Social contagion is a powerful force. The debate surrounding China-biotics, or “the case of the missing outlets,” has pitted testimonial evidence against physical evidence, and the testimonies appear to be enough for many investors. Gossip is perhaps as old as recorded history, and despite hundreds of years of advances in science, we are still a society largely driven by what others say they saw, even when it contradicts what we can see with our own eyes. The debate surrounding China-biotics has not yet caught up to methods for clear thinking recorded hundreds of years ago.
Forensics. It has an interesting history. It is one of the great advances in civilization, and for this the modern world owes a debt to ancient Chinese culture. The first known textbook on forensics was written by a man named, Song Ci (1186 - 1249). The title is sometimes translated, “Collected Cases of Injustice Rectified” … or, “The Washing Away of Wrongs.” In the book we find a classical example of testimonial evidence vying against physical evidence.
A body has been discovered. The corpse has multiple, deep gashes. An investigator soon hears testimony that the deceased had argued with a man who owed him money. We can see in the mind's eye the man being confronted by the authorities and denying the murder. We have at this point no other proof really. Even the motive for murder relies on testimony.
Where more primitive approaches stuck with the question – “Who's right?” – our investigator marks an advance in clear thinking by opting for the question, “What's real?” According to some accounts, he gathers many types of sharp weapons and tools. With them he strikes an animal carcass and compares the wounds with those of the victim. Using this method he determines that a sickle was used for the murder. Next he demands that all the villagers submit their sickles. Each sickle is laid out in the open air, until flies gather on one of them, the one with unseen traces of blood. The sickle belongs to the man who owes the debt, and when he is confronted with the evidence, he can no longer hold onto his testimony. He confesses.
Through Song Ci, a great advance in human judgment had been recorded: solid physical evidence trumps testimonial evidence. With physical evidence we have something that I can see and you can see, and that anyone can see. My motives or your motives do not alter the conclusion. And the validity of solid physical evidence does not weaken with time.
Testimonial evidence is weak because we have something that only a few can see, while the rest of us cannot. All information must be filtered through limited sources, subject to poor perception, incentives and degrading memories. If that source is unreliable, then everything downstream of its communication is polluted. Of course, sometimes the testimonial is all that we have to rely on, and we must do the best we can with a bad situation. Such evidence is often unstable – when circumstances change, it can be very frustrating to find that the testimonies sometimes change with them. With each side of the discussion, reason must hold the mind to the facts. When one side fails, rational inquiry is like trying to pick up jello with pliers.
With China-bioitics, we have testimonies of retail outlets ‒ physical buildings which are still missing. We have changing “facts” accompanying changing conditions. For those who are new to the debate, here is a review of China-biotics' and the case of its missing outlets.
China-biotics claimed in its June SEC filing to have 100+ retail outlets. (here)
Short sellers said that most of them did not exist and dared the company to provide a list of addresses. (here)
China-biotics then posted a list of addresses on its website. Short sellers took screen shots of that page, which you can see here. As you can see, the China-biotics website, at that time, read, “Currently, the company also has a large retail outlet network in the Shanghai area. The following is the recent retail outlet locations.”
Short sellers then challenged those addresses with photos showing that the majority of the retail outlets did not exist. In their stead they found supermarkets, empty lots, … etc
There was a quick “adjustment” after it became clear that most of these addresses did not lead to retail outlets. (Perhaps these adjustments were sincere … but then again, today's sincerity doesn't put up a never-constructed outlet yesterday. The dedicated Shining outlets are still missing.)
China-biotics next changed the website to its current form: “The following is a list of sample locations where you can find our products.” It has apparently been deleted or moved, but is still available Google cache, here. After it expires from cache, try these screen shots I have taken. (top of page, middle of page, and bottom of page)
A cover-up was and is well underway. How can we know that … now? How can we know that the screen shots taken by the short sellers were the same as what China-biotics had posted? How can we know that the photos are genuine?
Because evidence remains.
“I have the list”
Long investors were perhaps too quick to post the news that the addresses to the retail outlets had finally been published. A prominent investor posted the comment, (the emphasis is mine): “I have the list of all of the addresses of the retail stores that make up 7.8% of overall revenues. I tell you what, you tell me your real name and biography as well as the name, company name, and phone number of your competitor contact, and I will give you the addresses of the retail stores before they are listed on the Company's website.” (here)
The key point here is the declaration: “the addresses of the retail stores.” Long investors themselves provide evidence that the original post at China-biotics was indeed a list of retail outlets. Several substantially identical comments were made, for example, “As promised, here are the list of retail stores.” You can see this comment here, where you can also see that he has posted a link to the China-biotics website. And again, he comments here, here and here.
“List? What list?”
What about the list itself? The photos appeared, showing the majority of those addresses untrue. The original introduction to the list1 was pulled down by China-biotics, or so the short sellers tell us. How can we know – now – that their screen shot is authentic? Another blogger who was long on the stock had posted the list. It has recently been deleted. Fortunately, as of January 16th you could still see the blog in Google's cache. Although the expiration is approaching, the reader is invited to try it here.
