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I invest in U.S.-listed Chinese companies. My website is at www.chinesecompanyanalyst.com. I take long and short positions in the public securities of companies that I discuss on Seeking Alpha. Although I choose to remain anonymous, I provide full disclosure of my positions at the time of the... More
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  • China-Biotics: An Investigation of Its Alleged Store Base 18 comments
    Sep 9, 2010 10:14 PM | about stocks: CHBT

    On August 31, China-Biotics released the addresses of its supposed store base, in response to allegations of fraud from Citron Research. Citron asked a simple question: if CHBT is reporting accurate financial statements in its SEC filings, it should be able to provide the addresses to its 100+ stores, which contributed more than 25% of revenue in Fiscal Year 2009.

    After the company released its locations, a colleague and I hired local investigators to visit a majority of the disclosed locations to determine whether the the stores in fact exist.

    We’ve published our findings on the following website: www.therealchbt.com

    The company’s list of locations provided 80 locations. One of these locations is a repetition of a previous location, leaving 79 independent locations. We visited 43 of these locations. A China-Biotics store was found at only 2 of these 43 locations. The remainder of the addresses were supermarkets, hotels, office buildings and empty lots. There were no CHBT stores-within-a-store or kiosks at any of the locations.

    Technically, the company's list "is a list of sample locations where you can find [their] products." Published the day following Citron's allegations, the list has been assumed by many to indicate addresses of the company's stores. If the company never intended that, then it has continued to refuse providing addresses to its 100+ stores, which appears to me to be a transparent admittance that its 100+ stores do not actually exist.

    On our website, we have included a tab that lists all of the locations for which we have sent an investigator to, with information on:

    1. whether a standalone store existed at that location
    2. whether a store-within-a-store existed at that location
    3. whether the company’s products were found at all at the location
    4. if the product was found, where it was located.

    By clicking on any given address in the stores tab, such as here, you can see further information about what our investigators found when they inspected the location, as well as pictures of the address and outside of the store, as well as a picture of any China-Biotics products available at the store.

    The only standalone stores that we found are essentially the same ones that showed up when we searched for the chinese characters of the company’s stores ("益生有益" or click here if your browser doesn't support Chinese fonts) at http://map.baidu.com/, http://shanghai.aibang.com/, and http://www.mapbar.com/. These search sites only yield 6-7 CHBT locations. Many of the locations released by the company referred to supermarkets like Tesco or Carrefour. Some of these supermarkets carried the company’s products on their shelves. Some didn’t. None had “stores within stores”.

    The conclusion, in my opinion, is simple. The company claimed to have 100+ stores. Based on our simple visits to a majority of the addresses provided by the company, I believe that's a blatant lie.

    In my opinion, their misrepresentation of their store base is one of many pieces of false information that the company has provided in its SEC filings.

    Did the Company ever specifically claim it had stores?

    Yes, the company has historically claimed that it owned 100+ stores.

    Here is disclosure from their 2010 10K. The company says:

    “We intend to expand the sale of our retail products to the other metropolitan cities in China through a combination of traditional distribution channels and dedicated Shining outlets. We have a total of 111 outlets as of March 31, 2010.”

    The company makes a specific distinction between “traditional distribution channels” and “dedicated Shining outlets”. I don’t think shelf space at a Tesco supermarket is what investors typically have in mind when they read “dedicated Shining outlets”. Elsewhere, the company refers to its outlets as stores. See this press release from third quarter 2010, where the company announces the opening of “four new retail stores”. Or here, where they claim that in 2008, they “opened 51 new Shining-branded retail outlets, bringing the total number of stores to 60”.

    Even in the press release announcing their investor day, the company promises visitors a “tour visiting China-Biotics' retail stores”. A more accurate statement would be a “tour visiting China-Biotics’ shelf space”.

    Are the stores a material part of the company’s business?

    Yes, the stores have historically been a material part of the company’s alleged business.

    Here is a breakdown of the company’s alleged sales based on distributors versus “retail outlets” for 2008, 2009 and 2010, according to its SEC disclosure.

    The company generated more than a quarter of its sales from its retail outlets in 2009. Click here for the relevant disclosures from the 2008, 2009 and 2010 10Ks discussing the company’s share of sales from distributors, as compared to “retail outlets”.

