Muddy Waters came out with a new report on RINO International this morning, available here. As in ONP, they do an excellent job providing compelling evidence that RINO is fabricating its SEC financial statements. Here is an excerpt of their summary from the first page:
- RINO’s FGD sales (60% to 75% of revenue) are much lower than it claims. We found that many of its customer relationships do not exist.
- Chinese regulatory filings show that RINO’s consolidated 2009 revenue was only $11 million, or 94.2% lower than it reported in the US. We show that the Chinese numbers are credible.
- RINO’s accounting has serious flaws that are clear signs of cooked books.
- RINO’s management is draining cash from the company for its own business and personal uses. The management is in flagrant breach of its VIE agreements, which require it to pay income to RINO (as opposed to taking it).
- RINO’s balance sheet has an astonishingly small amount of tangible assets for a manufacturer. Rather, it is filled with low quality “paper” assets that balance out the inflated earnings, and likely hide leakage.
- RINO is not the industry leader it claims to be in the steel sinter FGD system market. Rather, it is an obscure company in a crowded field, and is best known for its failed projects. Its reported margins are two to three times what they really are. Its technology is sub-par.
- We are not sanguine about management “borrowing” $3.2 million to purchase a luxury home in Orange County, CA the day that RINO closed its $100.0 million financing.
The report examines a $15 million acquisition that the company made in July 2010, and raises serious questions about whether the acquisition was legitimate.
In its second quarter 10Q, the company announced it acquired Vital Glee Development Limited (“Vital Glee”) for $15 million on June 24, 2010. Vital Glee was an “investment holding company and through its subsidiary engaging in automotive shock absorber manufacturing business”. Click here for the relevant disclosure. I’ve re-pasted it below:
“On June 24, 2010, [WATG’s subsidiary] agreed to acquire 100% equity interest in Vital Glee Development Limited (“Vital Glee”), for a total consideration of $15 million of which $8.7 million was settled in June 2010. The remaining consideration will be divided into 2 equal installments and will be settled by December 31, 2010 and June 30, 2011 respectively. The Company obtained control over Vital Glee on July 1, 2010 by appointing the sole director to Vital Glee. Vital Glee is an investment holding company and through its subsidiary engaging in automotive shock absorber manufacturing business.”
Little additional disclosure was given, in the 10Q or any subsequent SEC filings.
OLP investigated the acquisition further. From speaking with management, OLP determined that Vital Glee’s operating entity was Jinzhou Lide Shock Absorber Co., Ltd. This is further confirmed by a Roth Capital report on September 30, 2010.
After some investigation, OLP found serious issues with the acquisition, which I will summarize below:
1. Jinzhou Lide was formed in April 2010
According to the AIC records for Jinzhou Lide, which are included in the OLP research report, Jinzhou Lide was established on April 26, 2010. You can also see this on the Jinzhou AIC website here (use Google Chrome’s translation functionality if you cannot read chinese).
I’m doubtful that a business that has been operational for 2 months can be worth $15 million.
Management told OLP that Jinzhou Lide was formed from a reorganization of an older company, which engaged in the same auto shock absorber business in Jinzhou. Management, however, declined to provide the name of Jinzhou Lide’s predecessor company, and I discuss below my skepticism around management’s claim.
2. Jinzhou Lide was established at the same address as another facility owned by WATG
According to AIC records (see page 4 of OLP report or the website I show above), Jinzhou Lide was established and located at:
Bohai Street, Jinzhou Economy & Technology Development Zone, Jinzhou, Laoning
This is the same address of Jinzhou Wanyou Mechanical Parts Co., Ltd., a subsidiary of the company. OLP learned this by calling the company, but you can look on this site, this site, or this site to verify that Jinzhou Wanyou is located at Bohai Street, Jinzhou Economy & Technology Development Zone, Jinzhou, Laoning. Or simply search for the chinese characters of the address and the chinese characters of Jinzhou Wanyou Mechanical Parts Co., Ltd., which are found on pages 3 and 10 of the OLP report, respectively, in Google Chrome.
Not surprisingly, we also see this address show up in this 8k from April 4, 2007, where Jinzhou Wonder Auto Suspension System Co., Ltd. sells a stake in Jinzhou Wanyou Mechanical Parts Co., Ltd. to WATG. Click here for the relevant page showing the address. Jinzhou Wonder Auto Suspension System Co., Ltd. is shown as a related party throughout several historical SEC filings, such as its 2007 10K.
We now see that WATG paid $15 million for a subsidiary that was two months old and established at the same address as one of WATG’s current facilities.
3. Jinzhou Lide had a registered capital of only $1.2 million, and yet was sold for $15 million two months after being established
Jinzhou Lide’s registered capital is only $1.2 million, which implies that its shareholders only put in $1.2 million in April 2010 to establish the business. Yet it was sold to WATG for $15 million in July 2010. I’m doubtful that Jinzhou Lide’s value rose 1,200% in its two months of operations.
4. Management has not disclosed the identity of Vital Glee’s seller
In the vast majority of M&A transactions, investors are aware of the identities of both the buyer and seller. In this case, WATG management has not disclosed the identity of the seller, and investors cannot determine the identity of the seller through any other means. Vital Glee is registered in the British Virgin Islands (BVI), and the BVI registered agent will only release the director and shareholder information if Vital Glee management consents. Upon OLP’s request, the BVI registered agent sought permission on multiple occasions from Vital Glee management, but has yet to receive approval to release Vital Glee’s shareholder information.
OLP also asked WATG management to identify the name of the seller. According to OLP, the WATG CFO stated that he does not know the identity of the seller.
The question therefore remains: who owned Vital Glee and who received the claim to $15 million upon its sale?
WATG should publicly disclose the identity of Vital Glee’s sellers, and enable investors to independently access the relevant information from the BVI registered agent.
5. Jinzhou-based sources in the auto parts industry were unable to identify Jinzhou Lide’s predecessor, and weren’t aware of M&A involving any $15 million shock absorber businesses in Jinzhou
OLP identified 14 companies in the auto shock absorber business located in Jinzhou that have effective AIC registrations. They are listed here. OLP spoke to “numerous” members of this list in an effort to identify Jinzhou Lide’s predecessor and none of them were able to identify a company that could have been Jinzhou Lide’s predecessor.
Additionally, none of the sources were aware of a $15 million acquisition in the auto shock absorber sector in Jinzhou.