The title to the blog was, “china-biotics retail store locations now listed on their website.” A notice advertising this blog posting, and which contains significant detail, can be seen here in Google cache. (scroll down).
If it has expired, I have provided screen shots here
(or enlarge screen shot, top) and here (scrolled down).
Note that at the bottom of the page the author discloses a long position in China-biotics. (Note also the second address on the list, 1208 Gongjiang Road, Baoshan District. We're going to challenge this address shortly. The first address was already highlighted by Citron Research, here and here)
The Testimonies Arrive
If we do not trust the short seller's screen shots, we can take the list from someone who was long on China-biotics. Other than these two lists, I have found no other list of addresses to fully account for the 100+ retail outlets claimed in the June SEC documents. This is an ongoing problem. Either we accept that the company has not provided evidence that it had retail outlets or we accept the list it published last summer or …there is a third option: .we do have testimony that there is a new list. It’s a little tricky. We don’t have the addresses on a list to check up on; we only have testimony that the addresses exist.
Let me clarify. On September 20th, 2010, China-biotics held their “Investors Day” in Shanghai. Visitors were shown documents – exclusively. I am aware of no copies which have been made available to investors at large. For the average investor, what is left of that evidence, whatever it was, is now only the testimony of approximately forty attendees.
But these testimonies are being used to support the company’s version of events. Here's testimonial evidence found in a SeekingAlpha comment, “We've seen the bank statements, tax filings, and leases for the outlets.” (here)
Here's another claim: “In one of the presentations we were shown the addresses of all 103 retail outlets that existed as of June 30th, 2010. These included 64 four-wall stores and 39 shop-in-shops.” For some reason, this witness did not examine the lease documents themselves. He only mentioned that Travis Cai (NASDAQ:CFO) brought in “a stack of lease documents for the 103 retail leases that were in force at June 30th 2010.” (here)
And another claim: “While the Company could certainly publish the list of its 103 retail locations on its website, it is a moot point since a significant number of the retail locations have been closed since 6/30/10. Therefore, the best way to do due diligence on the Company's prior retail outlets is to review the 103 leases, which were all made available at the Investor Day to anyone who wanted to review them. I looked at the leases, but I am looking forward to the Company closing all of their retail locations for the following reasons …” (here)
When we stop and think about it, we have investors in September in debate with their former selves as August investors. The transition was that quick. We have September's testimonies of addresses challenging the physical evidence of different addresses published last August. These testimonies emerge very quickly after the August list was debunked by the photos but there are no supporting documents for the retail investor.
And there are other problems. According to the Investors Day press release (here), “Management presentation and Q&A” was scheduled to last one hour. But even if two hours were spent entirely on the lease documents, one would still question how forty attendees would each have had enough time to verify the documents, and this goes without mentioning the difficulty of examining leases written in Chinese. Evidently copies or photos of the documents were either not allowed or not worth the effort.
We are told there is a list. We just can’t see it. But why not publish that new list and shift the strength of evidence from the testimonial to the physical? It is far from a “moot point.” As it is, these testimonies require a lot of faith, not just in the other person but in my own ability to out-think what can be seen on the other side of this debate. And there's a lot to see.
Short Sellers are not Necessary
China-biotics published addresses of retail outlets.
Photos taken by investigators showed that the majority of those addresses were false. These investigators were hired by short sellers. Did they doctor the photos? Did they go to the wrong addresses?
How can we believe short sellers?
Fortunately, we don't have to.
Let's take a look at the list of addresses. What follows is a presentation of the physical evidence surrounding the missing China-biotics “dedicated Shining outlets.” I hope to show that we do not need the evidence provided by the short sellers. Although for many of us those photos were conclusive, other evidence exists. Many of the addresses provided by China-biotics were of other retail stores, for example, supermarkets. These supermarkets have their own websites with their own photos.
Gongjiang, one miss for China-biotics
Let's take a look at the Gongjiang address which was claimed to be a China-biotics retail outlet. (Screen shot of CHBT, here.) We can use Google.com or Baidu.com to look up addresses of the stores in question.
1208 Gongjiang Road, Baoshan District. It is found on the China-biotics' address list, top row, second column. It was claimed to be a branded Outlet. It is not. It belongs to a retailer named, Carrefour: We can see it here at Carrefour's official website, which fortunately has a web page in English. (here)
It has its own photo.
I do not have any reason to believe that Carrefour has short sold China-biotics' stock. No incentive here exists to put up any address other than what is in Carrefour's own interest.
Where China-biotics claimed an address for a retail outlet, investigators found a Carrefour retail outlet. We can too. This is physical evidence. We don't have to take a short seller's word for it. It's here.
This is conclusive and unambiguous. But if you want to go back and test Carrefour's own photo against the short sellers photos, you can. Here is the investigator's photo.
Let's zoom in on some details.
Compare that photo with the Carrefour website in Chinese, here.
