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Guanwei Recycling Corp, Does It Hold Under Criticism

|Includes:Guanwei Recycling Corp. (GPRC)

Will warning signs, deter investors? Obviously the "cat has been out of the bag." Since then, these U.S. listed Chinese companies that came to market through RTO have came under great criticism. (For those that don't know, an RTO, reverse takeover, is like a hermit crab finding a new home.)

Red flags:

1) Umweltagentur Erftstadt Compliance Certification

This one is a bit confusing. The company argues that one reason it is competitive is because it sources its raw plastic from German suppliers and avoid the middleman.

They are able to do this due to the certification that allows them to buy directly from the supplier.

I not an expert in certification, but this doesn't make sense. What difference does it make if they buy directly from the supplier or the middleman? If there was a certification requirement, why wouldn't buying from a middlemen subject them to the same requirement?

From my research, I was unable to locate a company, Umweltagentur Erftstadt, but did find they received certification from TueVRheinland Cert. In addition, I was unable to locate any certification requirement for exporting plastic from Europe.

On the flip side, having a compliance certification would actually add to the costs and bring down the margin. One reason that China is competitive in plastic recycling is because of the lack of disposal costs.

2) Contradicting information about sourcing

In its 2011 annual report is says, "Guanwei has no current plans to use domestic suppliers as the waste classification and sorting techniques used abroad result in higher quality raw material."

But then it also says, "Guanwei's plastics recycling process begins with procuring raw material, which it sources primarily from Europe and China."

So which is it? In reality, only about 30-40% of China's plastic is imported and the rest is sourced from local manufacturers.

This is my initial assessment, more to come.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: GPRC