We have seen corporate governance issues and questionable financial and management practices at other Chinese RTOs structured and financed similarly to Wonder Auto. Like others, Wonder Auto has not chosen a top-4 auditor, instead choosing to go with PKF Hong Kong, a firm that boasts only 4 partners. Like others, Wonder Auto has eye-popping financial figures, claiming 40% to 50% revenue growth annually since 2005 and 20%+ operating income growth during that same time period, which imply extraordinarily high returns on capital on its capital expenditures and acquisitions. During the global downturn of 2008 and 2009, which impacted China just like the rest of the world, WATG doubled both revenue and gross profit, and increased EPS by 40%. The company has raised substantial amounts of dilutive equity at low valuations, such as $69 million in November 2009 at a valuation of less than 15x PE.
The facts behind the Jinzhou Lide acquisition are damning. WATG appears to have paid $15 million for a 2-month-old company established at the same site as one of WATG’s other subsidiaries. WATG has yet to disclose the seller of Jinzhou Lide, and its general disclosure of the acquisition is noticeably sparse. Numerous local competitors are unaware of a shock absorber business in Jinzhou that could have been the predecessor to Jinzhou Lide. They also have not heard of a $15 million acquisition in the sector. The shock absorber business community in Jinzhou is small enough that such a predecessor and acquisition would not go unnoticed.
If management wants to prevent further allegations of fraud, it should release an 8K elaborating on the details of the Jinzhou Lide acquisition. It should provide predecessor financial statements of Jinzhou Lide; the identity and backgrounds of its sellers; an explanation of why its initially registered address is the same as one of its subsidiary’s; a list of customers; and additional information that would allow independent analysts to verify Jinzhou Lide’s legitimacy.
Disclosure: Short WATG
On August 31, China-Biotics released the addresses of its alleged store base, in response to allegations of fraud from Citron Research. Citron asked a simple question: if CHBT is reporting accurate financial statements in its SEC filings, it should be able to provide the addresses to its 100+ stores, which contributed more than 25% of revenue in Fiscal Year 2009.
After the company released its locations, a colleague and I hired local investigators to visit a majority of the disclosed locations to determine whether the the stores in fact exist.
We’ve published our findings on the following website: www.therealchbt.com
The company’s list of locations provided 80 locations. One of these locations is a repetition of a previous location, leaving 79 independent locations. We visited 43 of these locations. A China-Biotics store was found at only 2 of these 43 locations. The remainder of the addresses were supermarkets, hotels, office buildings and empty lots. There were no smaller CHBT stores-within-a-store or kiosks at any of the locations.
On our website, we have included a tab that lists all of the locations for which we have sent an investigator to, with information on:
- whether a standalone store existed at that location
- whether a store-within-a-store existed at that location
- whether the company’s products were found at all at the location
- if the product was found, where it was located.
By clicking on any given address in the stores tab, such as here, you can see further information about what our investigators found when they inspected the location, as well as pictures of the address and outside of the store, as well as a picture of any products available at the store.
The only standalone stores that we found are essentially the same ones that showed up when we searched for the chinese characters of the company’s stores (“益生有益” or click here if your browser doesn’t support Chinese fonts) in http://map.baidu.com/, http://shanghai.aibang.com/, and http://www.mapbar.com/. These search sites only yield 6-7 CHBT locations. Many of the locations released by the company referred to supermarkets like Tesco or Carrefour. Some of these supermarkets carried the company’s products on their shelves. Some didn’t. None had “stores within stores”.
The conclusion, in my opinion, is simple. The company claimed to have 100+ stores. Based on our simple visits to a majority of the addresses provided by the company, I believe that’s a blatant lie.
In my opinion, their misrepresentation of their store base is one of many pieces of false information that the company has provided in its SEC filings.
Did the Company ever specifically claim it had stores?
Yes, the company has historically claimed that it owned 100+ stores.
Here is disclosure from their 2010 10K. The company says:
“We intend to expand the sale of our retail products to the other metropolitan cities in China through a combination of traditional distribution channels and dedicated Shining outlets. We have a total of 111 outlets as of March 31, 2010.”
The company makes a specific distinction between “traditional distribution channels” and “dedicated Shining outlets”. I don’t think shelf space at a Tesco supermarket is what investors typically have in mind when they read “dedicated Shining outlets”. Elsewhere, the company refers to its outlets as stores. See this press release from third quarter 2010, where the company announces the opening of “four new retail stores”. Or here, where they claim that in 2008, they “opened 51 new Shining-branded retail outlets, bringing the total number of stores to 60”.
Even in the press release announcing their investor day, the company promises visitors a “tour visiting China-Biotics’ retail stores”. A more accurate statement would be a “tour visiting China-Biotics’ shelf space”.
Are the stores a material part of the company’s business?
Yes, the stores have historically been a material part of the company’s alleged business.
Here is a breakdown of the company’s alleged sales based on distributors versus “retail outlets” for 2008, 2009 and 2010, according to its SEC disclosure.
The company generated more than a quarter of its sales from its retail outlets in 2009. Click here for the relevant disclosures from the 2008, 2009 and 2010 10Ks discussing the company’s share of sales from distributors, as compared to “retail outlets”.
Note that the company doesn’t specify whether distributors refer to distributors for only the retail operations, or for both the retail and bulk additives operations. In the above table, we’ve given the company the benefit of the doubt, and assumed an interpretation of the company’s SEC filings that minimizes the company’s sales from retail outlets.
Further Fabrications in SEC Filings
Our store investigation demonstrates that the company likely only owns 6-7 standalone stores. That means that the company is fabricating other aspects of their SEC filings, in my opinion.
First, the company, as I see it, is fabricating information about its employees. Here is disclosure from the 10K, where the company lists 232 full-time employees at its retail outlets.
Our investigators did not see any full-time China-Biotics employees manning the Shining Golden Essence shelves at Carrefour. It certainly doesn’t take 232 employees to operate 6-7 small retail outlets.
Second, the company has, as I see it, fabricated portions of its Management’s Discussion & Analysis in prior SEC filings. See the following disclosure in its 2008 10K, which I’ve also attached here:
“Selling expenses were $6,869,109 or 16.2% of net sales for the fiscal year ended March 31, 2008 compared with $4,502,687 or 14.7% of net sales for the fiscal year ended March 31, 2007. The operating costs of the retail stores are included as selling expenses. This increase in selling expenses was primarily caused by the roll out of retail stores. As of March 31, 2008, we had a total of 60 retail stores in operation (as of March 31, 2007, we had 9 retail stores).“
As discussed, the company doesn’t appear to have anywhere close to 60 retail stores.
