Critical Moment for China Expert Technology

When I first wrote about China Expert Technology (CXTIE.OB) on Aug. 13 there appeared to be still hope (though not likely) that it would file its 10-Q report for Q2 on time. The second day, however, the company filed for the five-day extension, citing the following reason:

"The review of the financial statements has not yet been completed."

Then a new CFO (Mr. Qiyou Li, or Jeff Liu) was nominated on Aug. 15. Today, three more weeks have gone by and the 10-Q is still up in the air. That, under a new CFO who was the company's former financial controller and has managed the company's financial matters from accounting to internal auditing for two whole years!

Is it really "the review of the financial statements" that is at issue? Did former CFO Mr. Simon Fu’s resignation cause the filing turmoil or was there a financial chaos that caused Mr. Fu to resign?

Honestly I do not have an answer. But some investors have begun to question the quality of the company's previous financial statements.

It is hard to blame them. I called five Chinese cities (including one district and one county) CXTIE claimed to have signed e-government contracts with in recent months. None of the cities confirmed the contract.

A few words of caution: I might not have spoken to the right official in all of the cases. But at least for the city of Xi'an, I was sure I have spoken with a key official responsible for the planning, assessment, and monitoring of the city's e-government projects. Moreover, for the district and county mentioned, I also had reason to believe I have spoken with reliable sources.

Still, it is possible that the company's contracts were signed with third-party management companies. But it really worries me when the local governments (particularly in Xi'an's case) had no knowledge at all of such management companies who were supposed to be doing e-government businesses with them. And the “management companies” were recognized neither by the local Departments of Commerce nor by the directory services.

Furthermore, all of the contracts were major ones mostly in excess of RMB 100M. It is very disturbing none of them was covered in the Chinese media.

All of a sudden, I felt I did not understand the company's business which I had once thought I did. And my natural reaction was to turn to the management for help.

With much persistence, I did finally get to talk with Mr. Michael Huang, Chairman of the company. Although he did mention management companies as a possible reason, he told me he was not involved in the company's day-to-day operation so he could not help me on questions regarding the contracts. He said he has forwarded my email inquiry to Mr. Xiao Xin Zhu, the company's CEO who should be answering my concerns. Mr. Zhu, as you might have guessed however, never responded to my inquiry and follow-up email I sent him.

Some of my readers were asking if the great buying opportunity has finally arrived. As you know, I do not make buy or sell recommendations. But this much I can say. If all of the e-government contracts prove to be real and solid, this stock can be picked up at $3 a share and still be a great value. On the other hand, this stock is worth little if the management cannot prove the contracts’ validity down to the RMB amount.

I have played enough hide and seek with this company. Before I quit this game, though, I would like to give this advice to the management: it is time to prove the company’s financial integrity and restore shareholder confidence. Face the shareholders and address their concerns. Concerns as basic as the validity and soundness of the e-government contracts! A no-nonsense approach to address their concern would be to publish contact information (in both English and Chinese) for them to verify the validity and progress of your outstanding e-government contracts.

Do that, before their patience runs out.

Update: It appears some of my readers have misinterpreted the above post. Or, I might not have communicated my ideas accurately. Therefore, I hope to make the following clarification.

1. I was only expressing my personal concern about CXTIE’s contracts. This should not be confused with an accusation against the company. There is a fundamental difference between the two. Personal concerns are based on one’s own opinion and could be incorrect. Accusation, on the other hand, should be based on well-supported facts.

2. Information collected from phone calls and through limited contacts is never scientific and may prove to be wrong or inaccurate. It should not be viewed as a conclusion, nor should it be interpreted as the result of a research or investigation. The only conclusion I have made out of my study is that I do not understand the company’s business and need the management’s help.

3. Under no circumstances should such information be used as basis for investment decisions. And I also want to caution that I do not hold a license to provide investment advices. I’m only a part-time individual investor who likes to blog about investment. Please also refer to the “Disclaimer” section at the bottom of this post.

