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  • Longwei Petroleum: The Most Brazen China-Based U.S. Listed RTO To Date [View article]
    Geo, needless to say I was shocked when I read your article this morning. As you said, this is probably the most shocking and unthinkable fraud case ever in Chinese small cap sector that fooled all investors including me. While I am indecisive on which side to believe until I hear the company’s response, I still cannot believe the conclusion you made that this company is a complete fraud because several things just don’t make any sense to me with that conclusion. Here are some key questions I have for you that I hope you can provide reasonable answers:

    1. Even after reading your article, I am still not completely certain on assertion you made that Longwei could not have had Taiyuan Economic and Trading Company paid all its taxes. Regardless of which subsidiaries paid the tax, as long as the company paid that much tax (and the company provided photo-copies of the tax payment records, which their auditor claimed have fully verified with tax authority I believe), wouldn’t it prove that the company did generate that much revenue during fiscal year 2012? This simple point, if true, overthrows the conclusion that the company does not have any business running.

    2. If the company is a complete fraud and just wants to steal shareholders’ money, why would they have spent so much time and money to do things such as completing the tax reconciliation, hiring two IR companies, paying Redchip to shoot an extensive onsite interview video and then subsequently a TV interview over the past one year or so to communicate to investors? Unlike some Chinese companies that were determined frauds, Longwei has not issued significant amount of new shares (except for the relative small amount that were issued for executive and IR compensation). What the CEO has to gain by spending so much time and effort to prove the legitimacy of the company?

    3. According to what the company shows on its website, it does have oil wholesaling and distribution license (which you seem to agree from what I can see in its article). Evidences so far suggest that the company’s subsidiaries actually own the three facilities (which you also seem to agree from what I can see in its article). Now, even if they do not have that high level of business activities they claimed to have, shouldn’t they still be able to sell quite significant amount of oil with the licenses, facilities, and money they got when going public? Oil is a commodity that is really easy to sell. Do you really believe that they are that bad of business people that are not able to sell one truckload of oil per day?

    4. The two biggest insider shareholders own about 66% of the company. So, every dollar they steal from the company 2/3 belongs to them anyways. In such a case, combining with point 1, 2 and 3, why wouldn’t they run a legitimate business but instead spending so much time, efforts, and money to keep their stock listed and at the same time doing the grand crime to steal money from investors? Even if they are not put into jail for committing such a crime, I don’t believe they can keep on running the three facilities and own the licenses. If I were a client or supplier I wouldn’t do any business with them anymore, and I would imagine that China government agency may withdraw their licenses. So, it looks to me that they would be giving up the business they’ve spent over 17 years to build. That reward/risk ratio for them to commit such a crime just doesn’t look good to me.

    5. You said that your team spent about 50 days in Taiyuan and Gujiao facility video-taping the activities, but you only show 3 days of videos for each facility. Are you hand-picking the days that happened to have lower business activities?

    I’d appreciate your feedbacks to these questions. Thanks.

    Kevin
    Jan 3, 2013. 02:40 PM | 12 Likes Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    Basing on information in the company's filings, I think the sequence of major events of the transaction was the following:

    1. In July 2007 Longwei contracted Heitan Zhingyou to Build an oil storage facility for about $17M. Looks like they originally written the contract as a "build-and-purchase" of assets, which practically is the same as a "pay-for-construction" real estate development contract (a developer contracts a construction company to build houses/buildings). A large scale oil facility construction project of this kind normally took a long time to complete (the permits application/granting process itself takes very long time).

    2. In February 2008 Longwei maybe decided to expand construction scope a little bit and also decided to just purchase the contracted company (Heitan Zhingyou) maybe for tighter control of the construction process and for cost saving (cutting one-layer of profit markup). Heitan Zhingyou of course should have other assets (office buildings, cash, investments, etc.). Thus, the purchase price was revised to $30M. Since Heitan Zhingyou then became a subsidiary of Longwei, its financial statements naturally was combined into Longwei's financial statements for fiscal year 2008 (ended June 30, 2008).