Third, the company is fabricating its lease expense, in my opinion. The company reported $3.4m and $3.9m of lease expense in fiscal years 2009 and 2010 (see here). After excluding the $74k of lease expense for its Pudong facility (the company disclosed that it has no recurring lease expense for its Qingpu facility), that leaves $3.3m and $3.8m of lease expense for its store base.
$3.8m of lease expense for 6-7 stores would imply annual rent of $550k per store. Small stores such as those shown here and here are more likely to incur annual rent expense of $20k to $50k per store. As a result, I believe that the $3.9m of total lease expense in the 2010 10K is, like much of the rest of the company’s SEC filings, carefully crafted fiction.
Disclosure: I am short CHBT
Over the past few months, the topic of financial filings with China’s State Administration for Industry and Commerce (SAIC) has made frequent appearances within the U.S.-listed Chinese RTO (“reverse takeover”) sector. I and other critics have advocated that AIC filings are important data points in determining whether certain Chinese RTOs are falsifying their SEC financial statements. In cases where AIC-reported revenue, profit and assets are substantially lower than SEC-reported financial figures, we’ve claimed that this provides material evidence that the companies in question are fabricating their SEC financials.
Our arguments have made sense to many investors, but some remain unconvinced. Misleading responses by certain of the alleged frauds that AIC filings don’t matter have muddled the debate. These companies, such as CMFO, LIWA or CSKI, have claimed that AIC filings are unimportant and are not taken seriously in China, and that investors should not use these filings as data points when analyzing U.S.-listed RTOs. I strongly disagree.
The point of this article is that AIC filings do matter.
To illustrate this point in a way that hasn’t been yet done, I’m going to provide full 80-page AIC filings on two Chinese companies, China-Biotics Inc. (CHBT) and Spreadtrum Communications Inc (SPRD). Both of these companies listed on the U.S. public markets several years ago, trade at similar market capitalizations, and both file with the Shanghai branch of the Administration for Industry and Commerce (“AIC”). Unlike some AIC branches that provide only selected AIC documents, the Shanghai branch provides full AIC reports to inquiring investors.
The China-Biotics filing is 84 pages, while the Spreadtrum filings are comprised of one 76-page filing and one 34-page filing. I also provide full English translations for each filing. These filings and the English translations help address much of the misinformation circulated about AIC filings, and provide clear examples of what information is included in AIC reports, and why I’m confident that these numbers matter. The filings provide extensive information about each company’s ownership, registered capital, and, most importantly, audited financial statements filed with the local Chinese government.
As I’ll discuss, Spreadtrum’s AIC report and financial statements provide evidence that SPRD is a legitimate Chinese company that generates substantial revenue and owns a significant amount of assets. Their filings give investors comfort that the company is accurately representing itself in its SEC financial statements.
CHBT’s AIC report and financial statements, on the other hand, indicate a company that is far smaller than its SEC filings indicate. Whereas SPRD’s AIC filings show a company generating more than $100m of revenue, CHBT’s filings show a company generating less than one-tenth of its SEC-reported revenue.
Both companies file with the same local AIC office. The reports are in the same format, and include similar sets of documents. Yet one shows a legitimate company, and the other shows a legal entity that has minimal business operations. Any long investor in CHBT, or critic of the legitimacy of AIC filings, has to ask himself the following question: why would CHBT provide false information in its AIC filings when SPRD doesn’t?
The answer is that CHBT management is providing accurate information to the AIC. The fake information is in the SEC filings they provide to public investors and the U.S. government, a government that does not have legal recourse to Chinese residents.
Currently, the public markets are valuing CHBT and SPRD similarly. CHBT has a market capitalization of $315m. SPRD has a market capitalization of $440m. Yet one of these Shanghai-based companies is real and the other is a fraud.
Brief background on AIC filings, and why I’ve chosen CHBT and SPRD
For those new to the debate, I’ll provide a brief discussion of AIC filings. The State Administration for Industry and Commerce is the Chinese government agency responsible for drafting and implementing legislation concerning the administration of industry and commerce in China. SAIC regulations are implemented by local AIC branches.
All Chinese companies file a variety of information with their local AIC office, including information on property leases; land use rights / building ownership certificates; capital verification reports (these show money / assets contributed by whom, and when); business licenses; the approved “business scope”; the legal representatives; applications to form the companies, with some personal information on the applying shareholders; applications to raise / reduce capital or change the business scope or term; tax and other government incentive documents; company bylaws; and, last but not least, annual financial statements.
Not all AIC branch offices operate the same way. Some provide photocopies of original documents to inquiring agents. Others email electronic data sheets. And others either provide information only verbally or require agents to visit the office and transcribe the relevant information by hand.
Furthermore, not all AIC branch offices provide the same volume of information to outsiders. Some AIC branch offices provide no information at all to the public. Some provide just financial statements. And some provide extensive reports, including financial statements, capital registrations, leases, etc.
The Shanghai AIC is one of those branches that provide full AIC reports, and in a convenient PDF document that is comprised of photocopies of all the relevant source documents.
That is why I have chosen to compare CHBT and SPRD. Both of these companies report to the Shanghai AIC. Unlike CMFO or ONP, which report to small rural AIC offices that are more secretive in terms of what they release to the public, the Shanghai AIC provides exceptional disclosure to inquiring investors.
CHBT vs SPRD
Click here for CHBT’s AIC report in its Chinese original.
Click here for CHBT’s AIC report translated into English.
The AIC report is 84 pages, and I’ve numbered the pages clearly in the bottom right-hand corner of each page. Here is a breakdown of the documents contained in the report:
- Page 1-9: Company bylaws
- Page 10-11: Registration of the company name and application to register the company (July 1999)
- Page 12-19: Lease of Pudong plant (August 1999)
- Page 20-41: Various registration documents from 1999 to 2005
- Page 42-50: Various registration documents related to transfer of ownership from management to Sinosmart Group, the BVI entity involved in the reverse merger, in 2005
- Page 51-67: Annual Inspection Report for Foreign-Funded Enterprises for 2007
- Page 68-84: Annual Inspection Report for Foreign-Funded Enterprises for 2008
There should be little doubt that this AIC filing is for Shanghai Shining Biotechnology Co., Ltd, the main operating subsidiary of China-Biotics, Inc. Here is CHBT’s organizational structure:
Growing Bioengineering (Shanghai) Co., Ltd. is the legal entity established in 2006 that owns the bulk additives operations. Our AIC filing comparison is for the years 2007 and 2008, when Growing Biongineering had no material operations. Shanghai Shining was the sole operating entity. The 2009 filings for Shanghai Shining are not yet available.