    Note that the company doesn’t specify whether distributors refer to distributors for only the retail operations, or for both the retail and bulk additives operations. In the above table, we’ve given the company the benefit of the doubt, and assumed an interpretation of the company’s SEC filings that minimizes the company’s sales from retail outlets.

    Further Fabrications in SEC Filings

    The evidence that the company operates far less than 100 stores indicates that it is also fabricating other aspects of their SEC filings, in my opinion.

    First, the company, as I see it, is fabricating information about its employees. Here is disclosure from the 10K, where the company lists 232 full-time employees at its retail outlets.

    Our investigators did not see any full-time China-Biotics employees manning the Shining Golden Essence shelves at Carrefour. It certainly doesn’t take 232 employees to operate 6-7 retail outlets.

    Second, the company has, as I see it, fabricated portions of its Management’s Discussion & Analysis in prior SEC filings. See the following disclosure in its 2008 10K, which I've also attached here:

    "Selling expenses were $6,869,109 or 16.2% of net sales for the fiscal year ended March 31, 2008 compared with $4,502,687 or 14.7% of net sales for the fiscal year ended March 31, 2007. The operating costs of the retail stores are included as selling expenses. This increase in selling expenses was primarily caused by the roll out of retail stores. As of March 31, 2008, we had a total of 60 retail stores in operation (as of March 31, 2007, we had 9 retail stores)."

    As discussed, the company doesn’t appear to have anywhere close to 60 retail stores.

    Third, the company is fabricating its lease expense, in my opinion. The company reported $3.4m and $3.9m of lease expense in fiscal years 2009 and 2010 (see here). After excluding the $74k of lease expense for its Pudong facility (the company disclosed that it has no recurring lease expense for its Qingpu facility), that leaves $3.3m and $3.8m of lease expense for its store base.

    $3.8m of lease expense for 6-7 stores would imply annual rent of $550k per store. Small stores such as those shown here and here are more likely to incur annual rent expense of $20k to $50k per store. As a result, I believe that the $3.9m of total lease expense in the 2010 10K is, like much of the rest of the company’s SEC filings, carefully crafted fiction.



    Disclosure: Short CHBT
    Stocks: CHBT
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Comments (18)
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  • Emerging Markets Investor
    , contributor
    Comments (141) | Send Message
     
    Nice try. The Company clearly states "The following is a list of sample locations where you can find our products."

     

    www.chn-biotics.com/c4...

     

    It does not say that the addresses are China-Biotics retail locations, but rather just a sample of where you can find their products (e.g., from distributors, etc.).
    10 Sep 2010, 02:13 AM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
     
    Author’s reply » OK, I added the clarifying paragraph:

     

    "Technically, the company's list "is a list of sample locations where you can find [their] products." Published the day following Citron's allegations, the list has been assumed by many to indicate addresses of the company's stores. If the company never intended that, then it has continued to refuse providing addresses to its 100+ stores, which appears to me to be a transparent admittance that its 100+ stores do not actually exist."
    10 Sep 2010, 02:56 AM Reply Like
  • A. Hendrick
    , contributor
    Comments (127) | Send Message
     
    Jason,

     

    You are certainly changing your tune.

     

    You were clearly claiming the list on the company website was the retail stores/outlets, not a sample of " where you can find their products (e.g., from distributors, etc.)".

     

    Here are your comments:
    seekingalpha.com/artic...
    ______

     

    Jason Nevader - Author's Reply - Aug 31 10:00 AM

     

    "OK, here are the addresses of the retail stores that make up 7.8% of overall sales. I can't believe you make your living this way -- makes sense to stay anonymous.

     

    www.chn-biotics.com/c4...
    "

     

    ______

     

    Jason Nevader - Author's Reply - Aug 31 09:39 AM

     

    "... I have the list of all of the addresses of the retail stores that make up 7.8% of overall revenues...."

     

    ______

     

    Jason Nevader - Author's Reply - Aug 31 09:39 AM

     

    "As promised, here are the list of retail stores:
    www.chn-biotics.com/c4...

     

    Good luck trying to maintain any credibility now. "

     

    ______

     

    Jason Nevader - Author's Reply - Aug 31 10:17 AM

     

    "Sure, check out the stores. You have a list of every store now. Was that so hard? Take your time and visit each one..."

     

    _____

     

    Jason Nevader - Author's Reply - Sep 01 01:53 PM

     

    "No, I do not feel foolish, but rather vindicated. The addresses for the outlets are there on the Company's website for all to see...."

