It is obvious that the issues surrounding Zhongpin (HOGS) have developed into a multi-faceted story that can become difficult to digest. That is why we feel it necessary to peel the HOGS onion one layer at a time so investors can appreciate the breadth and importance of each layer individually. In this installment we discuss our view of Chardan Capital’s take on the HOGS story as well as a look at Chardan’s track record in the ChinaHybrid space.
On September 27, 2011 Chardan Capital quietly downgraded HOGS from Buy to Neutral and cut HOGS price target to $9.00 from $14.50. The irony of this move is that it was only on August 9, 2011 that Chardan reiterated its "buy" rating on HOGS as Global Hunter Securities was being criticized for downgrading the company. Now it seems Chardan has had second thoughts about its seemingly unquestioned acceptance of whatever story the HOGS management team spins for the market. Could this be a sign that Chardan's motive for its initial reiteration of the buy rating was to support the stock?
To illustrate our point, referencing an August 26, 2011 Bloomberg article titled Zhongpin May Attract Private Equity Takeover Bid, let's look back to what Chardan had to say later on the same day that HOGS management hosted a conference call to address issues brought up by various negative research reports:
"We believe the long-term opportunity for consolidation within the Chinese food processing industry is too attractive for Zhongpin not to attract either a private bid or investment from an international partner," Tim Tiberio, a New York-based analyst for Chardan Capital Markets LLC, who has a "buy" rating on the stock, said in a report.
Chardan also stated that:
"Along with exploring business relationships with companies like Tyson Foods Inc. and Hormel Foods Corp., Changge-based Zhongpin may also be considering proposals to take the company private," Tiberio said.
We believe that Chardan based most, if not all, of its assumptions on an unquestioned acceptance of comments made by HOGS' management during the conference call in which management made casual comments regarding its willingness to entertain going private transactions or pursue international partnerships with leading global players such as Hormel (HRL) and Tyson (TSN).
Management's quote from conference call:
"for example such as a Tyson and Hormel foods Zhongpin has been in business relations with them."
That's not much for even casual investors to hang their hats on, much less an experienced analyst who should know better than to embellish and play back to the investment community such empty platitudes. It appears to us that Chardan's analyst simply took comments made on the conference call out of context and reported them as if HOGS was in fact in substantial discussions with Hormel and Tyson, and/or was seriously considering a going private transaction. We understand that Chardan is not exactly neutral in its analysis of HOGS since it acted as an agent in the company's March 2011 equity offering. However, we are surprised that Bloomberg ran what appears to be HOGS management's unsubstantiated comments as a "credible" story.
NEWS FLASH. A member of our team first contacted a Tyson Foods representative in China. This person commented briefly that he was unaware of any relationship with Zhongpin, and then referred us to a high ranking associate at Tyson's U.S. headquarter who was qualified to address our questions. He commented that they "have no formal working business relationship with Zhongpin.", and they wanted to know more about HOGS' claims.
Should we repeat this? This is the actual direct quote from the email correspondence with a U.S. contact from Tyson:
"We have no formal working relationship with Zhongpin. I am not sure how they are referencing TSN, but would be curious to know. Thanks."
Tyson Foods Inc.
Investors are more than welcome to verify this on their own.
Looking at the situation from Tyson Food’s perspective, even if they are approached by Zhongpin, the channel checking required to support any relationship with HOGS would no doubt put them off. Just look at what the investment community has had to endure; material SAIC vs. SEC filing discrepancies, capex issues, WOFE deception, and multiple capital raises without solid reasoning, just to name a few. Tyson would certainly be aware of all of these red flags. Furthermore, having a relationship with Tyson or Hormel would not validate Zhongpin's claimed profitability. It would just mean that they have some level of top line operation.
We consider Chardan's action to issue its comments just hours after the completion of the conference call to be an apparent attempt to support the stock. Chardan's analysts should examine what "has been in business relations with" really means and how real a possible going private transaction is. We just can't see how they could have examined such complete issues so quickly on the same day of the conference call. Once again, it appears that an analyst is taking statements by a ChineseHybrid's management team at face value and parroting them back to the investors.
We can’t help but note that on the conference call the Chardan analyst never challenged HOGS explanation of its SAIC filings and why the profits reported to the SEC were so much greater than what was reported to local Chinese authorities. In the end isn’t this all about whether or not HOGS SEC filings are accurate and can be relied upon? Once again, Chardan and many other investors simply took management's words and documents at face value and adopted the party line that is most supportive of HOGS's share price. Chardan is apparently willing to endorse HOGS SAIC commentary and defense without supportive documentation. As far as we can tell, HOGS management has not published any of its SAIC information, yet Chardan appears willing to accept HOGS SAIC explanation without any verifiable documentation.