Spreadtrum is a semiconductor manufacturer that IPO’d in 2007. It had a rough 2008 and 2009, when the global downturn reduced semiconductor demand, but business appears to be rebounding. Its two largest institutional investors, each owning more than 10% of shares, are $14bn private equity firm Silver Lake Partners and $11bn venture capital firm New Enterprise Associates.
SPRD, like most companies that generate $100m+ of revenue, has more than 1 operating subsidiary. Click here for its organizational structure. Based on discussions with management, most of the revenue, profit and assets were generated at two subsidiaries in 2007 and 2008: Spreadtrum Communications (Shanghai) Co., Ltd. and Spreadtrum Communications Technology (Shanghai) Co., Ltd. I’ll refer to the former as “Spreadtrum Communications” and the latter as “Spreadtrum Technology”.
I’ve acquired and translated the AIC filings for both of these subsidiaries.
Chinese GAAP does not consolidate financial statements. To approximate the consolidated financial figures for SPRD, we need to add the figures of Spreadtrum Communications and Spreadtrum Technology. Naturally, there are intercompany payments between the two subsidiaries that distort revenue and profitability. As well, the assets and liabilities are distorted by dividends payable to other SPRD subsidiaries, as well as the SPRD parent. But for our purposes, it’s clear that these AIC filings show a real company with assets and revenue greater than $100m.
Let’s compare the financial figures between each company’s AIC filings and SEC filings:
In the case of CHBT, the AIC filings show revenue of less than $1m in 2007 and 2008. This compares to SEC-reported revenue of $31m in 2007 and $42m in 2008. CHBT’s AIC-reported total assets were $7m and $9m, compared to $45m and $94m in its SEC filings.
CHBT’s AIC financial statements are on pages 51 to 84 of the AIC filing (English translation available here). A summary for 2007 and 2008 are on pages 53 and 70 of the filing (English translation available here).
In the case of SPRD, Spreadtrum Communications reported revenue of $62m and $64m in its 2007 and 2008 AIC filings, while Spreadtrum Technology reported revenue of $112m and $91m its 2007 and 2008 filings. Together, the combined entities reported $174m and $155m of revenue in 2007 and 2008 in their AIC documents. The SEC-reported revenue for SPRD was $146m and $110m in 2007 and 2008. The higher combined AIC numbers indicate that there were some intercompany sales in the AIC filings. Total assets for the combined two entities were $116m and $126m in 2007 and 2008, compared to SEC-reported total assets of $237m and $153m. The discrepancy in assets is likely due to large cash balances and other holdings at the non-Chinese parent Spreadtrum Communications, Inc., or other subsidiaries. Again, we shouldn’t expect these subsidiary financial statements to match the SEC filings; rather, we’re mainly looking to see if the SPRD AIC filings indicate that there is a legitimate business operating under the SPRD ticker. They do.
Do We Have the Right Shanghai Shining Biotechnology Co. Ltd?
There is boundless evidence that the 84-page filing I’ve included refers to the same Shanghai Shining that is CHBT’s main operating subsidiary.
The shareholders of the company in the AIC filings are Song Jin’an, Yan Li, Huang Weida, and Yan Yihong. Jin’an is the current CEO, Li is his wife, Yihong is her sister, and all four are current or former officers, directors or shareholders of CHBT according to its SEC filings.
The main company address listed in the AIC filing is the same as the one listed in the SEC filing.
The CEO’s signature in the AIC filing is the same as the CEO’s signature throughout SEC filings. For instance, compare Song Jinan’s signature on this page from CHBT’s 2006 10K with his signature on page 19 of the AIC filing.
The percentage ownerships of the shareholders prior to the reverse merger match the percentage ownerships that China-Biotics has disclosed to the SEC. For instance, compare the response to question 14 in this March 16, 2007 correspondence with page 37 of the AIC filing (Click here for English translation).
Pages 43 to 50 of the AIC filing (Click here for English translation) provide details on management’s transfer of ownership to Sinosmart Group, the British Virgin Islands legal entity that acted as an intermediary in the company’s 2006 reverse merger. That transaction is documented extensively in the company’s SEC filings – search Sinosmart in any 10K.
There should be little dispute that we have the correct entity.
Evidence for why AIC filings do matter
I don’t think any aspect of our AIC filings gives the impression that companies can outright lie in the financial statements they file with the AIC. Each company provides lengthy and accurate information on their registered capital, leases, shareholders, company bylaws, etc. It’s a tremendous leap of faith to believe that the AIC requires accurate reporting in these aspects, but is indifferent as to whether a $40m revenue company reports sales of only $1m in its financial statements.
Here are additional reasons why we should take CHBT’s AIC filing seriously.
1. CHBT management live in China. The AIC filings are filed with the Chinese government, whereas the SEC filings are filed with the U.S. government. Management is concerned about violating Chinese law and providing false information to the Chinese government. But they are indifferent to defrauding the US government and breaking US law. A Chinese resident does not have to obey U.S. law any more than a U.S. resident is required to obey Chinese law. That’s why they report the accurate numbers to the Chinese government, and the fake numbers to the U.S. government. There are practically no repercussions to Chinese management teams that defraud foreign investors. Numerous U.S.-listed RTO companies, like CXTI, CYXI and CHFI, have seen their management teams vanish with the companies’ assets, and suffer no legal repercussions. Defrauding U.S. investors is not a violation of Chinese law, whereas defrauding the Chinese government is.
3. On page 70 (English translation is here), near the front of the 2008 Annual Inspection report, we have a picture of Yan Yihong (the former CFO and sister-in-law of the CEO), along with her detailed personal information and the following testament:
I hereby confirm and promise that all the contents contained in the annual inspection report do not contain any fraudulent information and all the financial statements and other materials submitted are true and effective, and that I’m willing to bear any legal and related responsibilities caused due to the inaccuracy of such documents.
This is followed by the signature and personal seal of CEO Song Jin’an, as well as a seal of the company. I can’t fathom how the Chinese government would require such a testament in the Annual Inspection Report, but then allow a company to file false financial statements.
