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  • China Marine Food: There's Something Fishy Going On 16 comments
    Jun 1, 2010 9:27 AM | about stocks: YUII, CSKI, LIWA, CMFO

    Please read the disclosures at the bottom of this article.

    In my previous two articles, I’ve written about how several Seeking Alpha contributors have used locally filed Chinese financial statements to provide compelling evidence that certain U.S.-listed Chinese companies may be frauds.

    All foreign-invested enterprises must file financial statements with the State Administration for Industry and Commerce branch of the Chinese government. These documents are not available electronically; rather, a local Chinese citizen must go to the appropriate local branch to access these documents. Fortunately, certain third-party credit agencies provide this service to foreigners for a fee.

    In previous articles, I compared the SAIC and SEC financial statements of YUII, CSKI and LIWA. The numbers for YUII matched, whereas they did not for CSKI and LIWA.

    In this post, I compare the SAIC and SEC financial statements for China Marine Food Group Limited (OTCPK:CMFO). The numbers do not match.

    This provides evidence that China Marine Food Group Limited may be a fraud. In addition, I note additional data points that raise questions about whether CMFO’s financial statements accurately represent the financial condition of the underlying business.

    I also present the response of the chief financial officer of CMFO to a question on why the SAIC and SEC documents don’t match, and provide my opinion on his response.

    Organizational Structure

    Before discussing CMFO’s SAIC statements, let’s discuss the legal organizational structure of CMFO. This is important because each subsidiary files separate SAIC financial statements. Chinese GAAP does not consolidate subsidiaries, and therefore it’s important to determine which subsidiary generates most of the company’s revenue. We can then compare the SAIC financial statements of this main operating subsidiary with the SEC filings.

    Here is CMFO’s legal organizational structure, from an annual report. We use the 2008 org structure, because we are comparing their 2006, 2007 and 2008 financials. 2009 SAIC filings are typically not filed until midyear. 


    The U.S.-based, publicly listed entity is China Marine Food Group Limited. Nice Enterprise Trading H.K. Co., Limited, its subsidiary, is based out of Hong Kong. Nice Enterprise has one subsidiary, Shishi Rixiang Marine Foods Co., Ltd (“Rixiang”), which is based out of China. Rixiang is a foreign invested enterprise that owns two other subsidiaries: (1) Shishi Huabao Mingxiang Foods Co., Ltd. (“Mingxiang”)and (2) Shishi Huabao Jixiang Water Products Co. Ltd (“Jixiang”).

    Where are the operations primarily held? Rixiang. We know this by the following disclosures in the 10K:

    "With effect from January 1, 2005, Rixiang acquired the business operations of Mingxiang, which subsequently became a property holding company. Rixiang was incorporated as a FIE and was granted the tax incentives for FIEs, and was exempted from income tax for 2005 and 2006... Jixiang is also a property holding company and is not subject to tax."

    Elsewhere throughout the report, the Company also makes clear that Rixiang generates all of the Company's operating revenue, such as "All of our production is undertaken by our subsidiary, Rixiang" in the "Our Products" section.

    From the above disclosure, we also know that Rixiang is an FIE. As an FIE, Rixiang must file accurate annual financial statements with the Administration for Industry and Commerce branch of the Chinese government.

    SAIC vs. SEC financial statements

    I have had a local third-party credit agency go to the local AIC office in Rixiang’s jurisdiction and photocopy their financial statements.

    They are here, in Chinese. And here, translated in English.

    The figures in the attached documents are in Remnimbi. In the chart below, we convert the Remnimbi to US dollars, and compare key financial line items with CMFO’s SEC financials:

    As we can see, CMFO reports much higher numbers in its SEC filings than its SAIC filings. In its SAIC filings, the company generated only $2mm of revenue in 2007 and $7mm in 2008. In its SEC filings, it allegedly generated $36mm in 2007 and $49mm in 2008.

    Compare that with Yuhe, which generated $21mm and $34mm of revenue in 2007 and 2008 in its SAIC filings, compared to $22mm and $36mm of revenue in 2007 and 2008 in its SEC filings.

    As we discussed earlier, Rixiang is the primary operating subsidiary of CMFO. It is also an FIE. As a result, Rixiang’s financial statements should accurately reflect CMFO’s SEC financial statements.

    But they don’t.

    The CMFO’s response to the discrepancies is the following, based on an email:

    "It's a formality in China to file the operating figures with SAIC on an annual basis. We used to hire an independent agent firm to do the filing on our behalf as the process itself is quite tedious though. Guess the agent firm has used kinds of outdated figures to do the filing and thus discrepancies appeared as a result.

