Harbin Electric: Loan Fraud and the Docs to Prove It

,

If you haven’t yet figured out that there is rampant fraud amongst many Chinese stocks (mainly RTO’s), you obviously live in a “financial cave”.  The story has become so mainstream in China and the United States that it is actually featured in this week’s Time Magazine.

http://curiouscapitalist.blogs.time.com/2011/06/14/chinas-latest-export-stock-fraud/

Citron Research, the source that exposed Longtop Financial (NYSE:LFT) and the first to write on China MediaExpress (NASDAQ:CCME), now exposes the fraud behind Harbin Electric (NASDAQ:HRBN).

   Background

In its last reports on Harbin Electric, Citron has shown that:

  1. the company is potentially lying on their SEC filings, as their SAIC filings document higher liabilities and significantly lower profits than they report to the SEC.   HRBN 2011_05_25
  1. in the second report we described how preposterous the proposed buyout financing actually ishttp://citronresearch.com/index.php/2011/06/09/what-the-bank-says/

   Good Night

It is Citron’s opinion that it is now time for the SEC to halt this security.

The future of Harbin’s stock price is currently propped on the crutch of a purported $24 buyout offer from its Chairman / CEO, which Citron believes is a sham.  With time stretching seven months since first proposed, we still have no binding, official takeover bid filed in an 8-K, just a few press releases, and now the boilerplate document of a purported supporting loan that seems half baked, as discussed in the last report.  These filings are always tagged with the company disclaimer:

“There can be no assurance that any definitive agreement will be executed with respect to this proposal or that this or any other transaction will be approved or consummated.”

 

Yet, through reliable sources Citron has just obtained documentation that

 The Harbin Chairman/CEO Has A History of Fraudulent Loan Guarantee Documents! 

 

Citron Research has obtained a settlement agreement reached between Harbin CEO Tianfu Yang and China Construction Import Export Corp.  In 2004, Mr. Yang along with his brother, fellow Harbin board member Harbin Vice President, (corrected per   http://www.harbinelectric.com/management.html   ) Tianli Yang, fraudulently obtained the official seal of China Construction Import Export Corp. (CCIE) to guarantee a loan for Tinafu Yang’s company.

In the settlement agreement with CCIE, Tianfu Yang admitted guilt in order to get CCIE to agree to drop criminal proceedings in the matter. 

(Citron has gone to great length to verify the authenticity of these documents, and will publish any challenge or correction that can reliably demonstrate that they are not authentic.)  Here they are for your viewing pleasure. 

Harbin Chairman Civil Settlement

Harbin Chairman Civil Settlement (translated…)  ( … PDF format )

Signature of Tianfu Yang on SAIC doc that matches signature of settlement agreement

This link shows the signer from China Construction is the official legal representative of CCIE:

http://www.ypofchina.com/ep/detail3.aspx?id=335628

Citron recalls vividly how vociferously Longtop officials decried as “unfair” and “irrelevant” when Citron’s published references to a lawsuit, documenting prior misconduct of the Chairman of Longtop.  Similarly, this document goes directly to management’s credibility and trustworthiness.  And since Harbin’s buyout valuation rests solely on the credibility of the Chairman and his offer, this should be the end of the road for the Harbin charade.

Citron wonders how this disturbing legal baggage will reflect on Chairman Yang creditworthiness to his bank or any other bank evaluating this deal.

Citron asks:  Why all this effort to keep people’s attention off the underlying business?

 

Citron believes that, absent this sham buyout offer, shareholders are holding a company that is a potential 0….yes a 0, as in donut.  We believe the company has undisclosed liabilities, as we have seen with companies such as Longtop Financial.  Also, even with its limited disclosures, Harbin as a company is far too dependent on lending to support a business with heavy capex burdens, slimming margins, and decreasing revenue.

 

So now we are supposed to believe that a company, run by a gentleman with a disturbing history of loan misrepresentation, is actually obtaining a signature loan for $400 million, to buy out the publicly held shares at a 40% premium?  And this transaction is going ahead in a market environment so rife with skepticism about Chinese stocks and skittish about economic concerns that no Chinese company has sold a bond in the high yield market since May 26? 

http://www.reuters.com/article/2011/06/16/us-markets-stocks-adrs-idUSTRE75E6BF20110616

And this transaction is predicated on the numbers filed by the most notorious discredited auditor in the China space? 

