Harbin Electric: The Black Hole of Information

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Whether a company’s stock trades in the US, Shanghai, Hong Kong or Shenzen, all investors want the same thing:  transparency.  The problem with Harbin (NASDAQ:HRBN) is not the short-sellers, as the company so vehemently stated on its last conference call.  The problem is the company has been violating every principle of transparency over recent years, which only intensifies as the company ramps up its claims of an upcoming $24 a share private takeover.

Investors have nothing to judge an actual business, absent a buyout offer, except a 2010 audit by defunct auditor Frazer Frost, which was has become the poster child for auditor negligence in the Chinese RTO space.  Meanwhile, Harbin Electric’s stock is being propped on the promise of a going-private transaction at $24 per share, a make-good for any possible operational problem the company has or any inconsistency in its financial reporting.  The story has not wavered in the face of:

  • industrial slowdowns both worldwide and in China
  • increasing gross margin pressure on the entire Chinese industrial sector — in both labor and materials
  • wave after wave of exposures of fraud among China RTO’s
  • the specific corruption being investigated among China’s rail industry after the recent fatal crash
  • bank / state credit tightening in China

… just to name a few headwinds.

The operations of the company, as well as the going-private promises, are perched to an extraordinary degree, on the representations and obfuscations of just one man, Chairman Tianfu Yang.

The going private transaction filings are already replete with Chairman Yang’s refusal to provide transparency into his company.  Thwarting Morgan Stanley's buyer search, Chairman Yang’s was unwilling to share sufficient information with any parties trying to value the company.  Its language we've never seen before in a public company document.  (See link below to "no disclosure to suitors". )  

Further, despite having hired the world’s pre-eminent investment bank, Goldman Sachs to advise him personally, the bank financing essential to the company’s going-private transaction has been negotiated by just one man, Tianfu Yang.  Outside confirmation of the “bankability” of this loan commitment has been reduced to just one single disclosed conference call among the parties.  All of the nameplate advisors have explicitly disclaimed any independent verification of material company information, or the responsibility to acquire any, beyond what the company has disclosed to them.

And still the financials for this company are no better than those provided by the disgraced audit firm Frazer Frost, which is actually not in business any longer, its own merger-formed company torn apart by SEC sanctions for shoddy work practices ( http://www.sec.gov/litigation/admin/2010/33-9166.pdf ) and failure to detect fraud at RINO.

   Where is Harbin’s Real Business?

 

Here is a glaringly simple question, yet one which shareholders are willing to overlook in the hopes of a buyout.  Who are Harbin’s customers?  The linear and micro motor division creates custom motor solutions.  Therefore the company should have a portfolio  of customers with large-scale production orders.   Harbin’s revenue growth claims are enormous – it claims it is now doing more business in its most recent quarter than it did in the entire year 2008 — a 400% increase in just over 2 years — and at very high margins.   But not a single customer of significant size can be independently confirmed.  With a $500 million a year run rate, it should be possible to find at least a few customers doing $25, or $15 or even $10 million a year in verifiable revenues with Harbin.  But there simply are not.

This is why Citron’s findings published two weeks ago here  http://citronresearch.com/index.php/2011/08/03/harbin-electric-completely-exposed/   are so disturbing.  Harbin stopped disclosing customer concentration identities and percentages in 2010.  But its claimed 2009 and 2008 large customers do not check out, and are easily disproven.  Harbin’s largest purported customer in 2008 (and #2 in 2009), Jiangsu Liyang Car Seat Adjuster, simply does not manufacture or offer for sale electric seat adjusters (after a brief attempt to expand into that product line), and states it buys no electric motors. 

So who are the customers?  To make matters worse, the company was not willing to disclose or discuss customers even with a possible suitor, who was brought to the table by Morgan Stanley, as evidenced by comments in the fairness opinion. 