    Since there won't be any anticipated influence or harm over those inaccurate historical figures with SAIC, we don’t believe it’s necessary to re-file the statements. That said, we will switch to another sizeable agent firm to do the 2009 filing and will make sure the numbers so filed are consistent with our book record going forward."

    We’ve been down this road with CSKI. The CFO of CSKI said a similar thing in 2009 when asked why CSKI’s SAIC numbers didn’t match the SEC numbers. We have yet to see matching financial statements.

    What is actually going on? My belief is that CMFO is fabricating its SEC financial statements. FIEs in China must file accurate audited financial statements. I’ve spoken with dozens of accountants and CFOs of verifiably legitimate Chinese companies, and they have all confirmed this. It’s understandable to have small differences between SAIC and SEC filings, due to subsidiary consolidation and Chinese vs US GAAP. But CMFO’s 2008 SAIC revenue was 85% lower than its 2008 SEC revenue. That’s not due to GAAP accounting differences.

    In my opinion, fraudulent Chinese companies like CSKI and CMFO are making up numbers out of thin air. To fool their accountants, the companies are using sophisticated and undisclosed related party and off-balance sheet transactions to inflate financial statements. They are using phony bank statements to fake cash. It’s unclear how exactly they are doing it. But the differences between the SAIC and SEC numbers provides compelling evidence that they are finding a way to do it. After all, there is a lot of money to be made – companies like CSKI and CMFO have raised $25mm+ each in secondary equity offerings or private placements, all for dubious purposes. If they are indeed fraudulent, these funds are likely being siphoned to a large degree to personal bank accounts.

    These are shocking allegations, yes. But the world of Chinese reverse-merger smallcaps is a shocking one, and given the very low valuation multiples, it’s clear that many other investors suspect similar wrongdoings.

    Other Signs that CMFO is a Fraud

    The main thrust of our argument that CMFO is a fraud is that the Company’s SAIC and SEC filings don’t match. But as we did with our two posts on YUII, CSKI and LIWA, we’re going to highlight other signs that make us concerned about trusting CMFO’s SEC financial statements.

    Again, we’ll compare CMFO with YUII.

    Audit history

    In our last post, we explained that Yuhe’s attempt to upgrade to Grant Thornton was a welcome contrast to the audit history of many other Chinese companies that have gone public via reverse mergers.

    CMFO’s auditor, ZYCPA Company Ltd., is equally as questionable as LIWA’s and CSKI’s auditors. It is not listed in the top 100 global audit firms. It has 2 partners and 25 personnel, per its web site. Given that CMFO alleges to have generated $70mm of revenue and $15mm of net income in 2009, ZYCPA appears to be a woefully inadequate auditor for the company.

    If CMFO is making up its numbers, it would certainly find an easier time defrauding one of the two partners at ZYCPA than a top-5 audit firm like Grant Thornton.

    Capital Raise

    As we discussed in our last post, a key thing to monitor when examining whether reverse-merger Chinese companies are frauds is to see how much capital they’ve raised via secondary private placements and equity offerings.

    Naturally, we have no issue with capital raises. Companies need to raise funds to grow. But with Chinese companies that have gone public through reverse mergers, we see a tendency to raise large sums of money at large discounts to current stock prices, with dilutive warrants attached, and for dubious purposes. Indeed, if a company is fraudulent, a capital raise is the primary goal of creating a China-based fraud in the first place. The funds are taken from U.S. investors and deposited in the personal bank accounts of the organizers of the fraud.

    With YUII, we have not seen any dilutive and/or unnecessary secondary offerings thus far.

    With CMFO, we saw a $30mm private placement on January 20, 2010. The purpose was: “The Company intends to use the net proceeds from this offering for working capital and general corporate purposes.” From its SEC filings, the company allegedly had $7mm of cash at December 31, 2009 and has generated positive free cash flow (measured by cash flow from operations less capital expenditures) for each of the past three years. It’s unclear why the company needed additional cash.

    The dilution was not especially egregious though, and the new shares were issued at only a 9% discount to the prior 10-day trading average and a 12% discount to the prior 30-day trading average.


    At the time of writing, I and affiliated entities have a short position in CMFO and a long position in YUII. I intend to trade in these securities subsequent to this post within the next three days. I may also initiate positions in other stocks mentioned in this article, including CSKI and LIWA.

