In this report, we present a number of reasons why investors in China Gerui Advanced Materials Group, Ltd. (NASDAQ:CHOP), as well as its auditor and the SEC, should be especially cautious. In this post we investigate what appears to be some contradicting information we have found with respect to CHOP's 2011 presented results. The next post will address the lack of transparency regarding the company's operations in China.
1. Corporate Structure per 20-F For the fiscal year ended December 31, 2011 (Link)
- Henan Green was formed in China in December 2000 by Zhengzhou Company together with six individuals
- In December 2006, Zhengzhou Company transferred all its equity interest in Henan Green to 11
- On October 21, 2008, the then shareholders of Henan Green transferred all their equity interest in Henan Green to Wealth Rainbow.
- Wealth Rainbow was organized in 2008 for the sole purpose of acquiring and holding all of the outstanding equity capital in Henan Green.
- Wealth Rainbow was acquired by China Gerui on November 28, 2008.
It follows that the only operating Entity within CHOP is Henan Green Complex Materials Co., Ltd.
According to the Company's SEC filings, the local (Chinese Simplified) name of Henan Green Complex Materials Co., Ltd. (Thereafter: "Henan Green") is:
Source: EX-99.2 22 v164861_ex99-2.htm - (Link)
2. Net Income for the FY 2011
2.1 Two different Net Income numbers the Nine Months Ended September 30, 2011
2.1.1 Net Income Disclosed in China for the Nine Months Ended September 30, 2011
"On November 4, 2011, Henan Green entered into a financial guarantee agreement with Do-Fluoride Chemicals Co., Ltd., a non-related company. Under the agreement, Do-Fluoride Chemicals Co., Ltd is contingent as a guarantor for Zhengzhou Aluminium Industry Co., Ltd. with a maximum potential amount of future payment of approximately $4.0 million and Henan Green also agreed to guarantee the future payment of Zhengzhou Aluminium Industry Co., Ltd. for Do-Fluoride Chemicals Co., Ltd. The guarantee is effective through November 3, 2013." (2011 20-F / page 43)
Since Do Flouride Chemicals Co., LTD is a listed company on the Shenzhen Stock Exchange, it published a Circular (Link) describing the nature of the Business of Henan Green and its key data.
In an official Document available on the Stock Exchange Website (Link), Do Flouride Co., Ltd. reported that the Net Income of Henan Green Complex Materials Co., Ltd. (CHOP's only operating Subsidiary) for the first nine months of 2011 was RMB 87.59 million. Converting the RMB denominated figure into USD, yields a Net Income for the first nine months of 2011 of USD 13.58 million2.
2.1.2 Net Income Disclosed in the US for the Nine Months Ended September 30, 2011
The Net income disclosed by CHOP to U.S. investors for the Nine Months Ended September 30, 2011 amounts to USD 39'428'955 USD.
This reported Net Income figure is 190% higher than the Net Income of Henan Green Complex Materials Co., Ltd. (CHOP's only operating Subsidiary) as per Do Flouride Co., Ltd. circular dated November 2011.
Note the fact that, CHOP as no revenue generating subsidiary other than Henan Green Complex Materials Co., Ltd.,
2.2 Two different Net Income numbers the Year Ended December 31, 2011
2.2.1 Net Income Disclosed in China for the Year Ended December 31, 2011
2012/11/20 the "Henan Worker Daily" dedicated a section to Henan Green Complex Materials Co., Ltd. (link)
In the following passage the financial performance of Henan Green Complex Materials Co., Ltd. is described:
Two key info can be found:
- The Company's (Henan Green Complex Materials Co., Ltd.) production in 2011 reached 200'400 tons
- The Earnings Before Taxes (利税) for 2011 amounted to RMB 118'415'800
The RMB 118'415'800 figure (using the average USD/RMB exchange rate for 2011) corresponds to USD 18'366'157 million.
Net Income Disclosed in China for the Year Ended December 31, 2011
The Net income disclosed by CHOP to U.S. investors for the Fiscal Year Ended December 31, 2011 amounts to USD 79'582'179 USD.
This reported Earnings before Taxes is 333.31% higher than the 2011 Earnings before Taxes (利税)of Henan Green Complex Materials Co., Ltd. (CHOP's only operating Subsidiary) as per "Henan Worker Daily" article dated November 2012.
Please, note that the Profit reported in the above-mentioned article is perfectly in line with the Profit Do Flouride Co., Ltd disclosed in its Circular dated November 2011. (USD 13.58 million for the first 9 months (Do Flouride Circular) vs. USD 18.36 million for the 12 months period ("Henan Worker Daily").
It is also likely that the Company itself did write the article published in the "Henan Worker Daily" newspaper (link).
This belief stems from the "WE" form used in the article.
(last sentence): 我们愿与国内外一切有识之士友好合作，共同分享事业成功的喜悦，携手迈向光辉灿烂的明天！
Translation: We would like to cooperate with all domestic and overseas elites, sharing the happiness of career success, and step into the bright tomorrow together!
(another example): …鸽瑞公司之所以能够发展壮大，除了我们拥有高质量的产品、良好的企业信誉外，…
Translation: … In this era full of opportunities and challenges, Gerui has been able to expand because we have good quality products, a good company reputation ….
2 The exchange rate used si the average exchange rate published in 2011 CHOP 20-F available at : www.sec.gov/Archives/edgar/data/1449801/....htm
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.