Shorts: It's Misleading to Compare Apples And Oranges

Apr. 10, 2011 6:58 PM ETPUDA4 Comments
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I still reiterate my opinion that shorts allegation "Puda no longer owned Shanxi Coal" is simply wrong because they are comparing apples and oranges. You must be very careful whey you are trying to deal with different entities: Shanxi Puda Coal, an operating sub in China, and PUDA itself, a public company in the US. Shanxi Coal is a private company, and according to Chinese law its ownership is dictated by the registered capital contributed by its own shareholders (not PUDA’s shareholders). The key fact ignored by shorts is that all those “Transactions”: transfer of ownership, sale of company or loan pledge were treated in China AS IF Shanxi Coal had never gone public in the US or the entity PUDA had never existed.  Keep this mind, and we can only get a right picture of what chairman MZ has done and what implications those transactions may hold for PUDA shareholders.
Now let’s look at some simple numbers. According to 2010 10k, Shanxi Putai Resources (“Putai”) acquired 90% of total registered capital of Shanxi Coal and therefore became the 90% owner. MZ and YZ own 8% and 2% respectively. (Of course, this may not be true again after those “Transactions”, but I only wanted to show how numbers should work.) However, at the same time, under the whole PUDA ownership structure, the ownership percentages of Shanxi Coal is “Mr. Ming Zhao (10%) held directly, Mr. Ming Zhao (approximately 23%) held indirectly through Puda, BVI and Putai.  Mr. Yao Zhao (approximately 5%) held indirectly through Puda, BVI and Putai.”  So given the complicated PUDA corporate structure which was purposely set up during its RTO in 2005, there is no simple math to make those numbers add up. Therefore, simple math won’t make sense when you try to translate things between the two different entities: Shanxi Coal and PUDA without the help of lawyers and accountants.
So now how should we correctly understand those “Transactions”?
“Putai” transferred 90% ownership to MZ. It’s legal under Chinese law in the sense that MZ had paid off the registered capital contributed by “Putai” and filed the registration with SAIC. But is it true as Mr. Little claimed that “The transfers resulted in Ming Zhao owning 99% of Shanxi Coal, leaving U.S. investors with nothing”? MZ did get to own 99% under Chinese law, but like I said before, by saying US investors now have nothing Mr. Little was comparing apples and oranges. Little did complex and eyepoping math in his article, but unfortunately he came from a wrong place. Trying to simply translate ownership between Shanxi Coal and PUDA made his math and allegations included in his article invalid.  The transfer should NOT have changed the fact PUDA owns 90% of Shanxi Coal because the transfer happened within the entity Shanxi Coal. After this transfer, what’s the MZ’s ownership of Shanxi Coal under PUDA’s structure is another question, but he didn’t steal from PUDA shareholders. What MZ has done wrong is this transfer hasn’t been disclosed.
Use the same approach and we can get a correct picture of other transactions: MZ’s sale of his 49% stake to CITIC, Puda Mining’s 51% ownership pledge for the loan, etc., which will be addressed in another article.  

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