    In no part of this post do I attempt to provide false or misleading information. All facts presented in this post are true to the best of my knowledge.  All opinions presented on this website are my own and accurately reflect my actual opinion on the relevant subject being discussed. To the extent you believe I have provided false or misleading information, please list your concerns in the comments section and I will address it.

    Stocks: YUII, CSKI, LIWA, CMFO
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Comments (16)
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  • pmcmullen100
    , contributor
    Comments (93) | Send Message
    If you don't know what they used the private placement proceeds from, I have to wonder about the quality of the rest of your research. It was used to purchase the land for and build a cold storage facility for frozen fish, and to acquire Hi-Power Algae, a drink maker that is doing relatively well in China (as gross as algae drink sounds). Beyond that, your critique consists of: (1) 2 years ago, before CMFO filed with the SEC, they understated revenue in China (note your figures end in 2008) and (2) they need a more credible auditor. I agree with #2, but think the rest of your "critique" is weak and ill-informed.
    1 Jun 2010, 02:12 PM Reply Like
  • tommy tune
    , contributor
    Comments (4) | Send Message
    In addition, the Hudson Securities analyst Julie Chen has been over to see this company and has "checked" it out, describing in great detail the product and where she has seen it in many many stores.
    Also, today Brean Murrey initiated this company with a buy rating, having been over there and "kicked the tires" Many analysts and many people have seen the operations of this company, including the fish processing plants, packaging plants, and distribution warehouses. The product is well known in supermarkets. Something is fishy about this chinesecompanyanalyst IMHO.
    1 Jun 2010, 06:32 PM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
    Author’s reply » I wholeheartedly agree that China Marine Food’s products exist in stores, and at many stores. The company exists. It’s just far smaller than what its SEC financial statements suggest. In 2009, I would speculate that it generated approximately $10-$15mm of sales, not the $73mm it reported in its SEC filings.


    As for research reports by Hudson Securities or Brean Murray, I don’t have specific comments on those firms or analysts at this point. But as a general rule, I don’t think that research reports on Chinese RTO smallcaps written by 3rd tier investment banks are worth the paper they’re printed on. These firms produce research reports mainly to help their investment banking teams win equity offering mandates. Whether those equity offerings are for real or fraudulent companies is not of primary concern to them. Their primary concern is whether they can get the deals done, and if they can, they generally initiate research coverage on client firms.


    All the power to them. This is a business. Investors who look to Brean Murray for guidance on whether to buy CMFO in 2010 are no different from investors who looked to S&P for guidance on whether to buy BBB subprime RMBS securities in 2006. Or investors who looked to Morgan Stanley on whether to buy in 2000.


    Analysts from these firms aren’t kicking tires any more than Moody’s analysts were kicking the tires of subprime mortgage bonds or Henry Blodget was kicking the tires of money-losing dotcoms.
    1 Jun 2010, 09:49 PM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
    Author’s reply » At the end of 2009, the company had $32mm of cash and was allegedly generating positive free cash flow. It had enough money for the $28mm "algae" acquisition (I'm not convinced they were acquiring a company that was worth $28mm, as opposed to finding a way to siphon off $20mm+ into personal bank accounts), as well as a cold storage facility. At the end of March 31, 2010, having already paid for the acquisition, the company had $47mm of cash according to its SEC filings. So they didn't need the cash for the acquisition and cold storage facility.


    Again, my opinion is that most of this is fictional. The cash balance at the end of 2009; the cash balance at the end of March 31, 2010; and the algae business are all mostly fictional and only a bit true. But in this hypothetical scenario of the Company having $32mm of cash at the end of December 31, 2009 and wanting to buy a $28mm algae drinks business, the company didn't need to raise equity capital. Its hypothetical $47mm of cash at the end of March 31, 2010 demonstrates that.


    I don't have the SAIC filings for 2009 because they're not filed until midyear 2010.


    CMFO completed its reverse merger on November 17, 2007. Therefore, it was a Foreign Invested Enterprise before 2008 and its 2008 SAIC financials should match its 2008 SEC financials if the company was accurately representing itself in its U.S. filings.