Further, Chardan has made no attempt to contact the GeoTeam to consider the possibility that we could offer insight to the SAIC analysis. If they listened to the call closely or had any knowledge whatsoever regarding SAIC filings or had possession of the filings, as we have for several months, we believe that Chardan would have to seriously question HOG's CFO Warren Wang's SAIC net income analysis. Especially since Fuqi International (FUQI.PK), a company for which they co-managed an equity offering for in 2007, was accused by some of manipulating SEC margins despite the fact that SAIC revenues were on par with SEC revenues. Guess what Chardan; all you would have had to do was pull FUQI's SAIC filings and you would have learned that just like HOGS, FUQI's SAIC and SEC revenues were in line but net income was not (.pdf). This presents as a classic example of a real company manipulating margins to please investors.
It is troubling that analysts can be so superficial in their work and at times even incompetent. We suggest that Chardan download the conference call replay, listen to the boiler plate SAIC discussion about 5 minutes into the call, and give us their interpretation of the SAIC analysis and why it is valid. They owe this to investors! Did they independently pull the SAIC filings themselves to verify what was said? If not, we find it hard to embrace their due diligence. At the very least, If Chardan were to give serious consideration to the SAIC information we have already provided (See link, page 7) we are confident that Chardan's experienced analysts could give us their value-added input on documented material. Or maybe their recent downgrade of HOGS is already testament to their comprehension of the issues.
Before investors give credibility to Chardan's recommendation on HOGS, including the new $9.00 target, they should consider Chardan's less than stellar track record, much of which took place in the SPAC/RTO world. Consider Chardan's role in the following:
- Formed the SPAC that housed (APWR), which was halted, delisted and now trading around $0.30.
- Served as co-underwriter for a 2007 FUQI public offering. FUQI was delisted for not being able to file quarterly and annual financial statements with the SEC since late 2009. Allegations of fraud have surfaced and two auditors resigned. This case is eerily similar to the HOGS case we developed; real revenues but allegedly fabricated margins.
- Formed the SPAC that brought (SEED) public through a merger with Chardan's acquisition group, and then proceeded to give SEED a buy rating and $18 price target on May 28, 2010. SEED's CFO recently resigned in July 2011. The stock recently hit a new low of $2.10 and has been a consistent disappointment to investors.
- Formed the SPAC that spawned (CABL) which is now CABLF, trading at $0.17 and voluntarily delisted from NASDAQ on July 18, 2011.
- Formed SPAC, Chardan 2008 China Acquisition Corp. (originally intended to merge with a Chinese company, but later chose to merge with a U.S. based mortgage processing company, symbol (DJSP.PK) in 2008). DJSP has been delisted and has class action law suits against it for its connection with robo-signing of foreclosure documents. The stock currently trades at $0.08.
- Was involved in the $30 million secondary offering of (LIWA) in April 2010. The LIWA story is still unfolding, but has recently been the subject of much debate between long buyers and short sellers and is currently trading near 52 week lows.
- Formed the SPAC that housed (AUTC) and raised funds for the company in April 2005. Chardan put a Buy rating on AUTC on 3/25/11, raising its price target from $30 to $40. They terminated coverage on 7/1/11. AUTC was halted for a time and still has not met its 2010 20F filing deadline. The stock has been delisted and lost nearly half of its value on September 12, 2011. The company currently trades under $9.00.
- Was involved in the (HOLI) (then named HLS Systems International, Ltd.) IPO and raised equity funds for that company. The stock has tumbled lately amid allegations of fraud.
- Raised money for (AAMA.PK), a stock that now trades at $0.02
- Served as co-manager for the (KGJI) January 2011 secondary offering and the stock plummeted within days of the offering. A director of the company has since resigned due to his concerns regarding the pricing of the secondary offering. Please see issues we raised regarding the KGJI story.
- Served as co-manager of the (CAVO) October 2010 secondary offering. CAVO has since been delisted and trades under $1.00.
- Served as placement agent for the August 2010 (CBBD.OB) private placement. CBBD now trades at $0.07.
- Was involved with CNWHF, now a $0.10 stock.
- Served as co-placement Agent for the January 2010 private placement for BOPH.OB. We have no information on this company.
- Formed the SPAC Hambrecht Asia Acquisition Corp. that housed (SGOC), A company where our on-the-ground due diligence was not positive.
- Served as underwriter for the December 2006 (FFHL) IPO. See fraud allegations that quickly surfaced on this name.
- Served as placement agent for HOGS March 2011 equity offering. Will HOGS be the lone wolf? TBD
Note: much of the information confirming Chardan's involvement with these companies is readily available on its website. For those of us keeping score on the China front, that's zero wins, 15 losses and 2 undecided.
Even though the weak market sentiment played a large role in why these stocks underperformed, the point of this list is that we expect more from investment banks, as many investors place trust in their due diligence. They should have never brought many of these companies to US soil. We seriously question Chardan's ability to perform due diligence in this space and believe investors should follow our lead.
As we said in our original report; we believe HOGS might play the going private game, one that Chardan is now participating in unwittingly or otherwise. Sure, based on SEC filings we can see why some Private Equity firms might get roped into such discussions, but once competent analysts dig into the story and explore HOGS PRC financial filings they will no doubt find what we have. We feel this closely mirrors the Chardan-backed FUQI story. FUQI was a real company accused of fabricating margins and exaggerating profitability, and is now currently delisted!
Additional disclosure: Also short HOGS puts. No positions in any other stock mentioned.