Editor's note: On May 3, Sino Clean released a letter to its shareholders disputing Mr. Little's claims (here). It also posted its own videos (here), transportation log (here), and shipping records (here and here). On May 9, Mr. Little published a second article (here) responding to the company.
Investigators from the International Financial Research & Analysis Group ("IFRA") have conducted video surveillance of over 20 U.S.-listed Chinese operating companies and counting, according to IFRA's head of research Andrew Wong who is based in Hong Kong. Wong tells me that surveillance efforts are costly and difficult to conduct under very threatening conditions. IFRA's field agents first must spend a few weeks watching and evaluating factory operations to determine the production cycle, factory entrances, and security surrounding the facility. The expensive cameras must be hidden so that the company does not find them, typically quite some distance from the factory and requiring use of a good zoom lens.
Once the factory logistics routine is established, IFRA trains a local operative to monitor the facility and the camera, continuously, taking note of field conditions and any unusual activity at the plant not caught on film. Sometimes the cameras get stolen, in which case a backup camera is always on hand. Each day the local operative replaces the camera batteries (usually in the darkness of night) and memory card. The previous day's footage is then securely transferred to IFRA for processing. The local operatives are the heroes of the operation. Several have been detained, questioned, and beaten by company security. These brave souls protect investors in a way that neither SEC, FINRA nor PCAOB auditors can do.
IFRA allowed me to review all the surveillance records it collected to date and let me publish the most egregious "ghost factories" on my website with the hopes of getting IFRA more business for their surveillance operation, which of course is funded by their clients (both long and short). So far I have uploaded over 140 videos of the 5 idlest factories in IFRA's collection.
Two of these ghost factories belong to China Integrated Energy (OTCPK:CBEH). IFRA's video surveillance of these two plants in my opinion proved they were not shipping any meaningful amount of biodiesel during the four months filmed. The stock was recently halted and the company's audit committee chairman, Larry Goldman, director Christopher Wang, and CFO Albert Pu and auditor KPMG have all since resigned (see 8-K's here and here). CBEH's management refused to cooperate with a special investigation team led by Pillsbury Law and Deloitte, both of whom also resigned according to the 8-K. In my view, the video evidence against CBEH was insurmountable.
I believe the video evidence against SCEI is even more powerful. The three worst "ghost factories" in IFRA's collection all belong to Sino Clean Energy (SCEI). All three of SCEI's factories have little or no shipping or receiving activity (indicating little or no production activity) in the films. These three factories account for 100% of SCEI's sales according to its audited financials. A brief summary of the results of SCEI surveillance effort follows:
Three "Ghost Factories" account for 100% of SCEI's Sales and Net Income
Tongchuan (550,000 ton capacity): IFRA's video surveillance showed the plant shipped an average of 4 tanker truckloads of CWSF per day in January and February. Compare this to the 38 tanker truckloads management disclosed in shipping records on their website (here). In March and April IFRA's surveillance showed absolutely no production with the possible exception of April 7, when there were a number of tanker trucks entering and exiting the facility. SCEI Chairman Baowen Ren responded May 3 with a letter to shareholders (here), stating that IFRA's camera was located in the "wrong place" and that the company produces CWSF mostly at night when electricity is cheaper. In an effort to prove their point, management uploaded 10 days of its own security camera footage of its weigh station in an attempt to refute the IFRA footage. However, as I show (here), IFRA's camera was in fact properly positioned and focused on the same (and only) weigh station and shipping area. IFRA's surveillance team confirmed that during the entire four months in question the Tongchuan factory never shipped out CWSF at night and the lights inside the factory were always off all night. Most alarmingly, I proved beyond a doubt that the 10 days and nights of security videos management uploaded were staged sometime after the dates management claimed to film, due to the fact that many of the videos showed rainy weather conditions whereas the official local weather during the 10 day period was completely dry as confirmed by the local weather bureau and as shown correctly in IFRA's surveillance videos.
Shenyang (300,000 ton capacity): In SEC filings SCEI claims it has five customers in Shenyang with the largest customer, Haizhong Heat Resource Co., Ltd., accounting for 85% of the purported volume. In the May 3 letter to shareholders (here), management claims that in addition to one company-owned delivery tanker truck, they lease 23 more trucks. However, IFRA video surveillance only shows one company-owned truck delivering one shipment each day through the end of March. Beginning April 1 (after the winter heating season ended), IFRA video surveillance shows no shipments at all from the Shenyang plant.
Dongguan (300,000 ton capacity): Despite management's claims that Dongguan has been producing large amounts of CWSF in Q1, according to IFRA surveillance records there has been no production activity to date at the Dongguan plant, the newest and best-looking of SCEI's ghost factories. The company has two brand new tanker trucks bearing SCEI's new Dongguan subsidiary's name parked inside the plant. The two trucks have not moved during a month of surveillance, indicating no CWSF has been delivered to customers.
I have now posted over 70 videos of SCEI's ghost factories to my SCEI Vimeo Channel. It takes a long time to review all these videos, but anyone who does will clearly see the almost total lack of production and shipping activity at the three plants that together account for 100% of SCEI's sales and net income. I strongly believe that this evidence is the gold standard of proof that during the four months in question (encompassing the entire first quarter) SCEI generated very little sales or income. I hope that SCEI's auditor will review the video evidence before signing off on the upcoming first quarter results in which SCEI management already pre-announced $33.7 million in sales (press release here). I believe the truth is less than 1/10 of that figure.