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Alfredlittle.com (“A*L”) publishes cutting-edge long and short investment ideas and research focusing on companies operating and doing business in China. A*L is primarily supported by the efforts of analysts and investors based in China. A*L welcomes anyone to contribute articles and reports... More
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  • China Green Agriculture report from IFRA raises troubling questions 1 comment
    Aug 24, 2010 10:55 AM | about stocks: CGA
    Last week, a friend posted sections of a very large research report on China Green Agriculture prepared by a noted Chinese research firm called the International Financial Research & Analysis Group (IFRA).  The report was shows it was prepared for IFRA's clients and from the details and length of the report (well over 100 pages) it must have been a very expensive undertaking.  This is on par with anything I have seen during my days at Deloitte.  In fact it follows the style of PWC diligence reports of late.  I suspect maybe the IFRA must be a subcontractor to PWC in China.  Typical of most Chinese research outfits there are few details or contacts on IFRA's website.

    I spent the last several days reviewing the lengthy report and substantial evidence (mostly in chinese but keys sections are translated).  Below is a summary of the findings and questions raised by IFRA:
     
    1. Almost $15M VAT tax accrued by CGA over the past two years was never paid to the chinese tax authority, which collected only about $68k cash. Also why did CGA accrue so much VAT when the law says they are exempt? This discrepancy exposes a $15M hole in the balance sheet.
    2. $2.8M corporate income tax CGA says it paid in calendar 2009 was likewise never received and recorded by the government authority. "Where did the money go?", the report repeatedly asks.
    3. $10.7M CGA reported it paid for greenhouse land last September was overstated by 4X. Multiple official documents show only $2.5M paid. Another big hole in the balance sheet.
    4. For Calendar 2007 and 2008, in SEC filings show Jinong sales of $14.8M and $22.9M, but government records show only $6.6M and $7.8M. Chairman Li personally signed off on both records.
    5. For Calendar 2007 and 2008 SEC filings show Jinong net income of $7M and $9.7M, but government records show only $1.1M and $1.3M. Once again Chairman Li personally signed both records.
    6. IFRA report doesn't discuss 2009 government sales/income records. Maybe the record was not yet available?? But there are also a lot of pages missing from the report. Who knows?
    7. CGA's U.S. auditor Kabani & Company has only one other sizable client in china (LLEN), unfortunately Kabani used to audit Bodisen Biotech, which strangely enough is based in the same high tech park as CGA in Xian. Bodisen I recall was a huge scandal.
    8. IFRA shows that the Beijing Gufeng acquisition price tag is outrageous. They calculate the total cost could be $48M USD, pointing out that in addition to the $33M cash+equity purchase price there is another $14.7M in working capital that CGA is required to contribute to keep Gufeng afloat. I don't think most investors were aware of that fact which was buried in the 8k (i confirmed). 
    9. $48M acquisition total cost makes no sense when according to government filings Gufeng lost money in 2009 and only turned a small profit in prior years.
    10. Gufeng's audited financials show very low earnings quality since the 2009 net income of $3.8M was accompanied by negative cash flow while in 2008 the loss of $2.9M was accompanies by positive cash flow. Seems like they definitely took a bath in 08 so they could show a profit in 09 to try to justify the acquisition price. As with each point made in the report, the question is again where did the money go.
     
    My feeling is that the authors did a very convincing analysis backed up by a massive amount of original documents. CGA has a lot of explaining to do. A lot of cash could be missing if these original signed stamped government records are correct, which we should assume they are.  

    In case you didn't see my earlier post linking to the report, you can find it here:
    cid-55c2ddf5e323b488.office.live.com/bro...?


    Al


    Disclosure: No Position

    Disclosure: No Position
    Themes: CAGC, YONG, MOS, POT Stocks: CGA
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  •  
    You can also say that a big asteroid is going to hit CGA's factories.
    It's something of more terror and panic.
    9 Nov 2010, 12:23 PM Reply Like
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