And who is the purported lender bank?  China Development Bank – a bank who has become too familiar with China stock fraud.  They are the lender for the recently decimated Sino-Forest:

http://www.reuters.com/article/2011/03/23/idUS232730+23-Mar-2011+PRN20110323

Ask yourself if a little professional skepticism isn't warranted here. 

   The curious case of Harbin’s 2010 bank loan

Citron believes that in reality Harbin is a money pit with hidden liabilities that are consuming its cash. 

Only a month after the original “takeover announcement”, over six months ago, Harbin’s Chairman executed a $50 million dollar bank loan for the company, collateralized by his personal stock holdings, worth more than double the loan amount at the time. 

We ask one simple question.  Why?  If you really have $55 million in the bank, earning less than 1% interest, would you borrow $50 million at 8% interest if you don’t desperately need the money?

Clearly its an expensive transaction – the company is paying $1.9 million interest quarterly to service the loan (at 8%), while earning less than $200,000 interest on its free cash balances.  And according to more recent filings, they've never used the money.  It supposedly just sits in their bank account.  (Sorry to be so damn obvious.)

Regardless of what the reason is, it bodes poorly for a company that expects to get financing to go private for a 70% premium to market. 

 

  Not Only Does Citron Not Believe Harbin…but neither does Wall Street.

 

It is not only Citron that doesn’t believe the takeover but obviously Wall Street doesn’t either. 

Here is a typical Wall Street risk/arb spreadsheet, showing the difference between the current market price and the proposed takeover price for dozens of deals in process. 

https://spreadsheets.google.com/a/citronresearch.com/pub?hl=en&hl=en&key=0AkR3if0ljyredEZ4N2RFSzVzQVF3QW5iWkpmSjd4cXc&single=true&gid=0&output=html

 

Note that these stocks all trade within a few percent of the proposed  takeover price.  Yet Harbin has never traded higher than the range of 50% to 70% of its takeover price. 

 

To illustrate a final point we’ve made previously about the China space, there’s a tremendous vulnerability for US investors who assume  “a stock is a stock is a stock” if it trades on the Nasdaq or the NYSE. 

Investors are going to face “mission impossible” when trying to avail themselves of the customary legal protections they assume are available to shareholders, for companies domiciled in China.  Here’s a news story about one of the early civil shareholder suits, which can’t even get papers served on defendants domiciled in China.  Buyer beware!

http://newsandinsight.thomsonreuters.com/New_York/News/2011/06_-_June/Plaintiffs_hit_first_roadblock_in_China_fraud_case/

 

   Conclusion

 

For those of you who do not read Citron, yesterday another China coverage stock was halted:  China-Biotics  (NASDAQ:CHBT) …. How long until Harbin faces the same fate?

Citron has hundreds of pages of SAIC documents – the in-country filings of Harbin’s subsidiaries over the years.  These documents do not even remotely resemble the company that Harbin portrays to US investors in its SEC filings. 

But needless to say, we think no bank in China or anywhere else would dream of relying on Harbin’s SEC filings, generated by a disgraced auditor, as a basis providing hundreds of millions of dollars in high-risk financing to fund a huge premium to pay off US investors.

Citron sees no reason to drown readers in paperwork to prove a fraud that is too obvious.  If need be, we will continue to publish information on a timely basis that we find is relevant to investors.

 

Cautious investing to all.  

What the Bank Says vs What the Bank Does

,

  ** Post-publication afterthought:

 

To demonstrate just how stupid this is, if this $400 million dollar non-collateralized, personally guaranteed signature loan is to be believed, it is Citron's belief that it would be the largest single unsecured signature loan ever issued by any bank.

Citron challenges anyone to document a larger loan by any bank in any country in the world on similar terms.

 

   It's official!  Well, sort of ….

Today Harbin Electric (NASDAQ:HRBN) files its latest document in the unfolding soap opera of whether it can complete its private takeover transaction announced last October.

It includes a sizable boilerplate document from China Development Bank purporting to document the extension of a $400 million credit facility that allegedly provides the financing so the Chairman Tianfu Yang can take HRBN private at $24 a share.

While the document appears really impressive, it says almost nothing about security for the transaction.  The entire structure of the loan depends on the personal guarantee of Chairman Tianfu Yang and Ms. Luo Qian. 

Now we know banks in China in the past have been loose with lending.  But a $400 million dollar loan based on a personal guarantee, when they wouldn’t lend more than $50 million (with a huge spiral pledge of stock to collateralize it)  just six months ago? 