See page 2:  no disclosure to suitors

Instead of issuing Press Releases attacking short sellers, if Chairman Yang were interested in building the value of his company, rather than manipulating the price of his company’s stock, he simply needs to make his company transparent to investors.  With millions spent on “advisors”, not one dime has been spent to remedy the lack of a reliable audit.  Why has Harbin published at least 5 PR’s in the last year attacking shortsellers, and 7 others about the going-private transaction, yet only one identifying a single design win leading to a new piece of business with a disclosed party.  Citron has made a simple chart that shows the communications from Harbin to Wall Street.  In the past 2 years, Harbin has only disclosed one customer order (and we do not even know the value of the order) in December in 2010.  Besides that….nothing.

HRBN PR survey

 

   How do you explain this land transaction?

It has been a common tactic of China fraud stocks to announce fraudulent asset purchases to offset claims of fraudulent revenue.  The problem is, if you announce huge fictitious gross and net revenues, how do you account for the fact that your cash never goes up?  You have to offset the fake profits with fake asset purchases.  PUDA, YONG and BORN are just a few of the firms that have gone this route.

So it raised a few eyebrows when Harbin abruptly announced with its most recent “record” quarter, that it was putting down a $23 million deposit on land rights for a new factory.   This transaction was never disclosed in a press release, nor was the need for these 80 acres was ever previosuly disclosed in a conference call or investor presentation.  It just suddenly appeared in a filing last quarter’s 10-Q.  (It is just a coincidence that the purchase price is almost exactly Harbin’s pretax net income reported for the quarter?)

 

"On June 10, 2011, Simo Motor entered into a land use agreement (the “Simo Land Use Agreement”) with Xi’an Lintong Tourism and Business Development Management Commission (“Xi’an Lintong”) with respect to Simo Motor’s use of 500 Chinese Mu of land (approximately 82.4 acres or 333,500 square meters) located at Daixin Industrial Development Zone in Xi’an Lintong (the “New Site”). Pursuant to the Simo Land Use Agreement, the New Site will be used for construction of a new manufacturing facility that will produce electric equipment and machinery and related products as part of a capacity expansion project at Xi’an Simo. The term of the Simo Land Use Agreement is 50 years and the aggregate amount that Simo Motor shall pay to Xi’an Lintong is approximately $38.8 million (RMB 250 million). The Company made a pre-payment of $23.0 million (RMB 150 million) as of June 30, 2011 and will pay in full upon receipt of the land use license to be issued by the government."

 

The price Harbin paid for the most recent land transaction comes out to be 500 thousand RMB per Mu.  This price appears seriously inflated after some online research and review of corresponding land bureau records. 

  1. http://studio.e696.com/stock/InvestContent.aspx?stockid=600302&reviewid=254914173250

The link above shows the purchase of 242.85 Mu of industrial use land in the exact same industrial park, dated 2008.  The purchase price then was a mere 70 thousand RMB per Mu, 14% of what Harbin is paying. While Chinese land price appreciation has been steep since 2008, a 700% appreciation is not credible.

  1. http://www.dc88.com.cn/gyyq/police.asp?id=709

The link above is a policy document that shows the purchase price of the industrial park. While the date of the info is unclear, the purchase price comes to between 30 thousand to 60 thousand per Mu, roughly in line with the 2008 purchase record.

  1. http://www.xainvest.gov.cn/baozhang/tzbz.asp

The link above contains information about industrial land purchase prices during 2009 and 2010, in the city of Lintong, where Harbin’s land purchase is located.  We see prices of 112 thousand per Mu, less than 1/4th the 500 thousand per Mu Harbin paid for its land.

  1. http://maps.google.com/maps/ms?msa=0&ie=UTF8&ll=34.250406,108.998108&spn=0.503433,0.891953&z=11&msid=212302640873797248115.0004aa40c7b347d4bd0cc

The link above shows transactions and comparable land purchase data pulled from Xi’an land bureau. Harbin’s land purchase price simply doesn’t make sense when benchmarked against the recent transaction data and it most likely grossly overstated the price it paid for the land acquisition.  Further, this price would amount to more than double the entire land use rights the entire company shows on its balance sheet! 

