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.


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).


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:


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? 


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:


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. 



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!





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.