What's in a Name? Chinese Businesses Masquerade

Includes: CBEH, CLNT
by: China OTC Player

There are several companies out there that appear to be in a certain business, as evidenced by their name, when, in reality, they are operating in a different segment altogether. And I'm not referring to the situation which arises in a reverse merger when a shell company acquires a Chinese entity that has a completely different line of business. Here I refer to entities that deliberately name themselves such, sometimes in clear contravention of what they are doing.

Of course, there is a fine line between passing off oneself as something else, versus being aspirational as to what one would like to become. Where does the line fall? Well, why don't you decide. I present three examples.

1) From its name alone, it is clear what China Bio Energy (OTCPK:CBEH) is up to. "Bio" suggests that the company is into things green and renewable, perhaps biodiesel or ethanol production. So what does the company actually do? Well, it produces and distributes gasoline, diesel oil and heavy oil. As of Q3 2007, how much revenues do you think it earns from biofuels? The answer is zero. The company's latest 8K states that it engages in the "research and development, manufacturing and distribution of bio-diesel" and has a "10,000 square meter" bio-diesel plant in Shaanxi Province. But note that the 10,000 refers to the land area, not to the tonnage. Is the plant operational? Is it producing? It doesn't appear so. So how "bio" is the company?

2) China Wind System (CWSI.OB) is, similarly, very clearly positioned. In a recent press release, prepared by CCG, the company is said to be "positioning itself to be a significant manufacturer of forged rolled rings and other wind energy components for the rapidly growing wind industry in China." But the company also has substantial operations in the manufacture of textile dyeing and finishing equipment. In fact, for the first nine months of 2007, the textile segment accounted for 87.3% of its total revenues and 88.6% of its net income. Is this really a company in wind power? If not, when will its wind power segment overtake its textile segment? Is it in the foreseeable future?

3) And then we have Eternal Technologies (OTC:ETLT). Despite its "tech" name, and despite its position as (and I quote from the company's press release) "a major agricultural genetics and biopharmaceutical R&D firm", the company is essentially a meat producer breeding sheep, goats and cattle in Inner Mongolia. It does have a subsidiary called E-Sea in the medical devices sector, but meat accounts for approximately 73% of revenues. It also earns revenues from "land lease" and operates a mango orchard. How "tech" is that? What is the company really about?

My take is that in trying to court investors, many Chinese companies have bent too far backwards in positioning themselves in "hot" sectors such as renewable energy, when the reality is somewhat different. When I buy an orange (or a persimmon for that matter), I don't want to end up with a lemon. And does every company need to have "China" in its name? I don't think so. Just ask Baidu (NASDAQ:BIDU), Wuxi Pharma (NYSE:WX) or Zhongpin (NASDAQ:HOGS), which are all successful, recognizable Chinese companies.

My Position: None.