The Last and Final Word on Harbin Electric

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Citron believes it is time to offer its final comments on the long drama leading up to Harbin Electric's purported going-private transaction (NASDAQ:HRBN). 

If Harbin's private buyout falls apart at the last minute, consistent with the many other “fraud calls” we have made, Citron will not be taking a "victory lap".  Likewise, if this deal ultimately closes, we will not issue a mea culpa or comments full of sour grapes, as we are convinced that our research on the fraud committed at Harbin Electric was always honest and thorough.  Not one analyst, US or China-based journalist, stock commentator, or even the company has been able to rebut any of the voluminous data points presented by Citron documenting the many indicators of malfeasance Harbin's operating results, including:

 

  • The sole audit on which the buyout is based, from a firm that no longer exists, after being sanctioned by the SEC for improper audits on other China stocks.  This is the single most important document in the entire transaction.
  • An "independent director", the audit committee and "special committee" chairperson, is also on record as a director of Harbin's private equity funder Abax – a glaring conflict of interest. 
  • A multi-year track record of operations funded by a crazy-quilt of one-pocket-to-another band-aid financings
  • Consistent track record of cashless profits
  • Crazy fake asset purchases consistent with the behavior of other Chinese fraud stocks

One point on which longs and shorts agree is that the fulcrum of this deal is a massive multi-year, low interest term loan commitment from China Development Bank, upon which the deal depends for its core funding.  Longs' position is : "It’s a done deal, so just deal with it.", while skeptical shorts have pondered "Why would the bank make such an un-economic, high-risk loan?"

Harbin Electric is no longer a stock; it has become a leading indicator for a debate about business corruption in China.  Those who are long the stock have committed their capital, not to investing in the company, but to go long on the corruption that exists in China. The premise of this deal closing is that corruption has no boundaries in China and has moved beyond rogue CEO's all the way to the policy making bank of China. 

China has become a country whose economic stability has been plagued by fraud.  These are not allegations; these are facts that have played out over the past year.  Beyond the collapse of many Chinese RTO's, we have also seen two multi-billion dollar market cap companies delisted from US and Canadian exchanges for fraud (Sino-Forest and Longtop).  This has also been the year of the fake Apple Stores in China.  And now we are left to ponder the implications of a massive regulatory black hole created by the complete breakdown of a working relationship between the PCAOB and Chinese accountants, as well as between the SEC and its Chinese counterparts.

http://www.forbes.com/sites/francinemckenna/2011/10/21/auditors-in-china-a-whole-lot-of-posturing-going-on/

http://dealbook.nytimes.com/2011/10/20/deloittes-quandary-defy-the-s-e-c-or-china/

Talk of a Chinese banking crisis dominates the financial media while world markets perch on the edge of their seats wondering if the China bubble is about to burst.  In the midst of this uncertainty, the riddle of Harbin has not helped anyone.  Can someone really get a loan in China for $400 million with no business basis, knowing the only outcome is default, just because of political connections?  The market has handicapped "Yes", but Citron still thinks the real answer might be "No".

Citron looks forward to moving beyond Harbin.  We have been publishing this column for 10 years and have no plans on slowing down.  We are proud of the work we have done, and stand behind the research, analysis, and writing on Harbin Electric.  Readers are encouraged to reference  the "Citron Knows China" tab on this site for a summary of research on China companies.

As Citron waits like every other investor to learn the eventual fate of Harbin, we only hope for sake of the country of China that fraud and lack of transparency is just one of the temporary growing pains in their economy and society; and in the future, US investors will not have to rely on hope and faith as the principal factors in their investment decisions.

PS. For a little lighthearted humor, this news story just came out about the level of fraud in Harbin Province.  We couldn’t make this up if we wanted to.

http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20111023000081&cid=1103

Cautious investing to all.