Sean Wright

Sean Wright
Contributor since: 2010
I can just feel the love from you guys. Thanks for sharing the warm and fuzzies. The good thing about this short is that there is a problem, too much debt, and a catalyst, which is that they have to pay Sequoia back. So debt is going to keep piling on if they don't raise money soon. If they pull down all of their bank lines they will be toast. It's only a matter of time. Selling off assets won't help either because they'll never get balance sheet carrying value for this stuff. The question to ask yourselves is if shareholders are asked to put in new money, what price do you think that deal is going to clear at?
But, if you don't take my word for it, it looks like someone else is on to ADY as well.
Have you read this? There is definitely enough production capacity.
China will continue to build. CVVT is trading under 4x earnings and has great exposure to nuclear demand in China. I would not lump it in this category.
They can't do a buyback until they report numbers because they are in the blackout period and they didn't file a 10b5-1 trading plan prior to entering the blackout period. I expect they will start buying shares once they report, that is unless reporting triggers a massive short squeeze and the shares go so high that they are no longer a good deal under a buyback.
deloitte doesn't outsource anything to a local auditor. only the crappy small auditors do that kind of thing.
In order to keep the valuation analysis simple, I multiplied the CHBT EPS by the average industry multiples and by the Danisco transaction multiples. I should note however, that none of these companies has a huge cash surplus like CHBT. Danisco, for example, is levered at 1.3x EBITDA. In order to compare apples to apples, you actually need to add $5.79, which is CHBT's pro forma cash on 9/30/10 after repayment of the convertible note, to the implied price per share numbers for CHBT. So to give an example, Danisco is trading at 22.5x its FYE 4/30/2011 EPS. That multiple implies a $44.33 per share price for CHBT based on its FYE 3/31/2011 EPS. In order to make a fair comparison, you should add the $5.79 in cash per share to $44.33 to get the correct implied share price for CHBT. That's $50.12 per share. CHBT closed at $14.84 per share today. The upside is tremendous.
Nice article Glen. Loved the rip on Greenberg. I'd like to see someone do an analysis of the performance of stocks he tells people not to buy. It would probably be a great portfolio.
Hi Matt,
I like your writing style, although I disagree with your conclusions.
Here is a clip from the Financial Times yesterday that you might find interesting. Beijing is raising its minimum wage by 21% following a 20% increase in June. The rising labor costs management is referring to are real. Selling the product through these retail outlets did not make a lot of sense. I've visited the company twice in China and I can tell you it's the real deal and very impressive. However, the retail stores are not impressive, and I've visited several. The retail strategy never made much sense to me. B2B sales make a lot more sense.
You can write all day on this subject, but I've seen the bank statements, tax filings, and leases for the now closed stores all with my own eyes. I've also seen the factories twice. I even took a sachet of CHBT's protein probiotic in my OJ this morning. It's quite good.
Kind regards,
Jason, I am wondering if you could please post some more comments on the capsule economics and explain that in some more detail. That would be really helpful. Many thanks, Sean
Great article Jason!
Santi, great article. I look forward to your next one.
Best regards, Sean
Hi Rickraphael,
I am sure that liquidity will become less of an issue once the stock price is higher. Also, the company has engaged HC International as its IR advisor and is making more of an effort to get out on non-deal road shows to make itself known. Next week for example they are making more investor visits.
Best regards, Sean
Hi stocklad,
I've spoken with Mr. Yu and Zack about the issue. I am guessing they will make the switch at some point but I don't know about the timing.
Best, Sean
The interest earned depends on whether or not the company has its money in time deposits or regular deposits. I called Zack this morning who confirmed to me that all cash sitting in the PRC is sitting just as regular bank deposits.
The interest rate on regular deposits is 0.36% right now and that rate is set by the government. Using that rate I think you'll find that this works out well.
Please see the article here below that I wrote for another company where a short seller made a similar allegation.

Kind regards,
Unfortunately I did not get to see their facilities. Mr. Yu was in Beijing at the time working on setting up new training centers, so I had to meet with him in Beijing rather than Harbin. Apparently he spends about half his time in Beijing and the other half in Harbin now since there is so much going on in Beijing.
