I have spent much of the past month describing why I believe that China Marine Food Group (OTC:CMFO) is falsifying its financial statements. My posts and articles are here, here and here. From my posts, it should be clear that I don’t think CMFO is the only U.S.-listed RTO Chinese company that’s making up its numbers.
Another one is Orient Paper. Over the next few weeks I will explain why I believe this is the case.
Today, I will focus on a research report published by Carson Block and Sean Regan at “Muddy Waters LLC” earlier this week.
You can access it here.
This post will summarize several of Muddy Waters’ allegations. I urge readers to read their entire report, as my brief post does not do it justice.
1. Like CMFO, ONP is using an acquisition to justify a large equity raise that it is likely using for dubious purposes, such as redirecting the funds to personal bank accounts.
On April 12, ONP announced that it had entered into an equipment purchase agreement with Henan Qinyang First Paper Machine Limited to purchase a corrugating medium paper production line with an annual production capacity of 360,000 tons for $27.8m.To fund the acquisition, ONP raised $27m in a secondary equity raise underwritten by Roth Capital Partners.
Muddy Waters wrote this:
“We spoke with the purported seller of the equipment, Qinyang, and four other Chinese papermaking equipment manufacturers. Qinyang told us that its highest capacity 5.6 m corrugating medium production line (the type ONP purports to have purchased) produces only 150,000 tons per year and costs approximately $4.4 million. This stands in stark contrast to ONP’s contention that it is purchasing a single line from Qinyang that will produce 360,000 tons per year for a total price of $27.8 million.”
Qinyang further stated that no Chinese manufacturer makes a 5.6m corrugating medium line that can exceed 200,000 tons per year. Furthermore, the most expensive line was no more than $7.3m. Muddy Waters provides a table showing the companies contacted, their URLs and the rough prices of their highest capacity 5.6m corrugating medium production lines.
No company quoted a price greater than $7.3m.
In my opinion, ONP is either misappropriating 60% of the capital raise and using the remainder to purchase a line, or misappropriating all of the $27m capital raise and purchasing no line.
2. ONP also made a $5m capital raise in October 2009, allegedly to purchase digital photo coating lines owned by He bei Shuang Xing Paper Co. Ltd. But according to Shuang Xing’s audited financial statements with the Chinese government, its fixed assets were worth less than $500k.
With CMFO, we saw a similar instance where the company purchased a company for an amount far more than the target could reasonably be worth. With the case of Shuang Xing, ONP appears to be using the asset purchases as justification to raise equity, which was then likely diverted to personal bank accounts, in my opinion.
3. ONP’s SAIC financial statements show revenue, profit and assets that are far lower than their SEC financial statements, according to Muddy Waters.
In due time, I may publish a post independently discussing and providing ONP’s SAIC filings. But I want to mention here that based on Muddy Waters’ research, the SAIC and SEC financial statements don’t match.
The company has claimed that Muddy Waters had acquired the AIC documents for the wrong company. Muddy Waters have refuted that, and has provided evidence demonstrating their case. We'll discuss this more in future articles.
4. Muddy Waters provide visual evidence comparing ONP’s plants / technology with competitors’ plants.
Here is a video provided by thestreet.com’s Rick Pearson on ONP’s facilities.
In contrast, here are pictures of two competitors’ plants.
Shandong Chenming Paper Holdings Ltd.:
Nine Dragons Paper Holdings Ltd.:
The differences between the Orient Paper plant and the competitors' facilities are striking. The Orient Paper facilities are old, shoddy and in poor condition, whereas competitors' machines appear far more professional and new.
There is numerous additional evidence in the Muddy Waters research report that illustrates how Orient Paper is falsifying its financial statements and inflating its assets and operating metrics in its SEC financial statements. In future posts or articles, I will elaborate on some of the financial metrics. I will also explain how the Company's auditor, BDO Limited, is not the same as BDO Seidman, and how investors shoudl remain wary of companies audited by BDO Limited, as opposed to BDO Seidman.
Disclosure: short CMFO and ONP