Yuhe International Addresses Allegations: Attempts at Persuasion Unsuccessful

Jun.19.11 | About: Yuhe International, (YUII)

On June 14, 2011, Yuhe International's (OTC:YUII) management conducted an investors conference call to address the allegations and issues raised in our report published on June 13, 2011. We participated in YUII’s conference call and were not persuaded by management’s explanations or the documents it provided as support for its claims to have acquired farms from Dajiang Enterprise Group Co., Ltd.

Given our misgivings about the representations made by YUII’s management during their conference call, we once again decided to reach out to Dajiang’s Chairman, Mr. Xuejiang Zheng to make sure there were no "misunderstandings" and to see if he could shed more light on the situation. Our investigator had two follow up telephone conversations with Mr. Zheng, one at the beginning and the other at the end of the day (Beijing time) on June 15, 2011 (transcripts attached).

Key statements made by Mr. Zheng during the third and fourth calls follow:

  • When YUII first contacted Mr. Zheng in 2009, they proposed renting Dajiang’s breeder farms. Mr. Zheng proposed conditions that were unacceptable to YUII so no agreement was reached. He does not understand why YUII is claiming to have acquired his farms but assumes the motivation was/is to mislead regulators and investors in the US so the company could obtain/maintain a listing in the US that it is not qualified for in China.
  • When Mr. Zheng was told that disclosures in YUII’s SEC filings state a down payment of approximately $12.1 million was made he considered such claims a joke. He categorically denies ever receiving any payment whatsoever, not even $1, from YUII.
  • Mr. Zheng said that, Mr. Zhentao Gao, Chairman and Chief Executive Officer of Yuhe International, visited his offices on Tuesday (June 14, 2011, Beijing time) to discuss issues raised in Geo’s report regarding YUII’s claimed acquisition of Dajiang’s farms. According to Mr. Zheng, Mr. Gao apologized for any inconveniences caused by this matter but assured him that the disclosures regarding the transaction would not harm Dajiang since they were only in English and only made in the US. Nobody in China was aware of these issues so Mr. Zheng should not be concerned. Mr. Zheng was unclear as to what Mr. Gao’s intent was but it is apparent he wanted his cooperation, with or without incentives, to support YUII’s story. Mr. Zheng admonished Mr. Gao for bringing Dajiang into the matter and his business practices. He refused to support Mr. Gao’s story and has consulted with his attorney concerning possible legal action against YUII.
  • Mr. Zheng was aware of the documents that YUII offered to US investors as support for and proof of the transaction. In the fourth call, when Geo’s investigator offered to fax the documents to Mr. Zheng, he said he had already seen them and that they are forged. Once again, he has contacted his attorney regarding this matter.

In summary, Mr. Zheng repeatedly stated that there never was an agreement for YUII to acquire Dajiang’s farms much less an actual transfer of ownership. In his opinion,

YUII created the illusion of acquiring Dajiang’s farms to present a strong front and solid business for its SEC filings. YUII’s management seems to be caught in a series of lies regarding this matter and apparently produced forged documents to support the transaction. Those documents may have been created in late 2009 or early 2010 to give to YUII’s auditors as required support for the alleged transaction. YUII’s management is playing a dangerous game by continuing to claim it acquired Dajiang’s farms and is only digging a deeper hole by producing what are apparently forged documents to support their claims. One sobering thought for investors is if YUII is willing to falsely claim it acquired Dajiang’s farms when it did not and go so far as to create forged documents to support the story, what does this say about the company’s other acquisitions?

Investors should know that YUII’s claims that Geo somehow misled Mr. Zheng during the first two telephone conversations in a manner that caused him to give confused or unintended statements regarding the transaction are false. Mr. Zheng knew perfectly well what was being discussed and his statements regarding YUII’s claims of having acquired Dajiang’s farms were consistent both before and after the investors’ conference call; there was no such deal and Dajiang did not receive the $12.1 million (or any other amount) down payment reported by YUII. This raises the obvious question; if the cash was really transferred from YUII’s bank accounts, who got the payments?

Disclosure: I am short OTC:YUII and am also short via puts