Yet, not only did the company not state its intention to commit to this size land rights purchase, it didn't even put out a PR when it closed the deal.  Can this transaction stand independent scrutiny?  

   Xi’an 

Citron thought the following article, on the wild-west state of stock peddling in China, with epicenter in Xi’an, which happens to be where Harbin Ximo Motor is domiciled and where the “funky” land transaction occurred.  What makes this article interesting is it shows that even local Chinese are not immune to RTO scams and the epicenter of the problems is in the backyard of Harbin.

http://www.bloomberg.com/news/2011-08-18/chinese-protest-5-billion-losses-tied-to-u-s-reverse-mergers.html

 

   Is This the Price of a Payoff??

In Harbin’s most recent filings, we read an interesting disclosure, which management was recently asked to explain.  

In February 2011, the Company entered into a consulting service agreement with a third party which agreed to provide advisory and consulting services to obtain financing in Chinese Capital Market for a period of 5 years from 2011 to 2015. The service fee is non-refundable and amounted to $3 million.”  

Of the $3 million, over 2.9 million has already been paid to this undisclosed party … in cash.  Now while Citron does not believe that $3 million is enough to secure a $450 million loan that cannot get paid back, we do believe that it is more than enough to secure loan documents.  Why we believe this to be true is twofold.

  1. If there is one thing Harbin can do without consultants is raise money.  The company has multiple bank loans, relationships with the largest investment bankers in the world, and a purported deep-rooted relationship with one of the largest banks in China. 
  2. In normal fundraising situations, companies pay investment bankers a percentage after the money has been raised.  The upfront money to this undisclosed entity that was given the same month that all parties walked away from a possible takeover transaction is the type of business done by companies on the brink of bankruptcy, not ones about to be taken over.
  3. Most importantly, what makes this relevant now is that management had an opportunity to respond to the question of to whom and why they gave this money.  But management chose doubletalk and subterfuge, offering us this response:

$3 million consultant explanation

   The Black Swan

 

Citron, like many other investors, has taken a position that the lack of transparency about this company, and its operating history, create a significant risk that this deal is just a charade and can never close on the terms disclosed.  Investors will have to take their chances on a binary event – either the going private deal is funded and closes, or it does not, and the stock falls to low single digits.  There is really no other outcome.

This has nothing whatsoever to do with the fiction of "forcing down the company's stock price" the fiction management keeps trumpeting.   Based on mountains of due diligence, only the summary of which can be effectively reported in a blog, it is Citron’s belief that Harbin Electric cannot possibly pass an audit with a real accounting firm, or justify an enterprise value of $750+ million.  Further, without the going-private deal, its stock is worth no more than $2 or $3 on the Nasdaq market.   Meanwhile, Harbin has never responded to any of the substantive disclosure failures raised by Citron with verifiable  answers about the business, rather just more defense of the buyout.  Their story, and their stock, is propped by hope – the light at the end of the tunnel — without ever disclosing the dangers lurking for investors if that light is not reached.

However, what Citron cannot control is whether the political and economic situation in China is so corrupt that a bank can be influenced to make a low interest $400 million dollar loan that makes no business or economic sense, and that has no chance of ever being repaid.   If Tianfu Yang is able to use his influence and power to effect lending of a state owned bank on a stack of material misrepresentations, then the shorts are dealt a black swan situation. That is a question that no independent research or investment banking firm can handicap.

If this is the case, however, the current price of Harbin’s stock should be of no consequence whatsoever to Chairman Yang.  In fact, the lower it trades, the more “easy money” can be earned by his minions by simply waiting for this "sure thing" deal to close.  His preoccupation with the short positions and the option positions is all just noise.  The shareholder vote is a foregone conclusion; every shareholder wants the “easy profit” of the $24 payout.  The only question is whether this deal is real or not, period. 

