China New Borun (BORN) — You are Cold Busted: Now it is Time to Come Clean. The Smoking Gun

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Last month Citron exposed potential disclosure problems with China New Borun Corporation (NASDAQ:BORN), a corn alcohol manufacturer, whose reports of tremendous profits boast far-above- average margins in a heavily commoditized and competitive industry.  The company justifies these results with the claim it operates an “advanced” manufacturing process based on their unique proprietary technology.   Citron ‘s first problem with this company was its filed R&D expense over the past three years, which is minuscule, while its main manufacturing facility was on the brink of bankruptcy in 2009.   

The research was than furthered by Alfred Little, who wrote in some depth documenting that not only is BORN using an antiquated and largely unprofitable manufacturing process (“semi-wet”), but they have been in the process of updating their factories’ manufacturing to an industry-standard competing (“semi-dry”) process, as their “advanced and proprietary” (“semi-wet”) process was nothing more than old technology that needed to be replaced.  Worse, Little suggests that the company has an undisclosed debt of $270 mil RMB, as reflected in tax filings that predate its May IPO.  Below is a “reported” copy of the tax documents in Chinese that would corroborate the theory that the company is sitting on undisclosed debt.

BORN Pre IPO Financials (PDF)

It was presented that BORN is hiding RMB 270 million in undisclosed debt, a liability which offsets nearly all of its claimed retained earnings.  If they have to acknowledge that liability, they simply don’t have the assets generated by those retained earnings, the amount of which is claimed to be RMB 288 million accumulated through 12/31/09.

Neither the company nor its analysts have yet responded directly to the debt questions.  We are left to believe that silence is a form of complicity.  Worse, since these revelations have come to surface we have seen defections from the Board of Directors.   Whereas the debt issue would make this stock another Refco, and it MUST be addressed by management, we will now PROVE that the company is operating antiquated plant technology and further is trying to cover up their lie in an attempt to conceal it.

SMOKING GUN

The company and the analyst were quick to respond with a link from the Henan Sheng Wantongtong Machine Manufacture Corp. that there is never and was never a contract with BORN and going as far to say that any mention of a contract was pure fabrication.

http://www.wttjx.com/DynamicInfos/990544.aspx

This quick website cover-up states that the following full length contract was nothing more than a fabrication by short sellers to damage the company.  Really?  This whole contract is false? 

The contracts BORN wants you to believe do not exist:
Borun Production Technology upgrade contract ENGLISH (PDF)
Borun Production Technology upgrade contract CHINESE (PDF)

Citron has a cached version of their website (before they changed their story), that shows the contract has indeed existed.

Click here to view »

Attention management:  you cannot simply rewrite history by changing a website.

Piper Jaffray

Let us now see whether Piper Jaffray will address this issue, or bury its head in the sand.  This is not the first time that Citron has been at odds with Piper about reality.  Just two years ago Citron exposed a billing scandal at Arthrocare while Piper defended the medical device company and tried to discredit Citron, claiming its own internal review found no wrongdoing.  http://citronresearch.com/index.php/2008/02/14/citron-research-updates-on-arthrocare-artc/

Sure enough, only months later the company got investigated by the US Attorneys Office over the billing scandal and the stock fell apart with massive corporate resignations – but no apology from Piper Jaffray.  Let’s see if Piper will redeem themselves or continue to live in denial.

Questions for Conference Call.

Tomorrow, BORN releases earnings, which we anticipate to be a complete fabrication regardless of the numbers they post.  Their past profits cannot possibly have been generated with an antiquated manufacturing process, much less higher commodity prices for corn.  Management credibility appears to be gone on this issue.  Here are a few questions that can be asked on the conference call:

  1. Are you willing to undergo an independent forensic audit by a credible international accounting firm that specifically addresses the question of undisclosed debt as filed on your corporate tax filings ?
  2. How do you expect shareholders to trust management after such a blatant attempt to cover up your contract to update your factory to an industry-standard manufacturing process?
  3. How soon is the company going to have to raise money?  Why so soon after IPO?
Conclusion

It is the opinion of Citron that BORN is committing fraud on the marketplace.  How can shareholders trust anything that management has said or will say in the future?  Worse, the analysts covering the name are looking for the easy way out instead of actually analyzing the company.  The facts speak for themselves.
Cautious Investing To All