    3. In fall 2008 all building permits were finally obtained and land purchase contract is being signed; actual construction probably began close to end of 2008 or beginning of 2009.

    4. In June 2009 Longwei made final payment toward for the entire project because the construction of facility probably passed some final milestone (some residual equipment seemed to be still being built and some final tune-up was still made).

    5. The facility was completely ready and formally started operation (and generating revenue) in January 2010.

    The company also said in 2009 10-K that Gujiao facility was located in Langang County. LPH was much smaller and traded on OTC. So, the wordings it put in public filings and news releases were not as professional as those in its public filings and news releases in recent years (particularly 2011 and 2012). This is pretty typical for during the growth of a small company. Many American small caps went through the same process too.

    Kevin
    Dec 24, 2012. 06:16 PM | 2 Likes Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    I am not sure what you are trying to do by digging pieces of numbers from 5 year old documents. You seem to try to say something about the exact location of their Gujiao facility, but I don't get your point either.

    The management said clearly many times in conference calls and presentations that Taiyuan and Gujiao facilities have huge overlapping footprint and service "the same geographic area". That's why the company was so eager to get the new Huajie facility to expand its footprint.

    Page 4 of BTWResearch.com's detailed onsite investigation report clearly marked the location of Gujiao facility that their investigator visited: http://bit.ly/UicCA5

    As a shareholder the important thing to me is if Gujiao facility is generating good amount of revenue along with Taiyuan faclity in central Shanxi region. The exact address of it is an interesting information but does not have any effect to earning or cashflow based valuation formula.

    Kevin
    Dec 24, 2012. 02:55 AM | Likes Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    BTW, if you wonder why the disappointment to yesterday's news showed its effect today. The reason is that yesterday people were waiting to see what kind of explanation the management gives about this in the news release for whole company number. So, apparently the explanation did not totally satisfy some investors, who might still just want to apply the simple faulty logic that if the unit sales price is lower for a new facility for one month it will surely repeat for the next 12 months.

    Kevin
    Dec 20, 2012. 03:32 PM | 1 Like Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    herwig,

    I have never suggested anybody to put "all money" in LPH or any other stock (see my feedback to another user above).

    However, I think you are interpreting the market's reaction incorrectly. I have had conversations with many investors (mostly through email) today. Actually the dissapointment to some investors is not on today's news release. The dissappointment was on yesterday's news release about Huajie November numbers, or more specifically the drop of unit sales price per ton.

    The management said clearly in the news piece that it was only a one-time discount. My personal guess is that these are discounts on first sales order or first month to lock in big long-term contract. It is similar to the first-year teaser rate on 30-year mortgage that banks gave during housing boom, or the first-month discount on your two-year phone contract. However, some short-term investors do not think carefully about this and/or just don't have any patience to take any short-term sacrifice in profit for any long-term gain. Of course, the management probably could have given a better and deeper explanation in the news release or maybe just choose not to disclose Huajie specific number at all to avoid this kind of myopic reaction. I think they probably just wanted to be more transparent with investors but unfortunately weren't given any credit for that.

    Regardless, despite of the discount, as said in news piece yesterday, Huajie was still profitable on its own oin November. It is typical for big wholesaler like Longwei to pass some part of the discount in this kind of special promotion to its suppliers. Costco has similar practice. So, no, Huajie may earned less in November but still earned some. So, as a long-term investor I personally don't take it negatively.

    Kevin
    Dec 20, 2012. 03:27 PM | 1 Like Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    Nemesisjudge,

    Ok, let me just say this: objectively, some parts of your thinking is understandable and does have some merit in it, but the problem I see is that you have stepped too much over the line to make a conclusion that something must be wrong and the company must have ill intention to fool investors probably under the influence of your entrenched negative sentiment on the company and the sector. If the company really wants to avoid disclosing anything, it would have not even disclosed the details of this in 10-K (at least not until SEC or anybody asks). The fact that it proactively disclosed it indicated that the company was transparent to these facts and special circumstances.

