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.



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.