     

    _____
    10 Sep 2010, 03:35 AM Reply Like
  • plivac
    , contributor
    Comments (10) | Send Message
     
    CSA,

     

    If you are so concerned about these stores and the company, I suggest you attend the investor day and ask all these questions at the Q&A session. Your arguments would be valid if you were not rushing the gun and published your "research" after doing your own dd, talking to the company, their auditors, and then presenting your research.

     

    The fact that you are rushing the gun, leads me to believe that your motives are not sincere and that your research is subjective, biased, and misleading.

     

    Then again, if the company has the cash, uses it to repurchase stock and maybe issue dividends, your bashing will soon be meaningless and you will go find another victim for your guerilla tactics....
    10 Sep 2010, 07:44 AM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
     
    Author’s reply » This issue is fairly simple. The company alleges to have 100+ stores. Its store base accounted for more than 25% of its fiscal 2009 revenue. Citron asked for addresses to the stores. The company released 80 addresses. At least 40 of those addresses are not actual China-Biotics stores, but supermarkets.

     

    By any reasonable conclusion, the 100+ stores don't exist. It's at least less than 40, based on the pictures on the website and the company's disclosure of addresses, and in my opinion, there's actually less than 10. This renders the company's entire SEC filings as bogus. It's about as strong a smoking gun as you would want that the company is defrauding its investors, and is far smaller than its SEC filings indicate.

     

    Disclosure: short CHBT
    10 Sep 2010, 07:56 AM Reply Like
  • Waldo Mushman
    , contributor
    Comments (452) | Send Message
     
    Until just a few moments ago as I was doing some research I was unaware that weasels are of the same species as polecats. This distinction might be useful when you are accused of being a weasel. With the same skill you have used to make sure nothing you or the company says can be used against you in an intelligent conversation, I expect some great weasel work going forward.

     

    If you are proud of the results shown in the pictures, you are a fool. Rather than spending you futile efforts trying to torture the language into something that explains these puny retail efforts why don't you step back and start all over.

     

    CHBT has listed 80 physical locations where thier product is offered. You have seen pictures of over half of those locations. If you were not in this stock, what would your reaction be? Would you be impressed? Not likely. Would you be indifferent? Possibly. Or would you dismiss the entire idea as preposterous? I don't care what they are selling, thats pretty poor exposure. I don't care what business they are in, the inability to post an accurate address is inept.

     

    And because you are to proud or stubborn to man up to a massive error you continue to look foolish. In character for the weasel, (no polecat) you are.

     

    John
    10 Sep 2010, 09:08 AM Reply Like
  • Rai
    , contributor
    Comments (53) | Send Message
     
    Thank you for proving that their Shining-Biotics products are real and are sold throughout shanghai, even in big supermarkets!
    10 Sep 2010, 08:30 AM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
     
    Author’s reply » I've never claimed that the company doesn't exist and that it's products aren't sold. I claim that its sales are not $80m. Backing out their alleged bulk additives business, you get $60m of nutritional supplements sales.

     

    Yet the company couldn't even come up with 80 locations where their products are being sold. Less than half of the 43 locations that we visited actually had their products.

     

    There may be less than 50 total stores that actually carry their products. I don't know what the number is but it's fairly clear that this company isn't generating anywhere close to $60m of sales from selling Shining Probiotics Protein Powder and Bowels-Clearing and Liver-Protecting Capsule.

     

    I mean, look at their products: www.therealchbt.com/ch...

     

    They're not selling $60m worth of this junk.

     

    Disclosure: short CHBT
    10 Sep 2010, 08:48 AM Reply Like
  • Emerging Markets Investor
    , contributor
    Comments (141) | Send Message
     
    For the two missing addresses, please use the correct addresses:

     

    226 Haijiang Road is 426 Haijiang Road. Here are photos showing the Supermarket and products on the shelves:
    s897.photobucket.com/a.../

     

    3336 Guidu Road is 3366 Guidu Road. Here are the photos showing the Supermarket that carries CHBT products:
    s897.photobucket.com/a.../

     

    Kindly please update your website.
    15 Sep 2010, 01:35 PM Reply Like
  • Emerging Markets Investor
    , contributor
    Comments (141) | Send Message
     
    You visited several addresses of the selected sample locations listed where people can find China-Biotics products. You found a bunch of addresses where they could not find a retail presence at all. Instead of contacting the Company for an explanation, you claim the Company is a fraud?