   Conclusion

Citron expects that there will be private buyouts of a few Chinese companies in the next year.  But these will be at very modest prices, after the fraudulent inflated claims wash out.  The transparency risks of companies operating in China have been made very very clear to the market, and are now increasingly being priced in.

Meanwhile, Citron has published ample evidence that Harbin Electric closely resembles the raft of other China RTO’s that have collapsed under the weight of their material misstatements to the US market.  Consider:

  • Extreme revenue growth, but an absence of verifiable customers
  • 50-year old main manufacturing facility
  • Its unlikely cash position inconsistent with its patchwork of loans and financings
  • Quarter after quarter of purported “record profits”, but keeps needing financing
  • Hasty and apparently fabricated land rights transaction
  • Unnecessary cash-up-front “Fees” to undisclosed parties
  • No legal or financial accountability from the many paid advisors and consultants to the deal

If this buyout deal should hit a “last minute snag”, in Q1, 2012, China Development Bank’s financing commitment is set to expire, just days before the company faces its March 15, 2012 audited 10-K filing date with no “plan B”.  Without audited financials, Harbin then faces delisting proceedings. 

It is Citron’s belief that the company cannot pass a real audit, and the only way an unaffiliated banking entity would finance a $400 million dollar loan for this company is with the application of substantial “guanxi”, which is not a balance sheet item.

Meanwhile, the regulatory risk remains very high.  Harbin trades despite its obviously deficient 2010 audit, and its failure to satisfy Nasdaq independent audit committee requirements, which it was notified about in 2009.  It is obvious from prior Citron reports that Audit Committee Chair Boyd Plowman is not and was never "independent", due to his undisclosed director's role at various Abax entities. 

Meanwhile, if unchallenged by regulators, the proliferation of other “Chairman led” buyouts flying in the face of due diligence, (latest example PUDA) is an obvious consequence for the US markets.

 

PS   If the deal doesn’t close, don’t expect the deal terms to provide consequences that protect shareholders.  No purchase money is escrowed in this deal structure.  90% of the termination fee would be due from Chairman Yang himself.  And as Chairman, it would be his responsibility to collect it …. from himself.  Now that’s a payment that would take some “guanxi”…! 

 

Cautious Investing to All

 

 

 

 

 

 

 

Whether a company’s stock trades in the US, Shanghai, Hong Kong or Shenzen, all investors want the same thing:  transparency.  The problem with Harbin is not the short-sellers, as the company so vehemently stated on its last conference call.  The problem is the company has been violating every principle of transparency over recent years, which only intensifies as the company ramps up its claims of an upcoming $24 a share private takeover.

 

Investors have nothing to judge an actual business, absent a buyout offer, except a 2010 audit by defunct auditor Frazer Frost, which was has become the poster child for auditor negligence in the Chinese RTO space.  Meanwhile, Harbin Electric’s stock is being propped on the promise of a going-private transaction at $24 per share, a make-good for any possible operational problem the company has or any inconsistency in its financial reporting.  The story has not wavered in the face of industrial slowdowns both worldwide and in China, increasing gross margin pressure on the entire Chinese industrial sector, wave after wave of exposures of fraud among China RTO’s, the specific corruption being investigated among China’s rail industry, or bank / state credit tightening in China, just to name a few headwinds.

 

The operations of the company, as well as the going-private promises, are perched to an extraordinary degree, on the representations and obfuscations of just one man, Chairman Tianfu Yang.