It’s far more believable that CHBT is defrauding the US government and US investors, both of which have no legal recourse to the company’s management. The Chinese government certainly has legal recourse to Yan Yihong and Song Jin’an. The existence of this sort of testament at the front of the AIC Annual Inspection reports is a strong sign that AIC financial statements do matter.
4. Why does SPRD file financial statements that approximate its SEC filings (intercompany distortions notwithstanding), while CHBT files financial statements that are a tiny fraction of its reported SEC filings? As I’ll discuss in future articles, there are ample other signs that SPRD is a real business, while CHBT is not. But even excluding any such future arguments, why would one foreign-owned Shanghai company lie on its AIC financial statements when another would tell the truth? Why would SPRD report large, accurate numbers if these filings didn’t matter? What sort of reasonable explanation can anyone come up with? Either both should be understating their numbers, or both should be reporting accurate numbers.
I firmly believe that both are reporting accurate numbers in their AIC filings.
The fake numbers are the ones in CHBT’s SEC filings.
Naturally, AIC filings are not the only signs that CHBT is falsifying its SEC financial statements. Citronresearch raises excllent non-AIC-related issues with the company here. The notion that probiotics nutritional supplements allowed CHBT to achieve revenue growth of 30%-50% annually over the past 4 years while achieving Microsoft-like EBITDA margins of 40%-45% is nothing short of absurd. The company raised $75m of cash in 2009 when it already supposedly had that much sitting in the bank, with no compelling reason for the new capital raise and dilution. Its reverse merger was organized by the same investors who’ve provided capital to renowned fraud Orient Paper, and its auditor is also the same as ONP’s (not to mention China Expert Technology’s). But we’ll get to these points in the future.
For now, I aim to make the case that AIC filings matter. The documents provided in this article provide an indication of what information AIC filings provide, and why investors should pay attention to them. SPRD’s AIC filings show a legitimate business that manufactures and sells semiconductors. CHBT’s AIC filings, on the other hand, show a virtually non-operational legal entity which its management has used to defraud public investors, as well as the SEC, and to raise $75m of cash from US investors.
Disclosure: I am short CHBT, ONP, CMFO, CSKI and LIWA
This article is about how Orient Paper’s top supplier is either non-operating or very small, and is majority-owned by its CEO. I will also discuss certain suspicious share transfers by this supplier in July 2009.
But first, I want to discuss a recent development last week. Last Tuesday, Orient Paper announced that Loeb & Loeb, the law firm it hired to run its internal fraud investigation, hired Deloitte & Touche Financial Advisory Services Limited to “assist” it with its investigation into the issues raised by Muddy Waters, LLC. Per the press release, “Deloitte will provide support to Loeb & Loeb, which is working with the Company’s audit committee, in connection with the independent review of the accounting aspects of the issues raised and the investigation of the relevant financial transactions and customer relationships.”
Deloitte is not performing an audit. It is merely “assisting” and “providing support” to Loeb in the investigation. Much hinges on what Loeb asks Deloitte to do. I’ve previously written that Loeb is not the right firm to be leading the ONP internal investigation. I do believe that Deloitte is an appropriate financial consulting firm to investigate the fraud. But it’s unclear what Loeb will ask of Deloitte, and whether Deloitte will need to sign off on any aspect of the investigation. As a result, I could certainly see a scenario where the investigation finds no wrongdoing, despite compelling evidence that the company is committing fraud.
Now, let’s move to the new evidence that ONP is falsifying its financial statements.
ONP’S Main Supplier is an Empty Shell Primarily Owned by ONP’s Chairman
According to SEC filings, ONP’s largest supplier is Xushui County Dongfang Trading Co. Ltd. (“Xushui Dongfang”). From 2006 to 2008, Xushui Dongfang is listed as ONP’s largest supplier, supplying $14.6m, $15.9m, $28.5m, and $30.7m of goods in 2006, 2007, 2008 and 2009. See the 10Ks for 2009, 2008 and 2007. Note that “Xushui County” is the same county that ONP is based in.
Yet according to third party reports, Xushui Dongfang is an empty shell company with no reported revenue. Here is a third party credit report from Qingdao Inter-Credit Services Pte Co., Ltd. (“Inter-credit”). Inter-credit is a large independent credit agency that provides a variety of credit-related services for clients. It operates out of 12 branches, and has 200 employees, including lawyers, accountants and debt collectors. It compiles independent reports on Chinese companies, using data from AIC filings and other resources – a sample report can be seen on their website here.
For any readers who doubt the authenticity of Inter-credit reports, here are their reports on China Sunergy (CSUN) and Solarfun (SOLF), both of which I believe are more accurately reflecting themselves in their SEC financial statements than CMFO, CSKI or ONP.
Here is Inter-credit’s report on Xushui Dongfang, as well as the Chinese and English translation of the information received from the Xushui AIC office:
The last year in which Xushui Dongfang reported financial results was 2007. In 2007, ONP claims to have purchased $15.9 million in product from Xushui Dongfang (at the then prevailing exchange rate); however, Xushui Dongfang only reported approximately $200,000 in revenue in 2007 according to AIC reports.
Equally as important, Xushui Dongfang’s majority shareholder is none other than ONP’s Chairman and CEO. Liu Zhenyong owns 70% of Xushui Dongfang, while Li Jianjun owns 30%. Zhenyong has contributed approximately $500,000 (RMB 3.5m) of capital to Dongfang, while Jianjun has contributed approximately $220,000 (RMB 1.5m).
Naturally, ONP made no disclosure in its SEC filings that there were any related parties involved in the purchases from its largest supplier. This is likely a violation of SEC regulations.
It’s also an obvious sign of fraud. Xushui Dongfang was likely used to generate fake purchase invoices. By owning Xushui Dongfang, it is likely easier for ONP to generate fake invoices to show the auditors. Because ONP never disclosed the common shareholder, it is unlikely that ONP’s auditors looked into Xushui Dongfang. Thus, it seems that Xushui Dongfang was a vehicle to make ONP appear much larger than it is.
This revelation was first made on July 22, 2010 in the Chinese media when the 21st Century Business Herald (which is considered to be the “Wall Street Journal of China”) published an article on the allegations made by Muddy Waters, LLC. The article was the lead story for the entire newspaper that day – to see a PDF of the newspaper with the article, click here (it’s the article with the headline that contains “AMEX” and “ONP” throughout the text). The article quoted a local tax bureau official as saying that Xushui Dongfang is “just like a shell company.”
Click here for a full translation of the 21st Century Business Herald Article.