    I'm not ill-informed. CMFO's SEC financial statements are ill-informing.
    1 Jun 2010, 06:39 PM Reply Like
  • double d
    , contributor
    Comments (71) | Send Message
    Great article. Thanks for digging on this topic. I love cold, hard facts.
    2 Jun 2010, 10:31 AM Reply Like
  • dswingle
    , contributor
    Comments (3) | Send Message
    Very interesting, thanks for the information. It was enough to make me dump CMFO.
    2 Jun 2010, 11:26 AM Reply Like
  • wdpassword
    , contributor
    Comment (1) | Send Message
    At the end of 3Q09, they had $31M cash (not at the end of 2009), spent $28M to acquire drink company during 4Q. At the end of 2009, they had $7M cash. But they need to pay the cold storage cost of $20M through 2010. It is not enough at that time if they did not raise fund. Given the company generated CFO less than $6M, if you expect they can generate about $10M operating cash flow this year, it still not enough to pay down the cold storage cost.
    2 Jun 2010, 11:59 AM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
    Author’s reply » to wdpassword:


    The company generated (allegedly) $15mm of cash in Q1 and had (allegedly) $47mm of cash on its balance sheet as of 3/31/10, after the acquisition closed. The cold storage facility costs $20mm. Based on the SEC financials, they don't look like they needed the cash. And if they needed $10mm to cover a shortfall, levering up this business by $10mm is the rational response.


    Regardless, this is a moot point. Given that I think that the SEC financial statements are fabricated, it's simply an oversight on the company's part to say that the cold storage facility costs $20mm to build. They should have just said that it's $30mm to build and used that as reason to raise equity.


    The core thesis is that the SEC and SAIC financials don't match. CMFO is falsifying one set of its financial statements. It’s my opinion that in cases where the SAIC and SEC numbers don’t match, the Company is falsifying its SEC financial statements. There are severe repercussions for defrauding one’s own government. There are no, or few, repercussions for a Chinese company defrauding foreign investors or American regulators. From a Chinese company’s perspective, the downside to falsifying SEC financial statements is minimal. The upside is that the company can raise $30mm from U.S. and foreign investors, even if the actual underlying roasted squid / algae-drinks business is worth a small fraction of its U.S. market capitalization.
    2 Jun 2010, 05:58 PM Reply Like
  • Dark_Durden
    , contributor
    Comments (2) | Send Message
    dswingle - you are a fool if you sold shares on the support of this rubish. This clown does not even put his real name behind his SEC fraud allegations, has a full 4 followers for his "insta-blog" on Seeking Alpha, is short the stock and posts on Yahoo finance to further his cause. However, Chinese Company Analyst (the author) is likely also dswingle and double d (note their comments above) so it is likely no real person was harmed by selling shares based on this poorly written blog.
    2 Jun 2010, 08:47 PM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
    Author’s reply » I'll respond to the name-calling by providing more facts. On my blog, I've written an FAQ on SAIC financial statements:




    The key question to ask yourself is why their SAIC and SEC financial statements don't match. Both are audited. FUQI, YUII and SOLF have provided matching financials, among many others. Why didn't CSKI and CMFO? They're falsifying one set of financials - that's a simple, indisputable fact. It's your job to decide which one they're falsifying. Is CMFO falsifying the financials that they file to seven branches of their own government, or are they falsifying the financials that they use to get $30mm of cash from U.S. investors?
    3 Jun 2010, 01:00 AM Reply Like
  • Dark_Durden
    , contributor
    Comments (2) | Send Message
    Dear dswingle, double d or china company analyst (noticed your urge to respond on behalf of your alter ego) whichever nom de plume you prefer today, I think the response posted by rniewijk answers your feeble argument and unsubstantiated claims of fraud.
    3 Jun 2010, 11:50 PM Reply Like
  • rniewijk
    , contributor
    Comments (2) | Send Message
    Here is the CFO's emailed response to the allegations, which was passed on by the company's IR firm.


    * * *


    "It's a formality in China to file the operating figures with SAIC on an annual basis. Since there won't be any anticipated influence or harm over those inaccurate historical figures with SAIC, we don’t believe it’s necessary to re-file the statements. That said, we will switch to another sizable agent firm to do the 2009 filing and will make sure the numbers so filed are consistent with our book record going forward.


    1. SAIC is the authority who issues business license which is a must for an operating entity in China to renew on an annual basis. Such filing process is quite tedious as what you can expect in China and thus lots of entities will rely on their agent firms to get the licenses on their behalf at an small amount of service fee. In our case, we hired an agent firm to do the filings for us in the past without providing any audited figures. So even though someone can go ask SAIC to get the filed financial statements but in fact these figures are not audited, and that's why you cannot find any audited opinions associated with these figures. In other words, these numbers do not come from audited reports. All we concern is whether we can get the business license quickly and cost effectively.


    2. Obviously there's no sophisticated verification system over the filed financial statements by SAIC, nor any cross checking with the tax bureaus. We can ensure our regular filings with the tax authorities are entirely consistent with the SEC filings (for all prior, current and future filings). This is also a must audit procedure to check over all these filings are consistent with the financial statements.