Here is a brilliant opinion that I want to share with my readers. My smart reader from Research Intensive Investing has emailed me and posted a comment on my blog. He posed a sharp question that goes:

An interesting FYI: the CFO recently joined Chardan North China Acquisition Company, which just happens to be a large holding of JLF offshore investments. That can't be a coincidence. What do you make of this? In particular, if CXTI was a scam, why would JLF sit back and watch him join another one of their holdings? I can't imagine something being fishy at CXTI without the CFO having been involved.

I sincerely hope the company will improve its shareholder communication (including education) going forward. The more that shareholders understand the business, the more confidence they will have in their investment. It is also my hope that the company will take steps to restore shareholder confidence, prove its business model, and enhance shareholder value over the long term.

Wishing all CXTIE shareholders great success.

Disclaimer: the above represents only my personal view, which could be right or wrong. It is not a recommendation to buy or sell CXTIE. I do not have a position in CXTIE as of this writing.

Comments

[BenHoldsworth]

Seems like there is a very big problem with CXTIE.OB. JLF Funds, and Jeff Feinberg Here is a post from the Google CXTIE site:

Simon Fu, the CFO who resigned from China Expert and presumably caused the beginning of the stock slide, was recently hired by HollySys which is being acquired -- perhaps not coincidentally -- by Chardan North China Acquisition Corp, another firm that has 10% or more beneficial ownership by Jeff Feinberg's JLF OFFSHORE FUND LTD. In fact, Jeff's company reported owning more than one fifth of Chardan as of July 2007.

Being that Jeff Feinberg's fund is also the one that has been dumping millions of shares of CXTI, this begs some questions:

(1) Feinberg began massively selling CXTI stock almost immediately
following Simon Fu's announced resignation in late July. Assuming
there had to be some type of interview, offer, etc. in the hiring of Simon Fu, this would indicate a near immediate hiring of Simon away from China Expert.

The "shock" that other investors might have over Simon Fu's
resignation should not have "shocked" Jeff Feinberg were Simon being whisked away to work for Chardan. So it's unusual
both that the selling began right after that announcement, and that
the heavy selling as continued since.

(2) IF something is about to happen with CXTI earnings or if they
simply do not report and get delisted, and Simon Fu is aware of it but chose not to disclose it, an important question one would have to ask is if Jeff Feinberg's fund as one of the largest owners of the company acquiring Simon Fu's new employer is aware of it and trading on. Of course, we would hope and have to presume not, as I believe that is what is called insider trading, but on the other hand, if the "other shoe" does drop with CXTI, rest assured that every investor in CXTI will start taking an exceptionally hard look at these relationships.

Think the SEC would be interested?

[SMALLSCALE]

It stated in the June 25 PR that all 3 contracts have been sourced by consultants ? What ever the heck that means ! How hard can it be to verify the contracts - I guess pretty hard ! They have had contracts in the past - Why does everyone think these are BOGUS ? They still have 60 full time employees - I wonder if that figure has dropped also ?

[max petrisek]

There is real reasons for doubts about this company that is weeks late filing 10Q report without comments. Also its PR company said they broke off relations with CXTI since it would not communicate with them either.- What gives. One sure thing is that these antics is enough reason to drop share price from near $8.0 to 0.58 today within the past month The message boards are going ballistic !. Wow!!

[Billyboy]

In the interest of keeping you folks in the loop on this borderline criminal joke of a company CXTIE - The reason we see the stock under SO much pressure - JLF Selling all their stock on obvious insider info! - is primarily because many of the comical contracts CXTIE announced with these ignorant Chinese cities are simply contracts that HAVE NO CHANCE of ever getting paid for! The big announcements and excitement generated by this classless management team are contracts with the poorest of the poor cities in China! What a Joke. And JLF's Feinberg (another Joke) should be looked into for selling his stake on this news before any of us had a chance to react! Why should he be out of his position and somewhat whole while we lose until the announcement finally comes and the stock is at 0.10! Luckily I was able to sell my small piece much higher when I heard Feinberg wanted out! He is fool himself. It seems he and his comical team are in this CNCA with Simon "the criminal" Fu - is this another telltale sign to SELL CNCA. Just my opinions folks.