We don't think so!  

In China, you can not get a $400 million dollar loan because you know someone.  But you can get a commitment letter for a $400 million dollar loan if you know someone.

   Nice and Simple

If this deal is so simple the Chairman can just finance it with a simple signature loan, why didn't he do it last fall when it was announced?  He didn't need Barings, he didn't need Morgan Stanley, he didn't need Goldman Sachs, and he didn't need Bain.  He didn't need 7 months of deliberations by a "Special Committee".  It would be done by now, and the stockholders would have been delighted.

   Today’s Headlines in China

This week, China’s leading business magazine, Caijing, publishes its cover story on China stock frauds.

 http://translate.googleusercontent.com/translate_c?hl=en&ie=UTF8&prev=_t&rurl=translate.google.com&sl=auto&tl=en&u=http://magazine.caijing.com.cn/2011/cj292/index.html&usg=ALkJrhgYWFySGTOfRWE6j9qf7xfDGZ1JAw

 In this article they quote me, Andrew Left, editor or Citron Research, referencing my work uncovering the many frauds among Chinese companies with US stock listings.  You might not be aware that I have been writing on stock fraud for 10 years.  I uncovered my first China stock fraud over 4 years ago (XFML).  Since then I have covered 11 others.  All but 1 are down an average of 80% from the time of first publication.  One is halted, two have been delisted, and one has seen criminal indictment against management — with many more to come, we suspect.

 

I am just getting warmed up.  Citron is now asking the investing public to think out the story of HRBN for yourself.  See if you come to the same conclusions as regulators, investors, grand juries, and media on the prior opinions of Citron Research.

It is Citron’s opinion that  Harbin Electric is deceiving the public.  If the stock does not get halted for its numerous SEC violations, we believe it is at best a $5 stock.

   THIS IS NOT FINANCING…THIS IS A CHARADE

THIS IS MISLEADING TO INVESTORS AND IS AN ACT OF A DESPERATE COMPANY.  Look at this simple timeline:

 

Date

Event

Oct 12, 2010

HRBN announces a $24/ share buyout by the CEO and Baring Private Equity — with no 8-K filed and no terms attached.

Goldman Sachs Private Equity Asia Group announced as financial advisor to the acquisition vehicle.

Nov 22, 2010

The company borrows $50 million from China Development Bank.  In an odd move, the bank does not securitize the loan with company assets, but rather the Chairman’s stock – 7 million shares — $130 million in stock – for a $50 million dollar loan

Nov 23, 2010

Barings backs out of the proposed management buyout.

 Goldman Sachs’ Private Equity Asia Group role revised to “advisor to Chairman Yang”.

Apr 15, 2011

Phone call between Chairman and William Blair analyst – for which an 8-K was subsequently filed – because Chairman stated he was making a bid for the company the following Monday

No such bid was ever made.

May 10, 2011

Company files 10-Q for Q1 2011, reporting drastically compressed margins and lowered earnings, and reducing guidance.

May 12, 2011

SEC 13D filed, stating the HRBN board received a formal proposal – yet no 8-K was ever filed with the proposal terms.  It is in this 13D that we read about the aforementioned alleged financing, with no documentation of terms of the agreement.

 

And now today, we get a SC13D, and all it says is that the Chairman proposes to finance this transaction with …… drum roll…..a signature loan! 

Now it is time for everyone to think….simple common sense…the same common sense that has guided Citron's reporting to be one of the premier destinations for finding information about deceptive China stocks.

 

At first we thought the financing was coming from Baring, but it took them less than a month to back away.  The company then said they are working with Goldman Sachs, who undoubtedly has access to capital at the snap of a finger for a legitimate LBO, but nothing happens there.  And here is what we hang our hat on.

 

The alleged financing is now a commitment letter for $400 million from China Development Bank, the same bank which lent Chairman Yang $50 millon in November.  Yet, this existing loan was not made with the company, rather its proceeds purportedly go to Chairman Yang’s company, Tech Full, based in the Cayman Islands and recently domiciled in Nevada.  It is no more than a holding company that holds stock. 

And now this new loan, 8 times the size,  is supposedly based only on his personal guarantee plus Ms. Luo Qian?

 

So let us see what has changed between the first financing and the second (alleged) with the SAME BANK.

