The Harbin Land Shuffle: A Classic Bait And Switch


As of September 21, 2011, the risk equation at Harbin Electric (NASDAQ:HRBN) has fundamentally changed due to the release of 2 new pieces of information which essentially prove that HRBN has made material misrepresentations to the SEC, the NASDAQ and to China Development Bank. The size and nature of these material misrepresentations is now too big and too public to be ignored by the SEC, the NASDAQ or China Development Bank. There now exists a very real basis for the NASDAQ to halt /delist the stock and for CDB to walk away from the financing.

The irrefutable misrepresentations boil down to this:

· One of HRBN’s major customers doesn’t even know who HRBN is!

· The Bait and Switch (ala OTC:YUII): Creating a phony land acquisition and then attempting to replace it with another transaction after having been exposed.

The first development was the surfacing of audio tapes on The Financial Investigator which indicate that HRBN has completely fabricated its relationship with a reported major customer, Jiangsu Liyang Automobile Seat Adjuster Factory. GeoInvesting is strongly of the opinion that anyone who is following the HRBN transaction should absolutely make it a point to listen to these tapes in their entirety. [here and here]. We have spoken several times with the interviewer who made the tapes to confirm their authenticity.

The contents of the tapes can be summarized as follows:

- An US investor visited the facilities of Jiangsu Liyang in person and interviewed the head of sales, and then subsequently followed up with a phone call with the general manager (head of quality control)

- Both managers in 2 separate conversations independently confirmed that Jiangsu Liyang has no relationship with Harbin Electric, and in fact doesn’t even know who Harbin Electric is.

- More importantly, Jiangsu Liyang is effectively not even in the business of making electric seat adjusters. The company makes MANUAL seat adjusters. As can be heard clearly on the tapes, Jiangsu Liyang produced less than a total of $500,000 of electric seat adjusters in the past 2 years. However, in HRBN’s 2010 10K (page 9) HRBN disclosed that it sold over $40 million in motors to Jiangsu Liyang in the years ended 2008 and 2009.

- The interviewer asked if he could see any electric seat adjusters and was told that none were available because they are only made by special order and only comprise 1-2% of Jiangsu Liyang’s revenue.

- In each of the past 2 years Jiangsu Liyang can be heard to state that they sold only about 1,000 motorized seat adjusters, and more importantly for the few motors that they did purchase, they named their supplier as Shanghai Shenghuabo Motors, not Harbin Electric.

For those who wish to independently confirm what Jiangsu Liyang produces, it is easy to visit their website here. It can be clearly seen that Jiangsu Liyang includes pictures of all of their products and that none of them are motorized or electric.

These facts are easily verifiable by the NASDAQ and in similar recent incidents with China stocks the NASDAQ has acted relatively swiftly to halt the stock. It is also now easy for China Development Bank to visit Jiangsu Liyang, or to even simply call them and ask what they produce in terms of manual or electric car seat adjusters. Barring that, CDB can simply visit the website of Jiangsu Liyang and easily see that the company does not even produce motorized seat adjusters.

The second development was the September 21, 2011 after-market release of an 8K by HRBN which effectively confirms our findings and those of regarding a reported land purchase by HRBN that never took place.

On September 6th, HRBN released a press release refuting a report by and us. HRBN stated:

Regarding the land purchase referenced in the report, the Company stands by the statements as disclosed in its 10-Q dated August 9, 2011. Harbin Electric confirms that the land purchase was done in full compliance with various relevant Chinese government entities and notes this transaction structure is a common practice in China.

Yet in the September 21st 8K, HRBN notes that the land purchase had already been canceled as of August 24th. HRBN notes that now a new transaction has taken place for 2 separate parcels of land, yet both the total purchase price and deposit amounts required are exactly equal to the amount of the first supposed transaction that never occurred.

Creating a phony land acquisition and then attempting to replace it with another transaction after being caught is nearly identical to the situation that occurred with YUHE International and which resulted in the almost immediate halting and delisting by the NASDAQ.

Disclosure: I am short HRBN.