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Cao Wubo in New York Times
See last page. Seems like Hilead is Jiangbo round 2, only there's a real company actively suing them this time.
December 8, 2011 p. A1
or this link:
http://www.nytimes.com/2011/12/08/business/an-entrepeneurs-rival-in-china-the-state.html?_r=1&hp=&adxnnl=1&pagewanted=all&adxnnlx=1323356995-09BhwUWRpBTJVJiOPkqGvw
Based on the reported numbers and average selling prices for this product published in Cathay's F-1, Hilead's total gross revenue should be less than 10 million dollars per year at 20% profit best case scenario, or under 2 million dollars a year.
Their bank interest alone should be 15 million dollars per year (assuming 5% interest). According to their business plan, Hilead made over $50 million net profit in 2010. Sound familiar?
Light at the end of the tunnel
Still a long ways to go, but at least it's some light:
Apparently Cao Wubo's other ill fated venture, Hilead, is about to get him into some hot water over in China. He somehow convinced Laiyang City to guarentee a billion RMB bank loan from the Central Development Bank, and must have recently run out of cash as Laiyang city is currently making the interest payments for him to avoid having to deal with the consequences of a default. As an aside, you as JGBO shareholders probably have legal title to Hilead though Cao seems to have somehow transferred all ownership there to himself (part of what the SEC was investigating) but a) good luck enforcing that, and b) it looks like it's about to go broke anyway.
For those of you who have visited, Laiyang city is not the most affluent place in the world. A canary told me that the officials there are not too happy coughing up a few million rmb they can't afford every month just to pay Cao's bank interest, so things are getting a little...strained...to say the least.
In China that sort of thing tends to result in the likes of Cao getting shot sooner or later...
This is potentially good news for JGBO shareholders (if any are left trying to ride out this 15 cents in the morning 19 cents at night every day nonsense) because, once that disaster is dealt with, the city may take an interest in getting JGBO back on track, even as a pink sheets company.
Now it obviously does not have $140 MM in the bank and all that other ridiculousnes, but it is potentially profitable with an overhaul of the de facto management--it might be worth at least $0.30 once they get rid of Cao, hire a real auditor (the latest one has gone silent on whether they are still engaged or not, and CCGIR has long since resigned as the IR) and turn a couple things around operationally.
analysts and auditors
value_investor: do you have a link to that reuters analyst assessment you mention? the most recent reuters article I found didn't touch on valuation directly, but the tone of the article would suggest the current valuation is about right:
http://www.businessinsurance.com/article/20110926/NEWS07/110929894#
keekee: I'm confused. so the "independent auditor that decided not to stand for re-election" that you mention made that decision due to the reasons mentioned in that long resignation letter here:
http://www.sec.gov/Archives/edgar/data/1091164/000114420411034429/v225152_ex99-4.htm
and E&Y was commissioned to audit the company--it was either that or the SEC would take mneasures themselves according to the resignation letter. and E&Y according to the letter obviously had major issues with the companies finances and lack of cooperation...which was ultimately why the company got delisted from NASDAQ.
I think that's the point, not who they currently claim their auditors are, because they've sort of proven themselves to be completely unreliable sources even prior to getting delisted...the IR firm issue was just one example of why I'd even question whether their current "auditors" are who they say they are.
As for your point that they're required to file with the SEC in the event of an auditor resignation, I'd note that they're also in theory required to cooperate with SEC investigations. As noted in the independent auditor resignation letter, well, we all know how that worked out...
So I think that you are in fact being misleading by claiming their are "no auditor" issues with the company by parsing the definition of "auditor vs independent audit committee member vs auditor hired by the independent audit committee member."
Perhaps the simpler and more obvious statement would be: the company's audit book gatekeepers including CFO and independent auditors resigned a few months ago, it has obvious accounting issues that its independent auditors, E&Y and the SEC have raised serious concerns about, and since delisting it's sort of in a reporting gray area where no one knows what's really going on...
which analyst is Value_investor talking about?
I don't remember any analyst covering this company even when it was listed on NASDAQ (back when it was a "steal" at $3-5 because it was "worth" over 10 earlier)
Did an analyst decide to come in after they were kicked off of Nasdaq?
keekee--if you read the 8-k in my previous post's link, you'll find that Ernst and Young, independent *auditors* commissioned by the SEC to investigate Jiangbo, did resign because, amongst other things,
1) they were finding all sorts of inconsistencies (e.g. the company roster of employees listed a little over a dozen email addresses despite supposedly employing 456 people, the list of bank accounts being inconsistent with previous bank accounts identified by former CFO Elsa Sung, amongst other things, see p.19-20 of the June 7th 2011 8k exhibit 99.4, linked in previous post) and
2) under Cao's direction, "the Company refused to provide [to Ernst and Young as auditors] documents relating to the Company's sales, purchases, production and warehouse processes because the Company and the Company's legal counsel deemed those materials irrelevant to the investigation" (see p. 17 May 27, 2011 letter from same 8k exhibit 99.4)
Keekee:
1) First off, I agree it doesn't violate any SEC rules that they didn't bother telling anyone their IR firm resigned. However, it does sort of raise yet another red flag about the reliability of any of the company's announcements. Especially not that they're pink sheets--how can you believe they even have an auditor when they similarly claim they have an IR firm, with contact still on their website, when they actually...don't.