 

  • China stock fraud has moved from the blogosphere to front page of WSJ and mainstream China and Hong Kong press.
  • Over 20 Chinese RTO’s have been halted and/or delisted and only a few have reopened.  Therefore anyone with loans outstanding collateralized by shares in any of these stocks is up the Yangtze River without a paddle.
  • HRBN’s auditor has been disbanded after being charged with fraud by the SEC.
  • The chairman of HRBN’s audit committee (and also the chairman of the “Special Committee” overseeing this deal) has been sued for a fraudulent transfer by the bankruptcy trustee of his former employer.
  • The company has reported lower earnings with negative cash flow.
  • It has come to the attention of the investing world that HRBN’s SAIC documents show substantial liabilities never reported by its auditors in its SEC filings.
  • Baring Private Equity walked away from financing the deal
  • The mighty Goldman Sachs was not able to find financing for the deal

So the company is back to square one – with the bank who lent them $50 million in November. 

Now let’s assume for a moment that China Development Bank does not have internet and does not know how to read the news in English or Chinese  and now has no idea of how sentiment towards Chinese stocks has changed in the intervening months.  Let’s say they decide to stick to the same terms as the original deal…

On the same ratio of his currently outstanding $50 million loan, Chairman Yang would be responsible for posting over $1 billion in liquid marketable collateral to borrow $400 million.  So unless he owns an NFL team or the Mona Lisa ….how in the world would China Development lend $400 million to a Cayman Island Company with no assets or collateral? 

 

Mind you, that is under the best of conditions.

 

In most LBO’s you cannot use stock as collateral.  More importantly, the bank has already made it clear that they have no interest in the assets of the company as collateral.

 

The bank is not in the business of making bad loans…look at the hard-line deal they cut with HRBN last November under circumstances far better than now.  If you believe that the bank will lend $400 million to a Cayman Islands company to buy another company that they wouldn’t fund for $50 million in better times, then I have a large wall to sell you North of Beijing. 

   What Keeps a Banker Up at Night?

 There is an old adage: when you owe the bank $1 million, you lose sleep.  But when you owe the bank $50 million, then the banker loses sleep.  With the amount of Chinese RTO’s that have just ceased trading altogether, no amount of collateral of shares and Ambien can make this banker sleep at night.   If this stock gets halted or breaks below a certain price on a hard core investigation … the bank could wipe out its profits on billions of dollars of good loans with one $50 million write-off.

By the way, as a funny footnote, China Development bank was actually a client of Longtop Financial, which is still halted. 

http://ir.longtop.com/index.php/content/content_print/456.html

What makes this whole sideshow interesting is it seems that the company is doing everything in its power to keep the stock price up…in the initial loan agreement the bank made it clear that if they believed their $50 million loan was in peril, they would sell stock and keep selling even if it means they need more than the pledged 7 million shares.  It is the belief of Citron that HRBN is a struggling company doing whatever they have to do in order to keep that share price high enough.  Like the game of musical chairs, when the music stops will the bank have a seat?

 

  The Risks of Regulatory Attention

Further, Citron suggests the SEC and the NASD are already having a hard look at the practice of announcing "private buyout" deals that lack material basis.  Numerous currently halted China stocks are the subject of bogus takeover announcements right now. 

   Conclusion:

Don’t forget that after Chairman Yang gives you his wink-wink nod-nod at the social clubs throughout Harbin or on phone calls with analysts — use your common sense.  If you do not, you might end up on the wrong side of the trade like the many other Citron detractors of the past.

 

Cautious investing to all.

 

“That’s My Story and I’m Stickin’ To It”

,

Citron issues further commentary on Harbin Electric (NASDAQ:HRBN)

At the risk of overstating the obvious, Chinese stocks have fallen out of favor fast with US Investors.  And for good reason. 

  What's New?

A lot of things have changed since Harbin’s elusive $24 per share buyout offer was floated eight months ago.  Since we published on HRBN last week, yet another high profile China “blue chip” – Sino-Forest (TRE in Canada, SNOFF in the US) has been decimated by allegations of fraud from Muddy Waters Research.  The stories of Chinese frauds have gone from the back pages of weblogs to front-page news in business journals worldwide.

The SEC has also recently stated its intention to increase scrutiny of US-based auditors within its inquiry into Chinese reverse-merger companies.

http://online.wsj.com/article/SB10001424052702304563104576361422372121248.html?mod=googlenews_wsj

One thing for sure hasn’t changed:  Harbin’s auditor still is listed as Frazer Frost, a firm which no longer exists.  Frazer and Frost have dissolved their partnership; Frazer, who remains as Harbin’s auditor, also has RINO and CVVT to its credit, among other notorious stock failures in the China space.