    Let’s take it step by step.

    First, a “thing”, e.g. a land use permit, is not the same as dollar amount on accounting book. Even if you believe that they did not recognize their land value in a way you think is most appropriate, it is a logical overstatement to say you think they don’t have land use rights when the company and its auditor clearly says that they have the right and have the right to renew it and also clearly state in the description of its facilities on its official website that it has land use rights for these facilities. You are treading to an area that is at danger to be sued by the company in my opinion.

    Again you misstated the most basic accounting principal and rule: the “market value” of an asset does not have to be the same as its book value on balance sheet. In fact in most cases they are not the same, and in some cases (as the one we are discussing), they can differ materially. Read this article 1: http://bit.ly/Yw9Jjw

    Note this sentence: “Book value is the price PAID for a particular asset”.

    The general guideline of GAAP is that an asset has to be recorded at the amount of its PURCHASE PRICE, regardless of its market value, on accounting book.

    Now read this article 2: http://bit.ly/WHciJ8

    And note this sentence: “It is pertinent to note that the cost of a fixed asset is its purchase price, including import duties and other deductible trade discounts and rebates.” Again, the rule for the amount to be recorded for a fixed asset is its purchase price, not its market value. So, regardless of a land’s price, if it is worth $10M and party A is willing to sell to party B at $10, the book value of that asset is $10. Now, of course under most cases the purchase price should not differ from market value by that magnitude, but in some cases such as grant/gift or grouped asset purchase, it perfectly can.

    For Taiyuan facility, the government granted the land to the company 18 years ago (maybe to encourage it to build oil storage facilities on top of it). So, the transaction amount is zero or legible (if the company paid some paperwork fees). So, it is understandable that in such situation the accountant did not put any amount for the granted land. An accountant doing such is actually a good accountant because he/she followed the general accounting principal of being conservative and cost-based. Now, under today’s U.S. GAAP, for such special grant case, the company indeed can choose to put the market value of the land on balance sheet and simultaneously book a huge gain on transaction (added to that year’s net income) when being gifted a land. However, I wouldn’t expect an account 18 years ago in Taiyuan would knew how to do this, and the accounting rule in China at that time probably did not allow this. Furthermore, doing so is actually an aggressive accounting and will create an image that the company wants to artificially inflate its book value. I am certainly a lot of investors of Chinese company will certainly think this way if Longwei suddenly shows such big special gain on their book in a quarter. Note also that again the land value in this suburban Taiyuan area 18 years ago was tiny in today’s term anyway.

    In Gujiao’s case, as the company stated, the purchase price of the asset was set at a very low amount (don’t know how low, maybe $1,000) and thus the company chose to not recognize it separately and just include it into the value of the buildings. Read article 3: http://bit.ly/Yw9JjE

    And pay special attention to this sentence “A long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.” Since the whole property was purchase as a united bunch and the main purpose for it is the storing and selling oil, they are inseparable for the seller and the buyer (Longwei) for its economic use. In addition, since there was actually some amount (a very small amount) for the land specified in the transaction paperwork, Longwei CANNOT book the land using whatever “market value” the company’s accountant believed. Doing so would actually directly violate GAAP. So, it was a completely correct treatment for the company to recognize no value for the land (under “immaterial amount principal”) on accounting book.

    Note that in any case a company can only recognize value of a fixed asset (if any) WHEN THEY WERE PURCHASED. Regardless of how much it has appreciated (as in both case and especially in Taiyuan’s case) and how high its market value is today, the company cannot re-value an asset (mark to market) and recognize a big revaluation gain.

    Note the sentence in the article 1: “assets that have greatly appreciated - these assets cannot be re-priced and added to the overall value of the company.”