 

The going private transaction filings are already replete with Chairman Yang’s refusal to provide transparency into his company.  Thwarting Morgan Stanley buyer search, Chairman Yang’s was unwilling to share sufficient information with any parties trying to value the company.    (From filings:  “Management, with the support of the board, was unwilling to share information.” and “It’s difficult to conduct [due] diligence without CEO support.”  [ Link ]

 

Further, despite having hired the world’s pre-eminent investment bank, Goldman Sachs to advise him, the bank financing on which the company’s going-private transaction depends has been negotiated by just one man, Tianfu Yang.  Outside confirmation of the “bankability” of this loan commitment has been reduced to just one single disclosed conference call among the parties.  All of the nameplate advisors have explicitly disclaimed any independent verification of material company information, or the responsibility to acquire any, beyond what the company has disclosed to them.

 

And still the financials for this company are no better than those provided by the disgraced audit firm Frazer Frost, which is actually not in business any larger, its own merger-formed company torn apart by SEC sanctions for shoddy work practices and failure to detect fraud at RINO.

 

Where is Harbin’s Real Business?

 

Here is a glaringly simple question, yet one which shareholders are willing to overlook in the hopes of a buyout.  Who are Harbin’s customers?  The linear and micro motor division creates custom motor solutions.  Therefore the company should have a handful of customers with large-scale orders.   Harbin’s revenue growth claims are enormous – it claims it is now doing more business in its most recent quarter than it did in the entire year 2008 — a 400% increase in just over 2 years.   But not a single customer of significant size can be independently confirmed.  With a $500 million a year run rate, it should be possible to find at least a few customers doing $25, or $15 or even $10 million a year in verifiable revenues with Harbin.  But there simply are not.

 

This is why Citron’s findings published two weeks ago here [ Link ] are so disturbing.  Harbin stopped disclosing customer concentration identity and percentage in 2010.  But its claimed 2009 and 2008 large customers do not check out, and are easily disproven.  Harbin’s largest purported customer in 2008 (and #2 in 2009), Jiangsu Liyang Car Seat Adjuster, simply does not manufacture or offer for sale electric seat adjusters (after a brief attempt to expand into that product line), and states it buys no electric motors. 

 

Who are the customers?  To make matters worse, the company was not willing to disclose or discuss customers even with a possible suitor, who was brought to the table by Morgan Stanley, as evidenced by comments in the fairness opinion. 

 

[ Link ]   (insert no disclosure to suitors)

 

Instead of issuing Press Releases attacking short sellers, if Chairman Yang were interested in building the value of his company, rather than manipulating the price of his company’s stock, he simply needs to make his company transparent to investors.  With millions spent on “advisors”, not one dime has been spent to remedy the lack of a reliable audit.  Why has Harbin published at least 5 PR’s in the last year attacking shortsellers, and 7 others about the going-private transaction, yet only one identifying a single design win leading to a new piece of business with a disclosed party.  Citron has made a simple chart that will show the flow of information to Wall Street.  In the past 2 years, Harbin has only disclosed one customer order (and we do not even know the value of the order) in December in 2010.  Besides that….nothing.

 

(insert press release chart)

 

 

 

How do you explain this land transaction?

 

It has been a common tactic of China fraud stocks to announce fraudulent asset purchases to offset claims of fraudulent revenue.  The problem is, if you announce huge fictitious gross and net revenues, how do you account for the fact that your cash never goes up?  You have to offset the fake profits with fake asset purchases.  PUDA, YONG and BORN are just a few of the firms that have gone this route.

 

So it raised a few eyebrows when Harbin abruptly announced with its most recent “record” quarter, that it was putting down a $23 million deposit on land rights for a new factory.   This transaction was never disclosed in a press release, and was the need for these 80 acres was never disclosed in a conference call or investor presentation.  It just suddenly appeared in a filing last quarter’s 10-Q.  (It is just a coincidence that the purchase price is almost exactly Harbin’s pretax net income reported for the quarter?)