 

And another thing hasn’t changed in the past eight months.  Harbin Electric still stands by a “phantom bid” by its Chairman to take the company private.  Even though there is no formal offer, no committed financing, and the company’s reported financial performance has eroded materially in that time, investors are sitting on the edge of their seats waiting for the approval of this gesture by a “special committee” formed by Harbin.  Citron expects the next press release from the company to be an “acceptance” of this buyout offer, or at the very least, a special meeting of this special committee.

 

Before we go into who is on this special committee, lets first address the absurdity of this eight-month wait at the hands of the “special committee”.  Why would it take three men a total of eight months to approve an informal offer to take the company private at a significant premium?  Heck, the US Congress took less time to bail out the entire banking system and the US automakers!

 

“The Company’s Board of Directors has formed a special committee of independent directors consisting of David Gatton, Boyd Plowman and Ching Chuen Chan (the "Special Committee") to consider this proposal.  The Special Committee intends to retain independent advisors, including an independent financial advisor, to assist it in its work. No decisions have been made by the Special Committee with respect to the Company's response to the proposal. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other transaction will be approved or consummated. A copy of the press release is filed herewith as Exhibit 99.1 to this current report on Form 8-K and is incorporated herein by reference.”

   Introducing “The Committee”

While Citron eagerly awaits the special news this special committee will be generating soon, we’d like to introduce the players to you now. 

   Introducing committee member #1:

The chairman of the special committee is a gentleman named Boyd Plowman.  Mr. Plowman is the former CFO of Fleetwood Enterprises and is the chairman of the HRBN audit committee as well.  Interestingly enough just two months ago, the trustee of his former employer, now in bankruptcy, sued him.

 

“Plaintiff alleges on information and belief that Defendant used or benefited from his senior position with the Debtors to cause or to influence the Debtors to use corporate assets to make Benefit Plan payments to himself and other insiders at a time when the Debtors were insolvent.”

Plowman_Complaint

Note: Citron does not believe this makes Mr. Plowman a bad person and we do not know the end result of the lawsuit.  It just shows that Mr. Plowman has no problem playing “loose with the rules”.

 

… and now, Member #2

 

The next member of the special committee is David Gatton.  The company has no problem publishing the many accolades of Mr. Gatton :

http://www.wikinvest.com/stock/Harbin_Electric_(HRBN)/David_Gatton_Board_Member_Chairman_Compensation_Committee

 

However, Citron notes that Mr. Gatton was also on the board of directors of Bodisen Biotech.  Bodison was one of the first and most notorious of the China reverse merger stock frauds, after being a battleground stock for some years.  Of course, the company blamed its eventual demise on short sellers.

 

http://geoinvesting.com/forums/yaf_postsm3635_BODISEN-CASE-ANALYSIS–COLLUSION-BETWEEN-STOCK-SHO.aspx

 

Bodisen was eventually delisted in March of 2007, but Mr. Gatton did not resign until February of 2008.

 

Again, this does not make Mr. Gatton guilty of any crime.  It just shows that he is not immune to aligning himself with unscrupulous companies whose strategy for “creating value for shareholders” is essentially doing battle with short sellers. 

   …and Member #3

The last person on the special committee is Ching Cheun Chan. Much like Mr. Gatton, the company details many accolades in Mr. Chan's career. 

http://www.harbinelectric.com/boardofdirectors.html

But we also see he was also a director of a broken penny stock in Singapore called Azeus Systems.

http://www.securities.com/Public/company-profile/SG/Azeus_Systems_Holdings_Ltd_en_1690368.html

Azeus now trades for .08 cents

http://finance.yahoo.com/q?s=A69.SI%2C+&ql=0

 

Ching Cheun Chan was also on the board of a dubious US penny stock named Rotoblock, which he just resigned from in February 2011.  That stock currently trades by appointment at $1. 

In 2008 it was promoted to a brief high of $10 per share. 

http://finance.yahoo.com/q;_ylt=Ao5wT.DeGQ0I.sIDHyLZEwfxVax_;_ylu=X3oDMTFjOXRqY2NlBHBvcwMxMgRzZWMDeWZpU3ltYm9sTG9va3VwUmVzdWx0cwRzbGsDcnRiY29i?s=RTBC.OB

He also has stints on advisory boards of ZAAP and ALTI, which trade for 50c and a $1, respectively. 

http://people.forbes.com/profile/chan-ching-chuen/39300

Again, this does not make Mr. Chan a bad person; it just seems to Citron that he is a name for hire who does not mind aligning himself with any public company regardless of their credibility.

