The 2010 annual audit report for Jinjia Color Printing1 was disclosed last month. It appears that the China-Biotics (CHBT) 2 subsidiary is in arrears of some $55,000 USD. Not very much … but then again, the lower the debt, the more puzzling the failure to pay. The debt may have remained on the books of Jinjia for as long as five years now. The small debt of the subsidiary, Shanghai Shining,3 was listed as “unlikely to be recovered.”
I paid for a professional translation of the section relevant to China-Biotics:
Despite the small amount concerned, the final report contains a breakdown of this single provision for the bad debt reserve of accounts receivable.
Unit: Yuan Currency: Chinese Yuan (Renminbi)
Contents of accounts receivable
Bad debt provision
Provision ratio (%)
Grounds for this provision
are unlikely to be recovered.
(Click on the Chinese in each cell for an alternative translation through Google. As for the company name, it links to a Google search. You can click on through the Google hits to see that they connect to “Shanghai Shining,” China-Biotics’ operating subsidiary. See a screen shot of the report here. Its translation, as I received it, here.)
The 2009 and 2008 reports also mentioned the debt. In the 2008 Annual Financial Statement, we find the same numbers and reference with “3 年以上” in the last column (3 年 = "3 years" and 以上 = “More”) and a column heading, 欠款时间 ("Arrears Time.") I found no mention of the debt in the 2007 report. Is that because the debt was not more than 3 years old at the time? That might suggest that the unpaid debt was as old as 2005 (2008 – 3 = 2005).
What is baffling is that it is such a small amount, only about $55,000 USD at today's exchange rate. It does begin to make sense however with a little digging.
Here is the cash which Shanghai Shining declared to the Chinese government agency, Shanghai Administration for Industry and Commerce (SHAIC). 5
Cash claimed in China in RMB
USD per unit, Dec. 31
Converted to USD
At the end of 2006, Shanghai Shining told Chinese officials that it had $123,000 cash. Now of course the cash in SEC filings is a consolidated amount. That makes it difficult to say that the money is not with another subsidiary. However, for China-Biotics the only other subsidiary in the PRC at this time was Growing Bioengineering (Shanghai) Company Limited, and it had no operations until 2010. It was not even established until September 22, 2006 (from the March 2007 10-KSB).
It is difficult to believe that Shanghai Shining is not supposed to have the money. In SEC documents, net sales were said to be $14,421,772 for the year ending March 31, 2005. By March 31, 2006 it was supposed to have pulled in $21,862,385 … with a net profit margin of 38%. Cash in March 2005 was roughly 10 million dollars; in March 2006 it was 20 million (from the March 2006 10-KSB).
The only obstacle to grasping that Shanghai Shining was cash poor is an equally poor thinking process. If we use the company as the single source for our information, accepting only the facts downstream from the company, then we can easily be confused when outside information arrives to contradict us. If we deliberately try to falsify our own position, with outside information and from a variety of sources, then we can quickly identify contradictions and filter out the weaker facts, leaving a pool of stronger conclusions. If done with rigor, this should result in a mental state where the possibility of being caught on the wrong side of the market has been lessened to a considerable degree. With China-Biotics, after accepting a variety of sources, a very different story emerges.
Is it possible that around 2005, at about the time the company was preparing its reverse merger for March 2006 that it was really cash poor? In case the preceding was not enough, here is a passage from a lawsuit which was professionally translated:
Legal representative: Li Jianhua, manager.
Authorized agent: Shi Yu, attorney at Shanghai Lingyun Yongran Law Firm.
Defendant: Shanghai Shining Biotechnology, Co. Ltd.
Domicile: 999 Jinqiao Rd, Pudong New Area, Shanghai,
Legal representative: Song Jin’an, chairman of the board.
Authorized agent: Li Changzhi, employee of the company
Sales contract dispute case between the plaintiff Shanghai GM Biochemistry Product Co., Ltd. and the defendant Shanghai Shining Biotechnology, Co. Ltd, accepted by the Court on the 26th of July, 2005. On the same day, the plaintiff applied for property preservation; following review, the Court issued a civil ruling to freeze defendant bank deposits of 140,000 yuan or seal up property of the equivalent value.6
140,000 yuan, that’s about $17,000 in 2005. The court records show that the problem began before 2005, but what concerns us here is the financial state of Shanghai Shining in 2005. From July 2005 to March 2006 when China-Biotics introduced itself to the US markets, we are looking at 8 months. We begin that 8 months with evidence of a deadbeat and end with declarations to the SEC of outrageous wealth.
In SEC filings, China-Biotics claims $10,271,503 cash and cash equivalents on March 31, 2005. Yet in China the judge felt it necessary to freeze $17,000? How could this be? … Why? … What long journey had Shanghai Shining begun?
From the March 2010 10-K:
On October 5, 2009, the Company closed an underwritten public offering of 4,600,000 shares of its common stock at a price of $15.00 per share. On October 26, 2009, an additional 690,000 shares were sold pursuant to the exercise of an over-allotment option at the same price. Net proceeds of the offering, including the over-allotment, after deducting underwriting discounts, but excluding estimated offering expenses, were approximately $74.9 million.
That’s real money. I’ll just leave it at that.
1 Company description (from BusinessWeek):
Shenzhen Jinjia Color Printing Group Co., Ltd., (“Jinjia”)
Jinjia principally engages in the production and distribution of cigarette label products, as well as the design, plate-making, and printing of related packaging materials in China. The company is based in Shenzhen, China.
Four annual reports from Jinjia
- 2011-04-26 深圳劲嘉彩印集团股份有限公司2010年年度报告
- 2010-04-10 深圳劲嘉彩印集团股份有限公司2009年年度报告
- 2009-04-13 深圳劲嘉彩印集团股份有限公司2008年年度报告
- 2008-03-31 深圳劲嘉彩印集团股份有限公司2007年年度报告
2 China-Biotics, Inc. ("China-Biotics")
3 Shanghai Shining Biotechnology Co., Ltd (“Shanghai Shining”)
4 For those readers who think that the name should have been translated, as “Shanghai Shining” or literally, as “Double Gold”, I agree with you. But this is the name the translator chose. Of course, the subsidiary in China is, Shanghai Shining Biotechnology, Co. Ltd. At first he did not translate the company name at all, but left the Chinese characters in, which initiated the following dialogue:
Translator: “The company name was not translated as it is likely that the company has its own English trade name.”
Me: “I need the company name translated. What is its English name?”
Translator: “Its registered name on the stock exchange is ‘China-Biotics Inc.’”
I took a screen shot of this dialogue, which you can see here (the red circle is mine).
5 Every year, Shanghai Shining must submit its audited financial statements to this local branch of the State Administration for Industry and Commerce (SAIC). For 2007 and 2008 SAIC statements, here (English) and here (Chinese). For the 2008 and 2009, here (Chinese 2008, 2009). (I took the 2006 number from 2007 statement, “Opening Amount.”)
6 Original Chinese:
法定代表人李建华，经理。 委托代理人施煜，上海市凌云永然律师事务所律师。 被告上海双金生物科技有限公司，住所地上海市浦东新区金桥 路999号。 法定代表人宋锦安，董事长。 委托代理人李长治，该公司工作人员。 原告上海广茂生化制品有限公司与被告上海双金生物科技有限公司 买卖合同纠纷一案，本院于2005年7月26日受理，同日原告申请财产保 全，本院经审查后作出民事裁定书，冻结被告银行存款14万元或查封相 等价值的财产。
Copy the above and paste it into the Google Translator to verify.
Here is a screen shot of the Google translator with the above text.
Disclosure: I am short CHBT.