And here is the excerpt that discusses Xushui Dongfang:
In the upstream chain, this reporter discovered that a company named “Xushui County Dongfang Trading Co. Ltd” (henceforth termed Dongfang Trading Co. Ltd), according to ONP’s financial report, this company, with a (Chinese) name similar to the Company’s, has been ONP’s largest raw materials supplier since 2006.
In the three years from 2007 through 2009, this company’s supplier share is at levels of 53%, 50% and 37%, respectively.
Information shows that this company was established in 2001, registered at Xushui County AIC, and its main business is waste material collection. In the application information provided in the early stages of start-up, the company registration address contained five houses located in “Xushui County Nan He Shou Ying Village West”, and it also comes with lease contracts signed with the village committee.
This company’s initial registered capital was 500,000 yuan ($60,500 at the time), with two shareholders. The first shareholder was Liu Zhen Yong, the second was Li Chen. Li Chen once was a Director of ONP but resigned from the post in 2009. In ONP’s published documents, his drawn salary from ONP was US$4,826 in 2008 and US$4,093 in 2009. Li Chen now holds 201,164 ONP shares, which is 1.1% of shares offered.
Not long after Dongfang Trading Co. Ltd was registered, the legal representation was transferred from Li Chen to a man named Li Jian Jun and equity rose to 500,000 yuan. From what this reporter understands, Li Jian Jun is a native of Xushui. Also, Dongfang Trading Co. Ltd and the HBOP factory address are in the same place in Nan He Shou Ying Village.
“Dongfang Trading Co. Ltd in the most recent two years almost doesn’t have any revenue,” the aforementioned tax bureau insider informed me, “It’s just like a shell company.”
July Share Purchases
That’s not all.
Xushui Dongfang also somehow owned 4.4% of ONP’s shares prior to June 2009. We have no idea how it received those shares because there is no disclosure relating to it in the SEC filings prior to its sale of shares.
Click here for the 8K from June 30, 2009. Here is the first paragraph (bold added for emphasis):
“On June 25, 2009 (the “Closing Date”), Orient Paper, Inc., a Nevada corporation (the “Company” or “Orient Paper”), consummated a Purchase and Sale Agreement with Xushui District Dongfang Trading Limited Company (“Xushui Dongfang”), Barron Partners, LP, Fernando Liu and Golden1177 LP (Barron Partners, LP, Fernando Liu and Golden1177 LP collectively, the “Purchasers”). Under the terms of the agreement, Xushui Dongfang agreed to sell to the Purchasers an aggregate of 2,000,000 shares of the Company’s common stock at $.375 per share, for an aggregate purchase price of $750,000. To facilitate payment and receipt of the purchase price, the Company agreed to pay or cause to be paid $500,000 or the Renminbi (Chinese currency) equivalent to Xushui Dongfang, a company organized under the laws of the People’s Republic of China (the “PRC”). In return, $500,000 of the purchase price would be held in escrow for the benefit of the Company and used to pay the Company’s current and past-due legal fees, investor relations expenses, and auditing fees of a Big 10 accounting firm to be appointed by the Company.”
What? Why did ONP’s largest supplier own 2,000,000 shares of Orient Paper, or about 4.4% of Orient Paper’s share count?
In no previous SEC filing had Orient Paper disclosed the sale or contribution of shares to its largest supplier! Xushui Dongfang was unlikely to have bought the shares on the open market, given that this normally requires regulatory approvals. Foreign equity holdings by PRC nationals and entities require approval by the State Administration of Foreign Exchange (“SAFE”).
But this is beside the point. The question remains: Why does ONP’s largest supplier feature the following?
- It had no revenue in 2008 and 2009, and only $200k of revenue in 2007
- It Is 70% owned by the CEO of ONP.
- It owned 2m shares of ONP prior to July 2009
- Why wasn’t the 70% ownership disclosed in SEC filings? The purchase of products from Xushui Dongfang (keep in mind that Xushui Dongfang comprised 30% to 50% of ONP’s cost of goods sold from 2007 to 2009) was certainly a related party transaction by ONP, and a particularly dubious one at that.
The answer to these questions, in my opinion, is that Xushui Dongfang is a shell company with no underlying business that was used as part of CEO Zhenyong Liu’s efforts to falsify Orient Paper’s SEC financial statements. It likely also aided his efforts to fabricate audit-related supporting documents (ie. invoices) to provide to its auditor.
Last week, Orient Paper announced it would retain Loeb & Loeb to conduct an independent investigation into the issues raised by Muddy Waters LLC.
While I welcome the third-party investigation, Loeb & Loeb is not the right firm for the job. I don’t intend to discredit Loeb & Loeb’s credentials. But given their active involvement in the Chinese Reverse Takeover (RTO) space, they are neither independent nor objective when it comes to whether a Chinese RTO is defrauding investors. Rather, they are firmly entrenched in the “club” of service providers that earn substantial fees from Chinese companies that have listed publicly in the United States through reverse takeovers of U.S. shell companies. A service provider such as Loeb & Loeb is financially incentivized to conclude that Orient Paper is not making up its numbers. Failing confidence in Chinese RTOs could lead to dramatically reduced revenue for the firm’s Chinese securities practice.
I’m not alleging any present or future wrongdoing on the part of Loeb & Loeb. I’m merely saying that Loeb & Loeb is not a genuinely independent party; they are not the appropriate law firm to perform a third party investigation into whether Orient Paper is falsifying its financial statements; and I and other critics are unlikely to be satisfied with an investigation led by Loeb & Loeb that exempts ONP from wrongdoing.
If Orient Paper is serious about having a third party investigate critics’ claims, they should hire a law firm that is not actively involved in the Chinese RTO space, and can act as a more objective investigator. I provide dozens of potential law firms at the bottom of this article.
Loeb & Loeb’s Active Involvement in Chinese RTOs
Loeb & Loeb is one of the leading law firms in providing legal counsel to Chinese companies that undergo RTOs, or merge with SPACs, to become public in the United States. They are also one of the top firms that provide legal counsel to the investment banks and PIPE investors who provide banking services or capital to these companies.
As they write in their website, “In 2009, Loeb & Loeb LLP’s Corporate Securities practice, notable for taking many of the first private Chinese companies public on U.S. stock exchanges, completed 33 major transactions totaling approximately $2.1 billion in 2009”. For press releases from Loeb & Loeb discussing their strength in Chinese RTOs, see here and here.