     

    As a long investor, I went to the Investor Day and spent a week in Shanghai doing my own due diligence. I asked management about the addresses, and they were prompt in getting me a response. All of the addresses were accounted for as several of them are really there and several of them had the address numbers transposed when putting it on the website. The Company has fixed its website and I have proof of that those locations exist.

     

    As you can see from viewing my Photobucket albums, I have posted images of 9 of the locations that the shorts questioned. Are you going to update your website now to tell the truth? If not, your credibility is in question.

     

    s897.photobucket.com/h...
    30 Sep 2010, 03:50 PM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
     
    Author’s reply » Here is what happened. The company, which in my strong belief is a hoax, has said throughout its SEC filings and press releases that it owns 100+ stores.

     

    Citron asked them: give us your locations.

     

    It posted 100 locations the next day on its web site.

     

    Private investigators were hired to check them out. A very small fraction of the locations of the ones that were checked had stores. Specifically, 2 out of the 43 locations. I'm sure there's a few more, and my estimate is 6-7, based on Baidu and other online map searches.

     

    So the 100+ stores basically don't exist. The arguments that the company has closed down stores in the past quarter or the company never intended to be revealing stores when it posted the 100 locations on its website is absurd.

     

    I'm not going to update the website to your every whim. It's been demonstrated that the company is lying about its store base - the website has done its job.

     

    Disclosure: short CHBT
    30 Sep 2010, 04:02 PM Reply Like
  • Emerging Markets Investor
    , contributor
    Comments (141) | Send Message
     
    The Company posted 79 representative locations on its website to prove that their products sell in various retail locations, including thousands of distributor locations.

     

    The 103 Shining-branded retail locations as of 6/30/10 do exist. The Company provided lease agreements for all of them at their Investor Day. I reviewed them. Where was your private investigator at the Investor Day?

     

    Glad to hear that you won't update your website. You have lost all credibility.

     

    Too bad you are still short, paying over 30% in interest. You should have covered below $9 last week when you had the chance. You just lost another 20% on your short investment over the past two days. Cover while you can, this stock will continue to climb.

     

    Disclosure: long CHBT
    30 Sep 2010, 04:13 PM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
     
    Author’s reply » They forged the lease agreements. You can make up lease agreements. You can't make up 100 actual stores. That's why Citron didn't ask them to give it copies of their lease agreements, but actual addresses of their stores.

     

    I have plenty of credibility. There's a lot of investors who don't like investing in fake companies that are paying attention to what I write.

     

    Disclosure: short CHBT
    30 Sep 2010, 05:38 PM Reply Like
  • Emerging Markets Investor
    , contributor
    Comments (141) | Send Message
     
    Really? Forged lease agreements. They looked very real to me. Are you serious? Really? Keep telling yourself whatever works for you.
    30 Sep 2010, 05:42 PM Reply Like
  • Waldo Mushman
    , contributor
    Comments (452) | Send Message
     
    And for some reason having a photo parade of all those locations would be a bad idea?

     

    Suggesting the addresses will not be made available because some of them may now be closed is ridiculous. Have they shut everyone of them down in the last 60 days? All the leases expired on the same day last month?

     

    They don't make the addresses available because they don't exist. It would shut down this entire line of attack if the company provided exactly what it appears it is fully willing to do. A list of the locations. CHBT put up a list of addresses on its website, CHBT has modified and corrected that list, CHBT has openly shown leases complete with addresses to attendees at the shindig, but for some reason they refuse to allow any independent scrutiny of the store claim.

     

    Why don't you have them send you pictures of all the stores, or maybe the phone numbers, maybe a copy of the yellow pages that lists all the locations, maybe a list of the store managers, or maybe just send a copy of the addresses.

     

    John
    30 Sep 2010, 05:55 PM Reply Like
  • jcreuter
    , contributor
    Comments (12) | Send Message
     
    CCA - You are now reaching for the stars. Give me a break!
    30 Sep 2010, 06:19 PM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
     
    Author’s reply » Yes, really.
    30 Sep 2010, 06:47 PM Reply Like
  • Chinese Company Analyst
    , contributor
    Comments (135) | Send Message
     
    Author’s reply » Anyone who thinks that China-Biotics is growing revenue 30% a year and generating 40% ebitda margins by selling bowel-clearing supplements is reaching for the stars.
    30 Sep 2010, 07:35 PM Reply Like
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