 

On June 10, 2011, Simo Motor entered into a land use agreement (the “Simo Land Use Agreement”) with Xi’an Lintong Tourism and Business Development Management Commission (“Xi’an Lintong”) with respect to Simo Motor’s use of 500 Chinese Mu of land (approximately 82.4 acres or 333,500 square meters) located at Daixin Industrial Development Zone in Xi’an Lintong (the “New Site”). Pursuant to the Simo Land Use Agreement, the New Site will be used for construction of a new manufacturing facility that will produce electric equipment and machinery and related products as part of a capacity expansion project at Xi’an Simo. The term of the Simo Land Use Agreement is 50 years and the aggregate amount that Simo Motor shall pay to Xi’an Lintong is approximately $38.8 million (RMB 250 million). The Company made a pre-payment of $23.0 million (RMB 150 million) as of June 30, 2011 and will pay in full upon receipt of the land use license to be issued by the government.

 

The price Harbin paid for the most recent land transaction comes out to be 500 thousand RMB per Mu.  This price appears seriously inflated after some online research and review of corresponding land bureau records. 

1.       http://studio.e696.com/stock/InvestContent.aspx?stockid=600302&reviewid=254914173250

The link above shows the purchase of 242.85 Mu of industrial use land in the exact same industrial park, dated 2008.  The purchase price then was a mere 70 thousand RMB per Mu, 14% of what Harbin is paying. While Chinese land price appreciation has been steep since 2008, a 700% appreciation is not credible.

2.       http://www.dc88.com.cn/gyyq/police.asp?id=709

The link above is a policy document that shows the purchase price of the industrial park. While the date of the info is unclear, the purchase price comes to between 30 thousand to 60 thousand per Mu, roughly in line with the 2008 purchase record.

3.       http://www.xainvest.gov.cn/baozhang/tzbz.asp

The link above contains information about industrial land purchase prices during 2009 and 2010, in the city of Lintong, where Harbin’s land purchase is located.  We see prices of 112 thousand per Mu, less than 1/4th the 500 thousand per Mu Harbin paid for its land.

4.       http://maps.google.com/maps/ms?msa=0&ie=UTF8&ll=34.250406,108.998108&spn=0.503433,0.891953&z=11&msid=212302640873797248115.0004aa40c7b347d4bd0cc

The link above shows transactions and comparable land purchase data pulled from Xi’an land bureau. Harbin’s land purchase price simply doesn’t make sense when benchmarked against the recent transaction data and it most likely grossly overstated the price it paid for the land acquisition.

 

Xi’an 

Citron thought the following article, on the wild-west state of stock peddling in China, with epicenter in Xi’an, which happens to be where Harbin Ximo Motor is domiciled and where the “funky” land transaction occurred.  What makes this article interesting is it shows that even local Chinese are not immune to RTO scams and the epicenter of the problems is in the backyard of Harbin.

http://www.bloomberg.com/news/2011-08-18/chinese-protest-5-billion-losses-tied-to-u-s-reverse-mergers.html

 

 

Is This the Price of a Payoff??

In Harbin’s most recent filings, we read an interesting disclosure that was finally put to management.

 

In February 2011, the Company entered into a consulting service agreement with a third party which agreed to provide advisory and consulting services to obtain financing in Chinese Capital Market for a period of 5 years from 2011 to 2015. The service fee is non-refundable and amounted to $3 million.”  

 

Of the $3 million, over 2.9 million has already been paid to this undisclosed party.  Now while Citron does not believe that $3 million is enough to secure a $450 million loan that cannot get paid back, we do believe that it is more than enough to secure loan documents.  Why we believe this to be true is twofold.

 

1.      If there is one thing Harbin can do without consultants is raise money.  The company has multiple bank loans, relationships with the largest investment bankers in the world, and a purported deep-rooted relationship with one of the largest banks in China. 

2.      In normal fundraising situations, companies pay investment bankers a percentage after the money has been raised.  The upfront money to this undisclosed entity that was given the same month that all parties walked away from a possible takeover transaction is the type of business done by companies on the brink of bankruptcy, not ones about to be taken over.