Loeb & Loeb is a sponsor of many conferences that focus on Chinese RTOs. They sponsored CCG’s China Rising Conference this year and last year. They are sponsoring the Roth China Conference this year, and sponsored the 2009 and 2008 Roth conferences as well. They sponsored The Dealflow Reverse Merger 2010 Conference in June.
The lead partner of the China practice, Mitch Nussbaum, is a regular on the China RTO circuit. He speaks on panels regularly with other key service providers of Chinese RTOs – see here, here and here. In this link, for instance, Nussbaum speaks at a 2:15pm panel sponsored by Crocker Coulson, ONP’s investor relations representative. Two hours earlier, ONP board member Drew Bernstein gave his own speech at the event.
It’s difficult to imagine a scenario where Loeb & Loeb turns around and accuses ONP of fraud, when Bernstein has called the allegations “categorically false and without merit” and Coulson has been coordinating ONP’s public responses to the charges of fraud.
Nor has Loeb been able to sidestep some of the controversies among Chinese RTOs. For the September equity offering for China Natural Gas, which was alleged to be a fraud by the blog “Worthless Pennies”, Loeb & Loeb was legal counsel to the underwriters. For the April equity offering for Lihua International, which has been flagged by Chimin Sang and Steve Chapski as potentially falsifying its financial statements, Loeb & Loeb was legal adviser to the company.
A Genuinely Independent Third Party should Be Picked Instead
I don’t think Loeb & Loeb should be chosen to investigate the serious allegations of fraud that have been charged against Orient Paper. A law firm with a Chinese office that is not actively involved with Chinese RTOs should be selected to conduct the investigation. Loeb & Loeb is not sufficiently independent. They generate substantial fees from Chinese companies that have undertaken RTOs to become publicly listed in the United States. They have a vested financial interest in seeing that Chinese RTOs are cleared of wrongdoing, generally speaking.
Baker & McKenzie
Clifford Chance LLP
Freshfields Bruckhaus Deringer
O’Melveny & Myers LLP
Shearman & Sterling LLP
Skadden, Arps, Slate, Meagher & Flom LLP
Allen & Overy LLP
Gide Loyrette Nouel A.A.R.P.I.
Herbert Smith LLP
Paul, Hastings, Janofsky & Walker LLP
Paul, Weiss, Rifkind, Wharton & Garrison LLP
Sidley Austin LLP
Simpson Thacher & Bartlett LLP
Sullivan & Cromwell LLP
Weil, Gotshal & Manges
Davis Polk & Wardwell
Dechert LLP (Beijing Representative Office)
Latham & Watkins LLP
Mallesons Stephen Jaques
Morrison & Foerster
Some of these firms, like DLA Piper, also play active roles in Chinese RTOs. But many in this list do not. ONP should select a law firm from this list that is not regularly involved in Chinese RTOs to conduct the investigation.
Disclosure: short ONP
Over the past few weeks, there has been discussion around a wide variety of allegations surrounding Orient Paper. The original Muddy Waters research report was 30 pages long, and they have issued several subsequent pieces of commentary. The company, in turn, has submitted several responses to the Muddy Waters allegations and has hosted a conference call.
There has been a lot of information and keeping track of it has been difficult. The purpose of this article is to highlight the several most compelling pieces of evidence that Orient Paper is a fraud.
As I’ve written in previous articles and blog posts, I believe that Orient Paper is falsifying its financial statements. There is substantial evidence for that, but I’ll focus here on 4 of the most convincing points to me. I’ll exclude certain disputed items like the AIC filings, where the company and Muddy Waters are in disagreement over whose copies are the correct documents.
1. Top 10 Customers
Much of Muddy Waters’ research has focused on direct due diligence that they’ve done on the company’s premises in China. Yet some of the most compelling pieces of evidence that Orient Paper is a fraud comes from incriminating evidence that it has published in its own SEC filings.
One of the best examples of that is in its 2008 and 2009 Top 10 Customers. Here are the two lists, from the SEC filings:
Muddy Waters puts it well:
“ONP’s 2009 top 10 customer list shows that it replaced 80% of the 2008 customers. The strange item is that the minimum level needed to enter the top 10 lists stayed constant at around $2.1 million. In other words, one could reasonably expect that almost all of the companies who did $2.1 million or more in business with ONP in 2008 should do at least as much in 2009. But this was not the case, as eight of the 2008 top 10 customers disappeared. Yet, ONP did not lose any revenue. It grew by 56.5%.
The paper manufacturing business in China is highly competitive. First you have to make the product. Then you then have to sell it. “If you make it, they will come” is no less realistic in China than in the United States. Particularly when the product is highly commoditized – such as paper is.
For a company to lose most of its top 10 customers and not have sales decline requires significant effort by all throughout the organization. To lost most of its top 10 customers and still grow the company at 56.5% is a remote possibility.”
And here is the company’s response:
“Muddy Waters also accuses Orient Paper of churning and burning its top 10 customers and misrepresenting its sales volumes to these customers. Those who have followed Orient Paper and studied the Company’s 10-K and other financial disclosures carefully over the past two years understand the following Company developments. Almost all of the Company’s top 10 customers are printing companies that buy printing/writing paper. The Company traditionally has a large number of small packaging plants buying its corrugating medium paper and very few, if any, of them make to the top 10 list. Within the group of printing/writing paper customers, significant changes in Orient Paper’s product portfolio occurred in 2008 and 2009. In 2008, HBOP started producing writing paper, thanks to the 1760# Fourdrinier Multi-Cylinder Production Line that was placed into service in March. In the Fall of 2009, because of the skyrocketing cost of imported wood pulp, Orient Paper stopped producing high-grade offset printing paper, which requires virgin pulp (rather than recycled paper) as a major raw material. In an effort to push for a lower-priced medium grade offset printing paper, the Company converted the writing paper production line in September 2009 to concentrate on producing more medium grade offset printing paper. As a result of these shifts in product offerings, the top 10 customer lists of 2008 and 2009 had very different compositions. Orient Paper had more white paper sales sold to those customers who switched to the Company’s mainstream medium grade offset printing paper.”
Orient Paper is a paper manufacturer. It operates a commodity business, and Orient Paper doesn’t have any special technology over and above its competitors. As well, while China is a faster growing economy than the United States, it is nevertheless competitive, and paper demand isn’t growing at 50% a year. The Company can’t simply change its product mix, replace 80% of its Top 10 customers and nevertheless grow revenue by more than 50%.
