quarter.
  • Tongchuan 2/21/11 – CFO Albert Pu hosted a plant tour for Jason Xu of Quantum Asset Partners. Jason contacted me explaining that he was very unhappy at the lack of production activity he witnessed. After viewing the IFRA surveillance videos he told me he is “certain now that CBEH has been faking biodiesel production for a long time”. Other investors have come forward and shared similar stories. One investor who was allowed to film a video inside the plant in November 2010 expressed to me his concern that the operation was a hoax.
  • Tongchuan 3/2/11 – The first large biodiesel tanker truck the investigators witnessed in four months entered the Tongchuan factory.
  • Tongchuan 3/7/11 – The lights are on at night for the first time in four months.
  • Tongchuan 3/12/11 – After five nights of lights (centered around the March 10th Investor Tour), the factory returns to darkness.
  • Chongqing 3/9/11 – A large truck containing what may be waste oil barrels entered the factory. This was the first evidence of any possible production activity in two months of surveillance.

2010 Surveillance Records

IFRA has agreed to let me release surveillance records (pictures and comments) from its field agents stationed outside the Tongchuan plant in November and December 2010. I am formatting the pictures for upload to Vimeo this week. Like the surveillance videos from 2011, these records show no production activity at the Tongchuan plant. The only activity was the ongoing construction and equipment deliveries to the new 50,000-ton Tongchuan production line.

Cash Per Share Confusion: $2.29, $1.47 or $0.28?

I noted many investors expressing assurance that CBEH is a “safe” investment at these low levels due to Yahoo Finance and other sites reporting the company has $2.29 cash per share. But free sites like Yahoo routinely miscalculate cash per share, ignoring restricted cash, earmarks and dilution from new funds raised.

As I show in my updated report (here), according to CBEH’s own management shareholder letter dated 3/23/11 (here or here) the unrestricted cash balance at 12/31/10 was $30.3 million after management deducted working capital and prepayments from customers. I add to this the total net proceeds of $36.73 million CBEH received from Rodman & Renshaw investors in January to get $67.03 million. Dividing $67.03 million by 45.65 million fully diluted shares outstanding (following the financing) results in $1.47 cash per share as of the first week of January.

However, CBEH is aggressively spending its cash on highly questionable acquisitions, including the previously announced $46 million Hainan Lin Gao biodiesel project as well as the $8.2 million pending payment for the acquisition of the Chongqing FengDou wholesale distribution business. Subtracting these expenditures leaves only $12.83 million cash, or $0.28 per share.

I continue to conclude that CBEH shares are vastly overvalued and expect a delisting to happen shortly.

Disclosure: I am short OTCPK:CBEH.