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Digest: Reverse Merger Drama

|Includes: China MediaExpress Holdings, Inc. (CCME), CHBT, ONP

The world of Chinese Reverse Mergers continue to be the center of much controversy.  The great swings this week deserve a recap and a bit of background about RTOs in general, and the allegations and responses made recently.

Here's a review of some of the more talked about stocks and players in the Reverse Merger Sphere:

Muddy Waters, a research firm headed by Carson Block, made waves last year and continues to do so.  Their first report focused on ONP, Oriental Paper.  It was alleged to have little business, antique machinery in poor condition, and to have mistated the value of various assets.  One of the counter-claims levelled at MW was that they had evaluated the wrong subsidiary of ONP.  MW did respond to this allegation, which is still widely repeated, and confirmed they had the correct subsidiary - Chinese companies are listed by numbers, not names.

To ONP's credit, it has had a team of Auditors come in and perform some verifications.  However, MW's claim that the CEO owned a controlling interest in ONP's primary supplier was validated - as SAIC listings prove.  And allegations that the current production lines of ONP had considerably less value than stated by management still remain, as the Audit Committee did not get access to the facilities - this is particularly bothersome because the CEO could give this permission with a sweep of the hand, and management seemed to be very open in allowing the Audit Committee access to bank statements, payroll records, invoices, etc.  Why not a walk through by an equipment appraiser?

ONP shares remain in the doledrums at just over $6, from a May 2010 peak of almost $12. The long case for ONP was made recently by SA poster Jamz Unlimited.

The next MW target was RINO International, now RINO.PK, the purported manufacturer of Desulfurization Equipment.  This company was thoroughly busted by the research firm Muddy Waters, who questioned almost every aspect of the operation.  The CEO himself admitted that "20-40%" of the customers did not exist.  Conference Calls were announced then cancelled, a long hinted defense never materialized, previous financials were announced to be unreliable; culminating in the stock being first halted and then ejected from NASDAQ for a lack of response.  It quickly ended up on the Pinks where it trades just over $2 a share, from more than $26 back around January 2010.

And that's the recent history.  Now, a discussion about several other stocks that a currently a battleground between shorts and longs.

The most attention recently has been on CCME, China Media Express, the subject of the most recent Muddy Waters report.  MW claims this company has far less exposure than the company states, and that their media plays only on perhaps a thousand buses, rather than on the tens of thousands claimed. Furthermore, MW claims flaws with the business model:  Media is displayed on the buses, but many are played via DVD.  Bus drivers - no doubt looking for tips from happy passengers - are playing requests rather than CCME materials. 

However, Global Hunter fired back for CCME, stating that they did check with the various bus companies, and that they did indeed have contracts and were satisfied with the current relationship.

Then there is CHBT, China Biotics, a probiotics maker.  In June 2010 filings, management had bragged about more than 100 "Branded Stores".   However, when investigators began hunting down stores based on a list on the website and found supermarkets, empty buildings, and very few actual Shining Branded stores, the company quickly changed the website content.  Matt Berry has a great synopsis here at SeekingAlpha.  CHBT has been caught overstating their relationship to Bright Diary, one of the dominant diary companies in China.  This relationship was several years ago and involved some cooperation about placing probiotics in mooncakes; the website and mutliple recent filings had long featured Bright Diary as one of their noted customers.  The company seems very reluctant to disclose the names of bulk customers in general.

I would be remiss not to mention China Agritech (OTCPK:CAGC) - where recent blog posts by Bronte Capital seem to have fueled a sell off by nervous investors.  Ian Bezek, a fellow SeekingAlpha poster, has the details.  Most interestingly, in the comments Ian provides a link to a site containing some background on Gene Michael Bennett, audit chair for CAGC.

Finally, there is AutoChina International.  The subject of some short hit pieces recently, it seems to be ready to fire back and answer all claims, as this rebuttal demonstrates. 
There is an old Chinese curse:  "May you live in interesting times."  Over the next few months, we will definitely see some interesting times with Chinese Reverse Mergers.

Disclosure: I am short OTC:CHBT, OTCPK:CCME, OTC:CVVT.

Additional disclosure: Strong skepticism of most China RTOs. I short mostly using puts with a long time frame.