2. The Video
The visual evidence presented by Muddy Waters makes a compelling case that Orient Paper is falsifying its financial statements. While the new digital photo lines provided in subsequent pictures may appear somewhat professional, the main legacy production lines shown in Rick Pearson’s TheStreet.com video demonstrate a business far smaller than what the SEC filings indicate.
To best examine the visual evidence, it’s best to look at Competitors’ plants, and then compare those plants with the Muddy Waters facilities:
– See pages 14-17 of the Muddy Waters report available Here
Based on the videos and pictures, Orient Paper’s main plant is of materially lower quality than that of its competitors. The machines are old, run-down and appear incapable of producing high quality paper. As well, the videos show substantial steam generated in the facility, which conflicts with the company’s claims of producing high quality paper. Once paper is exposed to water, it becomes no longer flat, and cannot be billed as high quality.
3. Muddy Waters’ Claims that the Company’s Top 10 Customers Could Not Have Purchased As Much Product As ONP Claims They Have
In its report, Muddy Waters tried to contact each of the Top 10 customers that Orient Paper lists in its 10K. Five were contacted or otherwise verified, and Muddy Waters lists their phone numbers in its report. Any outside third parties can independently contact them, given that Muddy Waters makes their contact information readily available.
Click here for a table where Muddy Waters documents its diligence on its Top 10 customers.
Based on its findings, Muddy Waters concluded that Orient Paper has fabricated its sales figures to those customers. Five of the customers were too small to be able to buy the volume of paper that Orient Paper claims it purchased from them. For instance, at a company to which Orient Paper alleges selling $3.4m of product, the cleaning woman answered the phone during business hours and was the only employee working. She said that there were only a few employees at the business and all were part-time. Four of the companies within Orient Paper’s Top 10 could not be found, had no website or had no one answering the phones during business hours.
Only 1 of their Top 10 customers, Boading Huatai Printing Co. Ltd, was large enough to theoretically purchase the amount of paper from Orient Paper that ONP claimed.
Here is Orient Paper’s response:
“Muddy Waters has stated that it believes that “all but one of Orient Paper’s top 10 2009 customers are too small (if they even exist) to buy the amount of product that ONP claims they do.” This accusation is false and Orient Paper believes that Muddy Waters’ methodology is inappropriate for establishing substantiation in a fraud case. Business practices in China are different from those in the United States, where many businesses are willing to reply to sensitive trade account confirmation given a properly drafted written confirmation request from the trading partner and the confirmation performed by legitimate third parties, such as auditors. Unsolicited, improperly phrased enquiries are usually met with misleading or inaccurate results. In addition, even in the U.S., auditors who perform written or telephone confirmations must perform additional alternative procedures to get in contact with the relevant parties to be confirmed before any conclusion can be reasonably made. While Muddy Waters claims that they were unable to verify the existence of some of Orient Paper’s customers and made no effort to ask Orient Paper for assistance; many institutional investors; investment banks, such as Roth Capital Partners; and the Company’s auditor, BDO Limited, have all performed due diligence on Orient Paper’s large customers and have confirmed and communicated with their selected sample companies during the last twelve months. Among these parties, Muddy Waters is the only one that claims Orient Paper is providing “false information” about its top 10 customers.”
Orient Paper’s response is basically twofold.
First, it claims that Orient Paper’s customers would lie to Muddy Waters about their size because that is standard procedure in China. I doubt that’s the case.
Second, it claims that a variety of third parties have done the necessary due diligence on Orient Papers’ customers. As I’ve previously written, BDO Limited has demonstrated an inability to do proper due diligence in the past, given that it was the auditor of China Expert Technology, which was a complete hoax. I would not rely on their work. The investment banks working with Orient Paper are third-tier firms that have embraced Chinese RTO smallcaps mainly because the sector generates them a tremendous amount of fees, not because the companies whose offerings they underwrite are real. As for the institutional investors in ONP, I will not make an unwarranted generalization because a variety of funds invest in Chinese RTO smallcaps, and they do so for different reasons and according to different investment theses. But some of the funds that do proper on-the-ground business diligence on Chinese RTO smallcaps like Orient Paper are indeed savvy and have generated outstanding returns from the sector. But their goal isn’t necessarily to avoid frauds.
4. Further Inconsistencies within the SEC filings
In addition to the unlikely 80% turnover within the Top 10 Customers, there are further inconsistencies within Orient Paper’s SEC filings.
First, Orient Paper’s alleged inventory turns are extraordinarily high for a paper company, and when compared with competitors. On page 25 of the Muddy Waters report, we see a comparison of ONP’s inventory turns when compared to competitors. ONP’s 17x 2009 inventory turns is high for any manufacturing business, let alone a paper company in an industry where its listed competitors’ inventory turns are 4.3x, 5.6x, 6.4x and 7.7x.
Second, as an additional blogger wrote in a post last week, if the company grew revenues by 57% and earnings by 45% in 2009, why was its employee count 600 in both years? In fact, an old video on the company’s website (the video doesn’t download properly in many browsers) says that the company had 863 employees. If that’s true, how has revenue grown from $40m in 2007 to $102m in 2009 while employees have actually shrunk 30%?
That blogger highlighted further inconsistencies. How did the company have a 37-member R&D department that only cost them $30,130 in 2008? How do you more than triple sales in 3 years while spending only a collective $655 (six hundred and fifty five dollars) on advertising and promotion in those 2 years?
There is substantial additional evidence that Orient Paper is falsifying its financial statements that I have not touched upon.
The company and Muddy Waters are disputing whether the SAIC financial statements match the SEC financial statements. I also have acquired SAIC documents with the personal seal of ONP chairman Zhengyong Liu, and may post them at a future date. Either mine and Muddy Waters’ documents are false, or the ones recently submitted to the Hebei AIC are falsified.
As well, I have not touched on whether ONP could theoretically purchase a production line for $27m, when Muddy Waters has provided evidence that the most expensive highest capacity 5.6m corrugating medium production line would cost less than $10m.
I have not touched on how the recycled scrap inventory shown in the video and various additional Muddy Waters’ pictures could be worth the amount that ONP values them at in its financial statements.
I have not touched on how ONP can generate the same gross margin as its competitors despite its outdated equipment and far lower economies of scale.
But even without touching on the additional evidence that has been disclosed over the past few weeks, the points highlighted in this article provide compelling evidence that Orient Paper is falsifying its financial statements.
Disclosure: I am short shares of ONP.