China Biotics (NASDAQ:CHBT)

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“Where are the stores ?”  Update August 31, 2010…Either the Company does not know how to communicate…or it is a fraud.  You decide.

China Biotics (NASDAQ:CHBT) is out with a response to Citron’s report of yesterday, in which we questioned the accuracy and credibility of the company’s disclosures.  The company is hosting an “Investor Day” in Shanghai “by reservation only”.  Citron suggests that this event is unlikely to produce credible answers needed to tough questions about all the aspects of this company’s disclosures that don’t line up with reality.

More significantly, the company for the first time posted a list of locations when its corporate website returned to service today.
http://www.chn-biotics.com/c4426/c4435/default.html
Citron can’t help but conclude the newly posted list of locations is in response to our publicly posted challenge yesterday.

The problem is, here’s what the company says about its retail locations:

From China Biotics 10-K

As of March 31, 2010, we had 111 Shining branded outlets in Shanghai and 12 other major cities in China. We have been hiring consultants who have many years of experience in the direct selling industry to facilitate the development of new Shining brand outlets.”

The company states it is expensing $3.9 million US annually for its tiny office and production facilities, plus, presumably the retail locations it describes above:

“Rental expense, which was charged to expense, amounted to $3,906,098, $3,363,300, $990,300 for the years ended March 31, 2010, 2009 and 2008, respectively.”

Elsewhere it states it employs 232 retail outlet employees.

You would assume that this kind of expense and employee footprint is commensurate with a 100-branch retail network, no?  Something matching the classy photo of the yogurt shop they show here, right?

Yogurt Bar

Well, it appears the majority of the 100 locations they just published are not in fact leased company stores, but are locations of supermarkets, mostly located around the greater Shanghai area.

For example, their first listed location , 62 Wensu Road, Jiading District, is this Jiadeli Supermarket, a chain of over 140 stores.
http://icexpat.com/nm_AddressDetails;mid_3711366A2FD34ABF824EA1F0A7FF6014.shtml

Further down the page is “Jiading District, 420 Yumin Road”  This is Jiadeli Supermarket #59.
http://www.icexpat.com/nm_AddressDetails;mid_62F4670E393C478E967D3751049F748F.shtml

At least 10 other locations listed on the company’s website are found on this single listing of Supermarkets in the greater Shanghai metro area:
http://webcache.googleusercontent.com/search?q=cache:z6eRGG1ewnwJ:chinauniquetour.com/html/Shanghai/2009423/arts-5808.html+88+Baode&cd=5&hl=en&ct=clnk&gl=us

For example, look at 1538 Caoan , 501 Sanmen Road, 1557 Yunchuan, 8991 Nanfeng, 1218 Wuzhong, 88 Baode, 3155 Qixin Road. 1500 Xincun,  1688 Tongchuan,  Lane 133 Linping,  8 Baoming etc., etc.

Research is ongoing, but it appears the company is being intentionally misleading in these disclosures.  Shelf space in a supermarket does not equate to a freestanding retail location, period.  They have had ample opportunity to respond to a simple question and this is their answer.  This only leads to more troubling questions, such as:  “Where is the money really going?  Where are the 232 employees stationed?  Why post huge capital commitments to the animal feed business, with obviously far lower margins ?   Why scurry away from the retail business after making such a big deal about its retail network ?

Conclusion

There is no such thing as “half a lie” when it comes to public company disclosures.  It simply leads to deeper questions about every aspect of the company’s integrity.  Citron reminds investors of the regulatory gap that allows Chinese companies with US listings to live in the margins, held accountable by neither Chinese authorities nor the SEC.

Sorry folks.  This one is a recipe for indigestible investor losses.  The company is now caught in a web of its own deception, and will be greatly challenged to square its disclosures with verifiable data points.  On the financial side, its claims of a stock buyback plan and a huge cash hoard are inconsistent with its capital-raising activities.  Its reported gross margins do not square with its recent production capacities, and its gross revenues are inexplicably high related to its peers in the industry.  Its SEC and AIC financial reporting profile two entirely different realities.

Cautious Investing to All