2) JGBO did in fact file an 8-k, that rather famous one which included this letter:
http://www.sec.gov/Archives/edgar/data/1091164/000114420411034429/v225152_ex99-4.htm
3) there was an interesting reply in the same thread to that "worth more than $3 million" yahoo post that sort of echoes my discount rate theory--not exactly, but same general idea and understanding of the situation, the link to that forum thread is:
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_J/threadview?m=tm&bn=31759&tid=13047&mid=13052&tof=2&rt=2&frt=2&off=1
ah, the discount rate...
Value_investor, your 80% discount rate logic is exactly how Pope and Wellington fell for this fraud.
The problem is, if you look at Cao's claims for Hilead, he essentially exaggerates sales a hundred-fold, literally, and posts profits higher than his actual sales revenue when in reality he's running at a loss...
So essentially he inflates the stock price 100x, then you apply an 80% discount rate...you still don't win. The problem with the discount rate is that it assumes some semblance of reliability in the reported numbers, which may work for most normal companies, but Cao Wubo is...special...
As for the independent auditor--refer again to previous posts and the June 7th 2011 8k filing exhibit 99.4 on Edgar--I can't imagine how an auditor could possibly have MORE issues than explicitly laid out there.
Or as summarized by reuters:
http://www.businessinsurance.com/article/20110926/NEWS07/110929894#
JGBO "market cap"
Also note that the trading volumes of JGBO.pk went from about $2000 USD a day total to...zero?..this past week. May be worth noting that last week was a Chinese national holiday. I'd take the "market cap" with a grain of salt.
Cao Wubo's cell phone discontinued
Cao's debtors have recently found that Cao's cell phone has been discontinued and his secretary is not answering the phone.
I'm sure there's a perfectly rational explanation though...
How to bring up the stock price
1) as a random aside, isn't $15 million due to Pope today? Any news?
2) one way to bring up the price real quick is to make Mr. Wubo Cao return the money that he funneled out of Jiangbo and surrender his shares in the company.
a. Wubo Cao has all the money and only he knows where it is (I don't think Jiangbo has quite as much as reported, but Cao does have at least $50-$100 million USD squirreled away from shady dealings around his other company Hilead--he got a 2 billion RMB loan for that after all. Of course, that money is not in Hilead's bank account either, no one knows where it is but Mr. Cao...)
b. Mr. Cao is a congressman for the People's congress of Yantai city. this means, even if the U.S. has no formal jurisdiction, any official criminal investigation, or even civil fraud suit, in the U.S. will be very very problematic for Mr. Cao if copies of that official suit happened to be sent to, say, officials at every level of government from municipal to provincial to national in China. So bad that Mr. Cao would potentially be willing to make Jiangbo shareholders hold just to make the issue go away.
c. all the class actions suing JGBO should really consider suing Wubo Cao personally--he couldn't care less what happened to the company since he already took all the money out anyway. for reasons related to b above though, he would care very much if we were sued personally, even if the U.S. had no official jurisdiction to enforce the outcome (just the official investigation/charge passed to Chinese officials could be potentially even worse for him than actual enforcement of a verdict by the U.S.)
d. Robert Khuzami of the SEC just announced a fraud probe into Chinese tech stocks on NASDAQ. It may be in the shareholders' interest to write his office and get Wubo Cao's name on that probe list.
Robert Khuzami of the SEC
that argument doesn't make sense
the reason the stock fell in the first place was because, well, a significant number of shareholders already dumped their shares, and the current stock price reflects what they were willing to sell their shares at...
I think the volumes say it all--regardless of what longs might be in, the point is x volume of the stock changed hands at y price since it started trading on the pink sheets around August 4th or 5th. the market data completely contradict the notion that "the long shareholders aren't willing to take less than a few dollars a share" because, well, the volume and price shows they *already* dumped at far less than that.
simple question
If JGBO has so much free cash, and their market cap is under $3 million (not that much more than the audit bill they managed to pay for the SEC investigation, incidentally), why wouldn't they just buy the whole company back?
the "recent" discount
Dear Value_Investor,
yes, it has been trading at over a 90% discount ever since their independent auditor resigned and gave details of their ongoing SEC investigation and NASDAQ delisted them. Even more of a bargain than Longtop!
No, I never touched this stock from any angle, don't intend to.