   Conclusion

 

So as investors mull over this phantom bid, Citron believes it is important to note the pedigree of the three gentlemen who we believe will be at the epicenter of Harbin’s next PR. 

 

The fact that Harbin has delayed its response for so many months, while expecting investors to be keep paying to keep the stock price up, just takes us back to the good ole country sound “That’s  My Story and I’m Stickin’ To It”. 

 

( For those of you who have never heard it….you can read these lyrics here:

http://www.lyricsdomain.com/3/collin_raye/thats_my_story.html  )

Citron advises readers not to believe what the company says, only what it does.

That’s our story and we’re stickin’ to it. 

Cautious investing to all.

Harbin Electric: If the Bank thinks it worth $7.00, then Citron thinks it’s worth $7.00…..or less.

,

  Harbin Electric (NASDAQ:HRBN) Does their buyout story really make any sense?

 

 

 

Citron has received worldwide press exposure for its first-in-the-market commentary exposing China MediaExpress (CCME) and Longtop Financial (NYSE:LFT).  The driving force of our commentary has been and will continue to be simple common sense.  Whereas most analysts are busy listening to the company or blindly vouching for management’s statements, we reference a more profound source — the simple question, “Does this make any sense?”  So in keeping with the spirit of that question we present to you Harbin Electric.

On October 11, 2010 The Harbin board announced it received a “proposal of going private” from its Chairman Mr. Tianfu Yang.  Notice a proposal is not a buyout offer — it is just that — a proposal.  To Citron, this is like a “promise ring” exchanged between teenagers.  It is now eight months later and we still don’t have our engagement; shareholders just stare at their promise ring with hope. 

Citron asks…”Does this make any sense?”  Let us examine the deal.

When the proposal was announced in October…it was pre-RINO, pre-CCME, and pre-Longtop.  (These three notorious blowups have set the tone for finding fraud in China stocks over past 8 months).  Note to Harbin management:  “If you couldn’t secure the financing in October…than good luck trying now.”

  Listen to the Bank

 

One month after the CEO put the promise ring on the fingers of shareholders, he turns around and enters into a term loan facility with China Development Bank for $50 million.  Yet, the bank does not securitize this loan with the assets of the company or with its cash flow.  Rather, the bank collateralizes the loan with 7 million shares of Harbin stock pledged by the CEO … with provisions calling for him to pledge additional shares of stock if the price goes lower.  At the time of this transaction, he pledged stock worth $140 million USE collateral value for a $50 million loan.  What does the bank know that we don’t?

Well, if anything, this transaction created one powerful incentive for the CEO to keep his stock price higher.

   SEC vs SAIC

 

Those who believe SAIC filings do not make a difference are invited to skip this paragraph. 

The reason Citron believes SAIC filings are relevant in the case of HRBN, is that the sources of funds for Harbin’s proposed going-private transaction are money from within China — whether it be a partner or a bank.  Is it so far fetched to believe that possibly the banks in China rely on documents produced in China?   Citron has obtained copies of the HRBN SAIC docs from two different sources and they paint a completely different financial picture of the company than it presents in its SEC filings.  Below are the Chinese copies of the SAIC docs along with a spreadsheet summary of the numbers comparing them to SEC filings.

SAIC docs: 

Weihai Tech Full-0809

Shanghai Tech Full SAIC

Xi'an Tech Full SIAC

Harbin Tech Full annual inspection 08

Harbin Tech Full annual inspection 09

Spreadsheet compilation: 

HRBN 2011_05_25

The takeaway from Citron is that the SAIC filings reveal low profitability and undisclosed liabilities.   After the “Longtop fiasco” we understand that hidden liabilities are a larger and more real concern than ever.  The SAIC docs from Harbin and Shanghai Tech Full Electric reported consistent losses in both fiscal years 2009 and 2010. The Harbin subsidiary lost 1 million and 3 million USD in the two years respectively and the Shanghai subsidiary lost 2 million and 1.3 million in those two years.

  IS THIS WHAT THE BANK KNOWS??