3.      Most importantly, what makes this relevant now is that management had an opportunity to respond to the question of to whom and why they gave this money.  But management chose doubletalk and subterfuge, offering us this response:

 

[ LINK ]

 

The Black Swan

 

Citron, like many other short sellers, has taken a position that the lack of transparency about this company, and its operating history, create a significant risk that this deal is just a charade and can never close on the terms disclosed.  Investors will have to take their chances on a binary event – either the going private deal is funded and closes, or it does not, and the stock falls to low single digits.  There is really no other outcome.

 

Based on mountains of due diligence, only the summary of which can be effectively reported in a blog, it is Citron’s belief that Harbin Electric cannot possibly pass an audit with a real accounting firm, or justify an enterprise value of $750 million.  Further, without the going-private deal, its stock is worth no more than $2 on the Nasdaq market.  Harbin has never responded to any of the substantive disclosure failures raised by Citron with hard answers about the business, rather just more defense of the buyout.  Their story, and their stock, is propped by hope – the light at the end of the tunnel — without ever disclosing the dangers lurking for investors if that light is not reached.

 

However, what Citron cannot control is whether the political and economic situation in China is so corrupt that a bank can be influenced to make a $400 million dollar loan that makes no business or economic sense, and that has no chance of ever being repaid.   If Tianfu Yang is able to use influence and power to effect lending of a state owned bank on misrepresentations, then the shorts are dealt a black swan situation. That is a question that no independent research or investment banking firm can handicap.

 

If this is the case, however, the current price of Harbin’s stock should be of no consequence whatsoever to Chairman Yang.  In fact, the lower it trades, the more “easy money” could be earned by his minions by simply waiting for the deal to close.  His preoccupation with the short positions and the option positions is all just noise.  The shareholder vote is a foregone conclusion; every shareholder wants the “easy profit” of the $24 payout.  The only question is whether this deal is real or not, period. 

 

Conclusion

 

Citron does not doubt that there will be private takeouts of a few Chinese companies in the next year.  But these will be at very modest prices, after the worms have come out of the woodwork.   The transparency risks of companies operating in China have been made very very clear to the market, and are now being priced in.

 

Meanwhile, Citron has published ample evidence that Harbin Electric closely resembles the raft of other China RTO’s that have collapsed under the weight of their material misstatements to the US market.  Consider:

·         Extreme revenue growth, but an absence of verifiable customers

·         50-year old main manufacturing facility

·         Its unlikely cash position inconsistent with its patchwork of loans and financings

·         Quarter after quarter of purported “record profits”, but keeps needing financing

·         Hasty and apparently fabricated land rights transaction

·         Unnecessary cash-up-front “Fees” to undisclosed parties

·         No legal or financial accountability from the many paid advisors and consultants to the deal

·         .. and the shady past dealings of its Chairman and his brother

 

If this buyout deal should hit a “last minute snag”, in Q1, 2012, China Development Bank’s financing commitment is set to expire, just days before the company faces its March 15, 2012 audited 10-K filing date with no “plan B”. 

 

It is Citron’s belief that the company cannot pass a real audit, and the only way an unaffiliated banking entity would finance a $400 million dollar loan for this company is with the application of substantial “guanxi”, which is not a balance sheet item.

 

Meanwhile, the regulatory risk remains very high.  Harbin trades despite its obviously deficient 2010 audit.  If unchallenged, the proliferation of other “Chairman led” buyouts flying in the face of due diligence (latest example PUDA) is an obvious consequence.

 

PS   If the deal doesn’t close, don’t expect the deal terms to provide consequences that protect shareholders.  No purchase money is escrowed in this deal structure.  90% of the termination fee would be due from Chairman Yang himself.  And as Chairman, it would be his responsibility to collect it …. from himself.  Now that’s a payment that would take some “guanxi”…! 

 

Cautious Investing to All