    Kevin
    Dec 4, 2012. 01:00 PM | 3 Likes Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    It is hard to interpret SEC's intention here and now this thing will develop. There is a possibility that China government will yield quicker than later when seeing such strong demand from SEC. This may be SEC's intention and a tactic in negotiation. Like the currency appreciation issue, my guess is that China government will yield more grounds for document sharing under SEC’s new pressure.

    As for Longwei’s case, please read my response to a reader's comment last week regarding the auditor issue: http://seekingalpha.co...

    Many investors just careless chase media hype on demanding all Chinese small caps to "upgrade" to big-4 auditors without analyzing pros and cons. I am actually much more confident and comfortable with LPH's current working model with its current auditor than with LPH working with a big-4 or big-10 auditor's subsidiaries in China.

    This kind of "impeding of justice" problem does not exist in LPH's case because it's auditors in Utah office does not outsource the job to subsidiaries in China. Over the past two years its auditor Anderson Bradshaw PLLC has already checked all important documents of the company and took them back to their Utah office. So, whatever SEC wants to see (and very likely it has requested to show quite some documents), its auditor can show SEC these documents easily. This actually makes LPH stands out from many other Chinese companies.

    By just looking at the documents that Longwei has already shared with all investors – official tax records in China, licenses, Huajie asset appraisal, operations videos, etc. - you can see how Longwei is willing to be transparent and open. If the company is not real and clean and the management team is confident in everything, they wouldn’t have been so transparent. That's why Longwei is not afraid of giving all supporting documents that its American auditor wants.

    Kevin
    Dec 4, 2012. 11:57 AM | 1 Like Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    nemesisjudge,

    If you simply do not have adequate accounting knowledge to understand what I said, I suggest that you study more before wasting your and others time on this.

    You are mistaken ownership with dollar amount in accounting book. A lot of things that a company own does not have dollar value on balance sheet. For example, all fully depreciated assets (cars, computers, etc.) have zero amount on balance sheet, but companies may still use them for many years when they have no value in accounting system. A company that writes a story has copy-right to that story naturally granted by law, but such copy-right normally is not assigned any dollar amount value on accounting book until the company is bought by another company and the purchaser wants to assign value to such copy-rights during the allocation of its purchase price.

    Again, if you don't have enough accounting/finance knowledge just read the sentence The Company has the first right to "renew" its land use rights for its current business purposes. Your driver's license might not have any value in your personal asset statement (if there is such thing), but unless you own it you don't even have the right to "renew" it, period.

    Kevin
    Dec 3, 2012. 03:32 PM | 1 Like Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    nemesisjudge,

    Mis-statement again. The statement in 10-K clear says that company has land use right for both Taiyuan and Gujiao facilities.

    In accounting a company only puts the value of an asset on book if it such value can be clearly and accurately determined at the time of aquiring it. In a grouped acquisition, it may be impossible for seperate the land use right with other pieces of assets (building, equipment, etc.) in the purchase value.

    The statement in 10-K says:

    (1) The land use right was granted by government to Longwei 18 years ago, meaning that there is no specifically assigned charge for the land use right. Therefore, it is a correct accounting treatment to not put value for this in balance sheet. Of course the company should have paid something for the buildings and tanks, but purchase price was probably very cheap at that time, and the residual value on balance sheet after 18 years of depreciation is minimal right now.

    (2) For Gujiao facility the specifically assigned value for the land use right is small (e.g. $1,000). So, it is also a normal accounting treatment to not specifically recognizing this on balance sheet and just put the entire purchase price into the value of the buildings and equipment.

    If the company does not have land use right, it will be impossbile for the company to "renew" this rights, as the statement "The Company has the first right to renew its land use rights for its current business purposes. " says. Note that land use right in PRC is normally for 50 to 100 years. So, they rarely need to be renewed in a company's normal course or business.