Personally, I also think profiteering off of scams like Cao by shorting is just as bad as profiteering by artificially trying to puff up the stock.
It seems Cao Wubo is trying to retract his SEC filing:
http://www.sec.gov/Archives/edgar/data/1091164/999999999711015683/9999999997-11-015683-index.htm
they've applied for a court order to hide the June 7th 2010 8-k exhibit 99.4 (the independent auditor resignation letter that likely prompted all the class actions)
it seems a little post facto, you'd think, given the incriminating nature of the filing, they'd have acted much sooner. It seems the court hasn't granted their request yet, as the letter's still up on the SEC website:
http://www.sec.gov/Archives/edgar/data/1091164/000114420411034429/v225152_ex99-4.htm
Also, word on the street is Cao's other company Hilead has over twenty frozen bank accounts. It seems they're not paying any of their bills (shocking and completely out of line with Cao's proven integrity in JGBO, I know...) and all of their vendors are suing them too. Their solution seems to be to secretly open a new bank account each time.
So so far Cao Wubo is simultaneously getting sued by:
-a bunch of you, for the whole JGBO fiasco
-a bunch of vendors he hasn't paid in China
-another company in China, former employer of Hilead's cofounder/production guy that allege Hilead's product names are literally the same as their internal quality control codenames that aren't even known to anyone outside themselves and their immediate customers.
It seems Cao is on his way to being sued by just about anyone imaginable, with the exception so far of:
-a bank for not getting paid interest on time
-the guy Cao Wubo never paid for his own stake in JGBO in the first place (though in that vein, it should be interesting to see what happens with Pope on Sept 30...)
-a customer for defective product
-an employee for sexual harrassment
-and maybe a random bystander for getting run over by one of their senior mgmt on his way to work.
At the rate he's going, he might check off those boxes soon as well...
Why you should join the class action
If you haven't been already, there's also an active yahoo finance message board on this.
I copied this from rto_watcher as he seems to have insider info too and I couldn't have said it better myself, and he also cross-posted me from this board a few months back so I think it's ok:
Hilead has at least 100 million dollars of hard assets and up to 200 million more of (real) money in the bank, Cao's literally spent money to advertise Hilead as a subsidiary of JGBO and registered it as such with all sorts of official government channels a few years ago--NASDAQ listed JGBO being good for prestige points in China at the time, that plus the fact that he likely actually used JGBO money to found Hilead, this will likely come back to haunt him as the law firms must all have dug this out by now.
The Chinese government will likely want to put this fiasco behind them, and these days beginning the long process of making amends with wall street is actually much more important to them than the (pre T12) market cap of JGBO (pocket change for the richest government in the world), or Cao's life.
If he feels genuinely threatened, Cao would likely settle for 50 million if pushed. I don't know class action lawyers, but based on my experience with service agencies (in which I include auditors, underwriters, class action lawyers, pretty much any group that offers a "fee for financial related services" model) I'd guess they would probably happily take 20 if it meant a settlement with no work on their part.
If you really force the lawyers to actually work for their money and say, initiate criminal proceedings against Cao in the US (which the Chinese government will actually care about--politics and differences aside, international cooperation over criminal matters is important to them since so many of their corrupt officials flee to the US and Canada) it will get upper level attention in China and make all of Cao's powerful (but secret) political backers evaporate. At that point, Cao would give back the 200 million or so in his secret account wherever to save his own skin.
To get that, of course, you need the lawyers to actually do their homework, have people who understand China and how to turn the screws while also leaving enough of an out to actually give Cao an incentive to return the money (it has to be "return the money or you will die" but also "you won't die if you return the money"..."return the money and you die anyway," while perhaps more to your sympathies, is not likely to get what you want if recouping investment is the goal...)
To get your lawyers to invest that much effort, well, you as the class actioners probably have to organize somehow to push them...
About all this class action stuff...
As you all probably know from reading the resignation letter in the 8-k, one component of the SEC investigation was what happened to the money Jiangbo supposedly had and whether it went to Hilead.
Initially it did (and was even widely announced by the local Laiyang government), but now it is most likely not even in Hilead, but Cao Wubo's personal bank account.
There is no money left in Jiangbo.
Cao himself is a "ren da dai biao" --the equivalent of a congressman in China. He has the Laiyang city police, in their official uniform, as Jiangbo's security guards, party secretary of Shandong province personally supporting his other venture, and publicized relations with the former head of the Chinese Academy of Science Lu Yongxiang.
Unless you have a way to leverage the FBI, US consul, or very senior Chinese government officials to get at Cao, I suggest you not bother--the money is in his personal account and untouchable unless you can swing political clout at that level. Alternatively, if you can brand Cao as a criminal and fraudster (which he is), the pressure will make all his political support back up. But you still need some high level behind the scenes talks to actually recover US shareholder money from China.