Mr. Yu agreed to meet with me on the evening of the Moon Festival, which is like Chinese thanksgiving, and then I found out that during the National Day Holidays he was going to visit an acquisition target in Hebei. Later making smalltalk, I asked him where he likes to go on vacation and he said, "I don't go on vacation." Then I also found out he speaks with Zack Pan for an hour every night between 10-11pm Chinese time. The bottom line is this guy is an animal who does not stop. I think all we have to do is stay in the boat with him and he will make us a lot of money.
By the way, even though he wants to build a big business, I don't this guy is immune to selling either. I asked him if an EDU or similar came along with a full offer, something that would make him a decent nine figure sum, if he'd turn it down. He grinned and did not say no, but just said, "We'd consider it but EDU doesn't want to pay full prices." I actually think EDU should be using its stock to buy up companies like CEU. With stock that high, they have a great currency right now.
Lastly, have you spoken with Zack? I would encourage you to call him and ask him about the audit procedures and the like. I know that he has gone to the banks himself to see the cash. Zack is a very trustworthy guy. I don't doubt him.
Hi Bogus07,
You are probably right about my estimates being too low. My personal view is that I like to use conservative estimates so that I am not disappointed. Jason Nevader is WAY smarter than I am, and I cannot really argue with his model.
Best, Sean
if the GMP and TUV certifications are not enough, i can also tell you about the clean rooms and the workers packaging product clothed in plastic wrap. This is very high tech stuff. They would not be selling to the leading dairy companies if the product was not first class. it is not easy to manufacture, the margins are high, and the industry is, to quote the chairman, "not as competitive as people think." You should read further articles by me and Jason Nevader.
Best, Sean
Eric, I was at the event and these are all my own notes. This was the second time I have visited CHBT in China.
People need to understand the SAIC issue better. I have a good friend from business school who lives in Shanghai and is the managing director of a US funded private equity fund focused on China. I have discussed the SAIC issue with him. He said everyone files junk with the Chinese chamber of commerce. I think you have probably read the penalty is something like 50k RMB. My friend said his fund does not even look at these statements in their due diligence. When they do their due diligence they go directly for the bank statements and the tax filings. The fact is a lot of Chinese companies dramatically understate their financials with the SAIC because they don't want their numbers to get out and they don't want to get shaken down for "favors" from corrupt politicians and others. I don't think CHBT is any different. I'm not saying I think it is right, but I think we have to accept local convention in this case.
On your other question, I do not know BDO's audit procedures. I would guess you would have to ask BDO directly.
Best regards,
Sorry but I didn't copy down details of the retail stores. I was far more interested in viewing the taxes paid and the cash. These are for me conclusively the things to check. If they are true, then the company is not a fraud. A company that is a fraud is not going to want to pay taxes on false profits. I guess you could argue that the company could possibly pay higher taxes on fake profits in an effort to cover its fraud, but even if it did that it wouldn't have the cash it claimed.
Hi Stockdoc96. I'll do my best to answer your questions where I can.
1. I believe Smart Group is the parent of Shanghai Shining, the retail operating business. I believe Growing State is the parent company of Growing Bioengineering, the bulk operating business.
2. Bank of Communications is one of the leading banks in China.
3. It turns out most of the offshore money is actually in HKD. To see a breakdown on interest earned, I recommend you see my earlier posting
4. Management stated multiple times that it was closing retail outlets. It was also opening some new outlets to consolidate customers where they had closed multiple old outlets. Overall the retail strategy is shifting to distributors because it is a much more efficient use of management resources, and because rents and staff costs are rising in Shanghai.
5. I believe the company is talking with potential new auditors. I don't know the status however.
6. I talked to the Roth analyst at the investor day and he commented to me afterwards "impressive technology." If you've been around the securities industry long enough you'll know that analyst ratings are rarely independent. I wonder in his heart of hearts if he really believes what he wrote or if he was just pressured internally. We'll probably never know the full story. The important thing is to do your own work. I never rely on equity research reports to form my opinions and have often found the best buys when the analysts all have sells on a stock.
7. Maxim's analyst Yale Jen put out a buy report yesterday. You might contact him at
8. It means affixed with the official seal (called a chop) of the entity certifying something. So in this case meaning stamped with the official seal of the bank and the relevant tax authority. Here is an article on chops if you are interested. www.associatedcontent....
Best regards,
I am very impressed with your analysis. I've got to buy some more shares. I had no idea the animal feed business would be such a large project. Great work sleuthing out the Chinese articles.
Hey Michael,
I'll be at the investors day. If you're going to be there, I look forward to meeting. I agree with you that buybacks are the best use of cash.