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CHBT Store Verification Results Start Rolling In

|Includes: China-Biotics, Inc. (CHBT), ITP

Yesterday and throughout the night, I hired private investigators and other Shanghai residents to visit certain of the "stores" at the addresses provided by the company yesterday. These investigators were told to (i) visit the locations at the specified addresses, (ii) identify whether the addresses refer to standalone stores, (iii) take photos from outside the locations, (iv) enter the stores and request to see the company's nutritional supplements products, (v) to the extent possible, take photos of the locations of the company's products and (vi) write a brief account of each location in terms of what they saw.

I will publish an initial account from one of these Shanghai residents below, who visited three of the addresses provided by the company. I have disclosed his name and email address to Seeking Alpha's editors for independent verification. I will publish additional accounts as they come in.

But first, I want to address a note that came out from Robert Hsu last night responding to the post by Citron Research. I have little regard for the recommendations of and diligence performed by Robert Hsu. He wrote a similar piece on Orient Paper after Muddy Waters LLC published its initial report on ONP. Subsequent to his report, the leading business newspaper of China, 21st Century Business Herald, wrote a separate front-page article documenting Orient Paper's fraud, and adding additional relevant points indicating that Orient Paper is falsifying its SEC financial statements. We also found out that Orient Paper's top supplier is an empty shell owned by the company's CEO, and that as of June 2009, it somehow had acquired 2m shares of ONP, or about 4% of the company's outstanding shares.

Ample evidence has come out demonstrating that Orient Paper is a fraud, and Robert Hsu's note did a disservice to investors subscribing to his newsletter. I see the same poor level of diligence in his latest note on China-Biotics.

In particular, I'm concerned with his following unfounded comment, which, based on preliminary indications from our private investigators, will be demonstrated to be patently false by the end of the week.

"This morning, the short seller continues to accuse that some of the stores listed on CHBT website are actually hotels or supermarkets. Actually, according to our source in Shanghai, CHBT places some stores in supermarkets or hotels, similar to how we sometimes see McDonald's in a Walmart or a Burger King in a shopping mall."

That's just not true, Mr. Hsu. Not only does the company not own standalone stores at many of its disclosed locations, which is clearly what its SEC filings imply, but it doesn't even own stores-within-a-store at many of the locations.

I will begin the day with the following account that I received last night from one of the Shanghai residents who investigated several of the stores for us. I have disclosed his name and contact information to Seeking Alpha editors.

"I went to visit three locations so far. Mostly in Yangpu District and what I can confirm is there arent any retail outlets present for CHBT. There could be shelf space in the supermarket but that's a very different matter. Specifically, 102 Zhongyuan Road, Yangpu District and 1750 Changyang Road, Yangpu District are two super markets operated under the brand name Oushang.

The supermarkets do have separate stores inside them that sells clothes, food, even nutritional products. I personally walked around those two stores thoroughly and could find no signs of CHBT stores. The one on Changyang Road is right by home so I frequent there all the time. While I could not find the Shining stores, I was able to find a store that's called Natural Elements, a direct brand name under Shanghai Jiaoda Onlly Corp. I had a phone conversation with one of the managers and am pretty sure the store has nothing to do with CHBT. Also btw, after talking with the sales clerk, she said they on average make 30-50k RMB on a monthly basis for revenue, that translates into 4-6k USD a month. Noted, that's a retail space not shelf space. The places I went are much more of a prime location with significant traffic flow and tons of ppl walking in the mall. I would really expect places in Baoshan and others to have much less flow therefore less revenue. So now you count on a quarterly basis, this store can generate maybe 15k, you need 100 of these to generate 1.5mil...the reported 25mil number, you would be looking at 1800 retail outlets in a city like Shanghai. That roughly illustrates on a scale's perspective, their operation through retail distribution is very much unlikely to build up revenues.

Its a lot harder for me to prove the nonexistence of a retail store in a huge shopping mall of course other than putting my name behind this. But I think it's helpful to look at things from a scale's perspective. Even if they do have the 100 retail stores they claim to have, their revenue numbers are still unlikely at least from the conversations I had with the sales reps. In any case, I'm completely convinced that this company is a complete hoax. I took some photos but those are of the other brand name stores that are apparently unrelated, so I don't think it would be of any value for you guys. But i think you can upload it and cite the numbers I quoted you guys as a comp to illustrate the point.

Also I'd like to point out for you guys the severe lack of seasonality in these numbers. In China, most of the sales of these types of products happens right around the Chinese new year when people go around to visit relatives. The sales should really account for a huge percentage of the annual sales just because thats when people actually buy that kind of stuff to give out as gifts. To have a roughly flat sales in the first and second quarter is simply telling, you will never see that if the reporting is regular.

Again, given the difficulty of proving the nonexistence of a store, I think focusing on the ability of revenue generation will prove to be fruitful. Like I said, even if all the stores are real, which they are not, you still cannot be selling at that levels. To get credible verification however, you will need to get data from various supermarkets and see what volume of its products are actually being sold...but again, i cannot imagine a tiny shelf space in a supermarket or pharmacy can reasonably outsell a separate store inside."

Below is a picture of one of the Yangpu District addresses that this Shanghai resident visited. For the avoidance of doubt, the products in the picture are not Shanghai Shining's.

Disclosure: Short CHBT and ONP