    3. I personally realize such mismatch just a couple of months ago. I had immediately instructed my team to do the 2009 and future filings on our own to make sure accuracy and consistency. Since the 2009 filing has been done for a while, I would welcome anyone to go access these documents from SAIC so as to confirm our words.


    4. Regarding the audit history, even though ZYCPA is a small local firm, in fact the 2 partners are possessed of extensive KPMG audit experience. The firm is well positioned to service those small to medium sized companies in terms of quality and up to standard audit service. Of course we also have an attempt to switch to a 2-tier audit firm well addressing our investors' concern, hopefully will be done in the second half of this year.


    5. For reasons of capital raise, our current investors should well know about the recent projects like cold storage facilities and acquisition of drink business without doubts.


    Long story short, we simply pay a small amount of fee to get the license renewal done without headache, like lots of other companies do in China. Going forward, we will do the filing with SAIC on our own to ensure consistency. There was a mistake without checking over what the agent filed on our behalf but definitely it's not a fraud."
    3 Jun 2010, 03:13 PM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
    Author’s reply » I've received the 2009 SAIC filings, and will post a followup comment over the next few days.
    7 Jun 2010, 09:39 AM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
    Author’s reply » I've received the 2009 SAIC financial statements and have had them translated.


    The Chinese version is attached here:
    The English version is attached here:


    The 2009 SAIC statements match the company’s 2009 SEC financial statements.


    This by no means leads me to believe that CMFO has been accurately representing itself in its SEC filings. Rather, the chief financial officer of CMFO has indicated that he was alerted several months ago to the fact that the historical SEC and SAIC financial statements did not match. I believe that as a precaution to future allegations of fraud, such as mine, China Marine Food made sure that the 2009 SAIC filings matched their 2009 SEC filings. I believe that I have overestimated the veracity of SAIC filings in my article above. Now I think that they can be falsified just as SEC filings can.


    The chief financial officer of CMFO naturally has a different story, and I will let him argue his case on his own. Investors can then decide whether my story or his story is the more compelling one.


    The mismatch between the 2006, 2007 and 2008 SEC and SAIC financial statements was only one element of my case that China Marine Food is much smaller than its SEC filings indicate. The Company’s dubious acquisition of Xianghe plays a more central role in my argument.


    I will end with a final point. In this link (, I have included comparisons of SEC and SAIC financial statements for four companies: FUQI, YUII, SOLF and CMFO.


    I provide backup for FUQI’s and YUII’s SAIC financial statements on my blog at www.chinesecompanyanal..., and SOLF’s SAIC financial statements are available at


    For FUQI, YUII and SOLF, the SAIC and SEC financial statements are in the same ballpark. But you’ll notice that the numbers are not identical; rather, Chinese GAAP and other reporting norms will always result in differences between SEC and SAIC filings. For SOLF, for instance, 2008 SAIC revenue was $809mm while 2008 SEC revenue was $712mm. Similar differences exist in other line items as well. But in CMFO’s 2009 filings, the revenue, gross profit, net income, total assets and total equity are nearly identical, different only by a couple million dollars at most. YUII's are fairly close as well, but there are still more discrepancies than CMFO's filings.


    While it’s ironic, my evidence for fraud when looking at the 2009 SAIC financial statements is that they match the SEC filings too closely.
    8 Jun 2010, 02:41 PM Reply Like
  • double d
    , contributor
    Comments (71) | Send Message
    Good work. For the record, I am my own person, not a different log-in for Chinese Company Analyst, as suggested in an above post.


    I like healthy skepticism about the Chinese small caps. I think there are fair questions raised here. I don't care if Chinese Company Analyst is short on CMFO. I don't own the stock and have decided against buying it because I am not a trader -- I'm an investor. And I'm not comfortable investing in CMFO based on what I'm reading. These are facts. Maybe I miss out on a great company -- but CMFO isn't the only company with great growth potential out there. In the end, I'll sleep better.


    8 Jun 2010, 09:11 PM Reply Like
    , contributor
    Comment (1) | Send Message
    CMFO is being audited by BDO China Li Xin Da Hua, a respected CPA firm in China. How can you conclude that this CPA firm has been fooled by "so-called fraudulent" company. I'm a CPA and an auditor myself, and any bank accounts and balance sheet items are thoroughly investigated before any statement on the financial condition of a company is made.
    31 May 2011, 07:21 PM Reply Like
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