 

A simple consolidation of HRBN’s four subsidiaries based on subsidiaries’ Chinese filings showed no more than $12 million USD of profits versus $80 million net income reported on its SEC filings in the year 2010. Additionally, it appears HRBN grossly understated its liabilities on its SEC filings when compared with a consolidated version including all of its subsidiaries. HRBN showed a total liability of $180 million on its SEC filings while consolidation of its subsidiaries yield a total liability of $244 million; similarly in year 2010, its SEC liability was $151 million versus a consolidated $276 million shown on the SAIC docs.  

  What a buyout should look like … if it was real.

Nine months ago when this “proposal” was released management could argue that things are done differently in China and shareholders need to understand.  Sorry, we now see that is just not true.  Just last week China Fire’s (CFSG) management agreed to a buyout with Bain Capital.  In that deal, we see a definitive partner in Bain and definite closing dates.  On May 31, we witnessed 2 deals get done.  The first was an investment into (YONG) from Morgan Stanley, a deal that posted with a firm closing date June 10, 2011.  The next is taking private of  Funtalk China Holdings (FTLK) by Fortress for cash. 

Of course, Citron cannot validate that all of these deals will get closed.  But lets look at the 3 key aspects that they all have.

 1.  There is definitive funding.

 2.  There is a definitive partner.

 3. There is a definitive timeline. 

With these 3 engagements from strong suitors on the table, Harbin Electric shareholders are obligated to look at their promise ring with wonder, doubting if it is nothing more than a cubic zirconium.

The overarching issue that defines HRBN as a complete outlier in these private equity transactions is the purported price of the deal.  All of the above stock transactions are priced relative to a trading range for the stock.  The most real of the above deal appears to be FTLK which is being acquired for $7.20 a share, a midpoint of where it has traded over the past 52 weeks.

At $24, the HRBN buyout promise is a price the stock has seen only on three brief visits during its entire trading history – once in 2007, and the others after the deal was announced.  Other than that, there is zero credibility to this price – it is simply made up. 

After all, their last quarter results reflected a disastrous compression of margins that would have sent a normal stock reeling lower, especially considering the debt load of the company.

   What are They Hiding?

 

Beyond the alleged unstated liabilities and lower revenue numbers, Harbin is a business without much sizzle.   HRBN was a reverse merger which has rolled up various electric motor manufacturers, is the primary operator of a large, antiquated, formerly state-owned electric motor manufacturing facility.  The company has burned over $90 million in cash, and would require a huge new capital investment to reach a tenable position in the current intensely competitive landscape.  Their 40-year-old factory, which makes small motor parts, appears to be everything but state of the art.

So, let’s assume for a moment that the buyout offer is not real, and cannot be consummated.  Why does the company find it necessary to keep this crutch?  It is the opinion of Citron that without the buyout offer, this stock could see single digits as investors realize they own a piece of China’s past, and not its future.  As long as the CEO can continue to put out press releases of advisory committees and 8-K filings alluding to “wink wink” conversations with analysts, the charade will continue.

Note to Harbin management:  If you are serious about buying the company, then take the ridiculous $24 price off the table, let the stock trade freely, and only then go in and buy it at a significantly discounted price to today’s offer  … then maybe you can get your financing and gain some credibility with Wall Street and your bank financeers.

 

  Bottom Line

 

If HRBN couldn’t secure financing when the story was good, how can they do it now?    

Harbin and the Chinese RTO space is no longer hot nor sexy.  In fact, it is toxic.  Harbin operates an old world manufacturing plant, producing largely commodity products at slim margins, with rapidly escalating prices for materials and labor.  And of course this was BEFORE the SEC task force on China RTO’s, before the halts, when it seemed like a good idea to take it private.  It is Citron’s opinion that investors had better ask themselves what this stock is worth without the buyout offer. 

        

  The Company’s Response

 

We can predict it now.  The company is sure to respond with a PR insisting its “special committee” is continuing its work to further the proposal.  Or maybe we will read about a formal offer made by the CEO “contingent on certain financing”….  We can even read of a fancy law firm or investment bank that has been hired to move this proposal along.  Not to mention, we will likely read about the evil short sellers who are out to “get the company” … IT IS ALL WORTHLESS RHETORIC!  There is only one thing the company can do at this point …SHOW US THE MONEY AND CLOSE THE DEAL! 

Anything short of a definitive closing is a disappointment and worse, it is a sham.  It is the opinion of Citron that this deal will not close – not at $24, and not at a price above half of $24. 

Cautious investing to all.