    Kevin
    Dec 3, 2012. 02:50 PM | 3 Likes Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    Charles,

    Please refers to figure 8 of my article. Don't invest or trade just on my targets though. These are only my own personal target. The stock may not reach these levels or may go higher than these levels in the time frames shown in the figure. The stock is in an uncharted situation and territory right now. It is hard to predict where it will be at any given time in the future.

    Kevin
    Dec 3, 2012. 01:58 PM | 1 Like Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    nemesisjudge,

    I noticed that I missed the last part of your comment. Please be careful before putting out a mis-statement of factual things like this. The company has land use rights for all its facilities, of course including its Taiyuan and Gujiao facilities. The company has been operating Taiyuan facility for 18 years and Gujiao for 3 years now. The thought that the company can operate on a land for almost 20 years without land use rights is weird. Use your common business sense. The fact that the company has never put out a news release explicitly saying that "we have land use rights for Taiyuan and Gujiao facility" does not mean that they don't have it. The core problem for attackers of Longwei and other Chinese small caps is that some people take negative spin on whatever things that a company has not explicitly said in news release for financial reports. There is no way a company can proactively spend millions of pages to explain all things that can possibly relate to the company. No person or company in the world has ever done that.

    Read the last sentence "The Company owns and maintains all assets and land use rights at the facility" for the descriptions of Taiyuan and Gujiao facility in the storage and operations page on the company's website:http://bit.ly/NTCRvp

    Kevin
    Dec 3, 2012. 01:18 PM | 2 Likes Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    Exactly,

    For short to mid term, the biggest plus to the company for having Huajie is expansion of geographic coverage, not capacity expansion (except to the fact that Huajie of course has to store certainly amount of oil on its own to serve clients in its area). Because this area has more industrial customers, the average sales price per ton for Huajie facility will be higher than that for Gujiao or Taiyuan facility. So, once its inventory and revenue run rate rise to certain level, the gross margin of Huajie facility should be higher than the gross margin of either Gujiao or Taiyuan facility. This (margin improvement) is another benefit that Huajie can bring to the company.

    Kevin
    Dec 3, 2012. 11:27 AM | 1 Like Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    Sir,

    Honestly, I wouldn't suggest that you do so. No matter how strongly you like a stock and believe in its potential, you shouldn't put all your money into one basket. Every investor needs some diversification. Of course, personal preference is one of the factor that determine a person's optimal degree of diversification. It is more an art than a science. However, most portfolio management guidelines tell people not to put more than 20% of portfolio in one stock. Even Warren Buffett probably never put more than 1/3 of his investment portfolio in one stock. As we have seen over the past two years, sometimes a company's stock performance can be completely out of management team's control regardless of how solid a company's underlining business is. Having some diversification will ensure that your portfolio won't be decimated when stocks in one market, industry, sector, or type (e.g. Chinese small caps) are dumped by the market due to various reasons.

    This is particularly important for investors in your age when you need to rely on your investment portfolio for retirement income and won't have a very long time to wait for your portfolio to recover past losses or simply for a single stock of your portfolio to realize its potential gain that you are hoping for.

    Kevin
    Dec 2, 2012. 02:34 AM | Likes Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    Yes I do. I think the CEO, CFO, and other executives have learned a lot over the past 2 years. The increasing communication and disclosures to shareholders, the addition of an IR firm which has strong focus on communicating to big institutions (per their website), and the hosting of an investors/analysts day in the near future are all things that many successful western companies do.

    Kevin
    Dec 2, 2012. 02:23 AM | Likes Like |Link to Comment
  • Simply Put, Longwei Petroleum Worth $6 Or More Per Share [View article]
    Sorry for getting back to you late on this. I hope I can help, but honestly I have very little knowledge about the company's products and technologies. The bio-pharma industry has very dispersed valuation multiples mainly because companies' growth prospects and risks in the industry vary by a very wild range. Two key factors are a company's R&D staff's ability and its products.

    So, I'll pass giving you advice on this stock.

    Kevin
    Dec 2, 2012. 12:52 AM | Likes Like |Link to Comment
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