Waldo Mushman's  Instablog

Waldo Mushman
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At first glance many situations appear obvious. Rigorous examination may reveal that the obvious is in fact impossible. My focus is on companies that unethically sell the impossible and thrive only with financial slight of hand. I am a retired businessman living near Austin Texas and I both... More
  • Show me the VAT 0 comments
    Aug 11, 2010 10:20 PM | about stocks: ONP
    The Chinese tax system is in large part driven by VAT. Value Added Tax. When you purchase something you pay the price of the product plus 17% VAT. The VAT you pay to a supplier is deductible from the VAT you collect from your customers. VAT is administered by the SAT (State Administration of Taxation). Approximately 80% of all Chinese corporate taxes are generated from VAT. The reported sales amounts inclusive of VAT are confidential and unavailable to the public. But these SAT records are readily available to the tax payer. Requesting and receiving  summaries of net VAT payments is a simple request that should be honored  by the SAT within days.
    ONP has a fury of attention surrounding it and virtually all critics would be satisfied with a irrefutable confirmation of revenue for the years 2008 and 2009. VAT summaries offer the company an easy way to accomplish that objective. When ONP sells $100,000 of product they are required by law to add an additional $17,000 VAT and collect the entire $117,000. ONP is then required to transfer the $17,000 to the government within three days of receipt of payment. Each transaction is electronically reported to the SAT and every transaction has a unique identifying number.
    In 2009 ONP claims revenue of $102mm which would equate to VAT paid to the SAT of ~$17.3mm. They also report cost of goods (which we will assume all qualified for VAT reimbursement) totaling $82mm. The VAT they would have been obligated to pay their suppliers would therefore equal ~$14mm. That amount would be used as a credit against the amounts they collected from the customers. The final result would be that if ONP can document  net payments  to the SAT of ~$3.4mm for 2009 they will have presented an extremely compelling proof to refute the claims of the short selling community. ONP has gone to great lengths attempting to disprove the many charges leveled against them. They have taken the unusual measure of employing Deloitte Financial Advisory Services to “assist” the firm’s counsel Loeb & Loeb. The specific terms of the letter of engagement offered Deloitte and the items subject to  review are undisclosed. It is also undisclosed if Deloitte has begun investigating any of the issues covered in the engagement letter.
    Presentation of the VAT summaries would resolve  the argument conclusively. The SAT would readily accommodate a request to provide relevant documentation to ONP. Any observer would be able to make the simple conversion from taxes to sales. Deloitte could vouch for the legitimacy of the tax records and provide their own "Revenue – Expenses  = Tax Paid" calculations.   The issue could be settled within days and copies of the official tax reports could be presented on the web. I am a short seller of this stock and I would cover my position if SAT records supported ONP revenue claims. The lengthy list of accusations become meaningless if the top line and bottom line are proveably  accurate. The VAT filing can definitively settle the issue .

    Disclosure: Short ONP
    Stocks: ONP
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