Last month, we wrote an article demonstrating that China 360 Solutions relied on a changed SAIC report in its due diligence report, thereby causing an incorrect conclusion. We also indicated in that same article that the cash verification was incomplete because it did not confirm the bank borrowings. This article is intended to shed more light on the bank loans at Lihua International, Inc. (NASDAQ:LIWA).
On LIWA’s registration statement filed on December 15, 2008, a bank loan granted by Industrial and Commercial Bank of China for $1,466,641 as of September 30, 2008, was mentioned in Note 12 Short Term Bank Loans. According to the note, the bank loan matured on October 27, 2008, but was extended to July 23, 2009. However, the loan does not appear in any subsequent SEC financial statements. In addition, this RMB 10 million loan is the same amount as the difference in the short loans between the 2008 Lihua Electron SAICs obtained by us (Line 52-RMB 52 million) and those obtained by China 360 Solutions (Line 52-RMB 42 million).
On LIWA’s quarterly report filed on May 14, 2009, a bank loan granted by China Construction Bank for $585,146 as of March 31, 2009, was mentioned in Note 12 Short Term Bank Loans. According to the note, the bank loan was maturing on April 29, 2009, but had been extended to April 29, 2010 subsequently. However, the June 30, 2009, financial statements noted that the loan “matured and (was) fully repaid on April 29, 2009.” These statements directly contradict one another despite both being made after the loan had matured on April 29, 2009.
It appears that most loans that were marked as paid on the 2009 SEC financial statements were actually extended. According to the 2009 unaudited SATs, Lihua Electron had short loans of RMB 50 million ($7.3 million) as of December 31, 2009, a decrease of only RMB 2 million ($300,000) from the 2008 SAICs obtained by us. This decrease is in stark contrast to the 2009 SEC financial statements, which showed a decrease of $4 million in short term bank loans from the 2008 SEC financial statements.
Besides these disappearing loans, an even bigger alleged problem lies in the amount of loans that were never recorded in the first place. According to their 2009 unaudited SATs, Lihua Copper had short loans of RMB 120 million ($17.6 million). However, the 2009 SEC financial statements showed no loans for Lihua Copper. This difference is slightly more than the net income shown on the 2009 SEC financial statements ($16.8 million).
If the December 31, 2009 bank loans should be $24.9 million instead of $2.2 million, the recent rise in LIWA’s stock price (from 4.93 as of December 15, 2011 to 6.25 as of January 10, 2012) should be short-lived, especially with Crowe Horwath’s audit looming. At least the unnecessary capital raises, paltry stock buyback, minuscule cash dividends, pathetic interest income, and the existence of any bank loans all start to make sense.
Disclosure: I am short LIWA.