家乐福 is Chinese for Carrefour. You can check it on Google translator: here.
Going back to the investigator's photos you can see that the city's street signs are bilingual, using both Chinese and English. We can enter the Chinese characters or the English spelling into the Google translator, add the street number. What does it look like? Try it, here. In the Google translator you can see the same Chinese characters: 共江路1208 and click on the phonetic spelling feature: Ā gòng jiāng lù 1208 (路= “lu” and means “road.”)
You can compare the phonetic spelling with the address that China-biotics claimed to be a Retail Outlet, and then compare this again with Carrefour's official website.
Check the Chinese again on their Chinese web page.
Fairly conclusive. China-biotics claimed to have a retail outlet at this address. Investigators took photos of that address, one of them with a street sign using both Chinese characters and the English alphabet. A retail investor can however ignore those photos and find independent photos and official websites on his or her own.
Shuichan, one miss for the short sellers, another miss for China-biotics
Now I chose the previous example to find a weak spot in China-biotics' claim. But what about the short sellers' claims? Do they have a weak spot? I deliberately chose the next example to test the investigator's photos. I looked for discrepancies between the short sellers' list and the list provided by China-biotics. Two red flags appeared very quickly. First, with the Shuichan branch listing. China-biotics listed it as “Shuichan West,” whereas the short sellers listed it as merely “Shuichan.” Were they the same address? Were two different addresses possible? Second, the most ridiculous photo of them all was claimed to be at this very address. 1028 Shuichan Road belonged to a “hardware store.” (Even the pessimist can get caught up. We don't, but perhaps we should say, “If it’s too damning to be true, ... )
Let's take a look.
Again, here is the company's list of retail outlets.
Second row, third column over: 1028 West Shuichan Road, Baoshan District
Here is the photo taken of the “hardware store.”
The web page lists the address as “Baoshan location at No. 1028 Shuichan Road.” It does not include “West,” whereas the China-biotics' list does.
If you've ever played Mahjong you may already know that 西 means “West” in Chinese. If not and if you have your doubts you can check the Google translator, here.
At first I thought the odds would be low of finding a wrong address, but upon further inspection I began to feel that there was a possibility that an error had been made by the investigators. I “reverse engineered” the translation, beginning with English (since I don't read Chinese). I let Google translate “No. 1028 Shuichan Road” from English to Simplified Chinese. (Mainland China is “Simplified Chinese.”) Try it here.
We get 水产路1028号 and Google provides the phonetic spelling, “Shuǐchǎn lù 1028 hào”
(If you translate the page into English you will see that Shuichan is translated as “Fisheries.” Knowing this will come in handy if you browse Chinese web pages using Google's translation feature.)
Next I match the Chinese characters in the translator to the Chinese characters on the shop's sign. I got lucky and we have a match.
Using the information we have so far with Baidu.com and Google.com you can find websites listing these two addresses. Without putting “West” in the address we easily arrive at a link to the “Hardware store.” (here ‒ It might actually be a petroleum pipe company.)
Putting “West” in the address however leads us to a supermarket: Century Lianhua. (here)
Look at the pages in Chinese and English. Compare their addresses to the Chinese characters for “Shuichan Road No. 1028,” 水产路1028号, or to the Google English translation, “Fisheries Road.”
I added China, Shanghai, and Baoshan. (here) Then I plugged the two versions of the address into Google Maps, one with “West” and one without it. Click here to see them. The Supermarket is on the left, to the West, and the “hardware store” is on the right, to the East. Zoom in and you can see the difference in both English and Chinese between Shuichan West and Shuichan.
Using these addresses, Google maps shows that “Shuichan West” and “Shuichan” are two different addresses and that although Shuichan is a “Hardware store," Shuichan West is a Lianhua supermarket – which still means that China-biotics comes up short. It is not a dedicated Shining outlet.
The broader view
The purpose with the above is to demonstrate how it is possible to match up China-biotics's list of addresses with the actual locations as shown on official websites, without having to rely on the short sellers' photos. But there is a larger point and one which aids investors while undergoing due diligence for any company. Solid forensic evidence trumps testimonial evidence. It is also easier to understand.
This is not new. Sir Arthur Conan Doyle's, “Sherlock Holmes,” has done much to inform the public of the power that forensics has over hearsay. We can also bring to mind the many recent cases where wrongful convictions that had relied on testimonies have been overturned by the singular power of DNA evidence. We can trace this line of rational discipline back to the first known forensic textbook. In front of the Chinese investigator, the accused can leave his testimony, and his friends vouch for him, but he still needs to account for the flies gathering on the blade.
There is some debate regarding the timeline of events. I invite the reader to visit Mr. Jason Nevader's comments below.
1 Word omission was fixed; it used to read: "The was pulled down by China-biotics, or so the short sellers tell us."
Follow up Chinese government filings, see, China-Biotics' 2009 Revenue is 70 Million Dollars Off www.scribd.com/doc/55259969/China-Biotic...
Disclosure: I am short OTC:CHBT.