If you're unable to access the requisite resources and play on this level, I suggest you not bother--Cao is a blatant fraud but he has a political fortress and has stolen all of Jiangbo's money and safely put it there.
Good luck.
more specifically
from http://www.sourcing.org.cn/ens/User_Showe.asp?userID=8614:
"Mr. Wubo Cao, the legal representative of the company, and is also the Chairman and CEO of Laiyang Jiangbo Pharmaceuticals, Inc, the vice president of Association of Yantai private entrepreneurs, the representative of Yantai City People's Congress, the vice president of China Science and Technology Investment Council."
Cao Wubo is a Congressman in China
Can't believe I forgot to bring this up easier.
Not joking.
Cao Wubo is a "ren da dai biao" at either the municipal (Laiyang city) or provincial (Shandong province) level...this is the equivalent of a US congressman--well, obviously they have a little less real power in China but still...this should be fairly easy to confirm for any legal counsel with a China presence...
In other words, it is slightly harder for Cao to disappear than your average Chinese businessman, and shareholders pursuing him through official channels (say, the US ambassador...), may actually have recourse to hold him accountable.
Cao Wubo has the money, can be sued in US
Jiangbo's money is in Cao Wubo's pockets, either directly or through Hilead at any given time.
There may be ways for JGBO shareholders to sue Mr. Cao and/or Hilead. I'm not a lawyer so don't ask me about logistics, but I believe the information in my older posts on this board should be sufficient for any lawyer with a good investigative team to get started.
proof, any computer/internet experts?
On November 2, 2009 at 8:48:39 on the Laiyang government's own website they announced that Hilead was Jiangbo's subsidiary with Jiangbo investing capital.
The link is:
http://www.laiyang.gov.cn/wMcms_Board_News.asp?ID=29
It was up until very recently. I have not been able to find it on the archive.org wayback machine. I doubt these sort of internet things just disappear even after they are taken down though.
If anyone with computer or internet skills can somehow find an old copy or archive of the page...
I'm not sure. Practically the Laiyang police were willing to go to so much trouble to chase a reporter who wrote a negative article about Hilead, so Cao probably has at least a few people there in his pocket, so kicking him out might be tricky.
Liquidating and demanding the cash in the accounts may be the best bet, as the Chinese government may be reluctant to let that get out even if it is a fraud. They might just be concerned enough about reputation to quietly funnel in the money themselves to compensate shareholders (and later quietly deal with Cao appropriately), if a big enough stink is made about it.
The loan fraud, on the other hand, could potentially get many people in trouble, Cao being the first, of course. That's one reason the police and other local officials were probably so touchy about the article--it highlighted Hilead as pretty much some version of a Ponzi scheme to the investment community and public at large, which was obviously a problem for the current stakeholders then.
correction--state development bank, not construction bank. I get mixed up with the translation sometimes, but the original loan announcement is in the Chinese news and should even be on Hilead's own website.
Long-vestor: That guy actually was referring to my post HERE, #7593.
anyway, I hear shortly after the July 2010 article in Chinese Hilead's second installment of the promised 2 Billion RMB loan was cancelled by the construction bank, so it seems they are a bit short on cash.
Now that Jiangbo is also halted it will be interesting to see how Cao maneuvers--I have a feeling he owes money to certain people who will be less than pleased.
BigGreen: You're right, I misread. Cao only controls over 30% total.
So it may be possible to kick him out, or demand liquidation of the cash, etc...
One thing I'm not sure about--whether he is a US passport holder (believe it or not many Chinese businessmen are, tells you how much confidence they have in the government there). This may be interesting to look into for any potential fraud, embezzlement, or other action's against him...
BigGreen:
The problem is Cao owns or controls about 70% of JGBO still. If you look at the footnote for the holding company Verda-something that supposedly owns thirtyish percent in the recent forms disclosing all the major shareholders --you'll find Cao actually controls the holding company too.
Long-vestor: I think he had a much bigger funnel, namely see post #7593
In other words, I think the funnel wasn't just "approval funds" but actually "the registration capital for Hilead"...MUCH bigger funnel
but it's the first time I heard the LCDA approval story--I only started following the Nasdaq announcements after hearing of the T12, prior to that I was only familiar with the local China situation via a friend who unfortunately knows Cao.
If Jiangbo really said they were spending money to approve LCDA do you still have the source of the exact announcement by any chance?
I'm asking because there is no government approval process for LCDA as a product in China, other than the standard approval to manufacture anything, which actually does not require "special funds," unlike many things in China. Also, LCDA is not a pharmaceutical. So if you have the record of that actual announcement, the other shareholders and their lawyers might love you.
Long-vestor and BigGreen101:
BigGreen101: Pharma is the shadiest industry in China in terms of govt approval--think worse than melamine. Ask anyone who's worked in pharma in China (who isn't trying to raise money/sell you stock at the moment)
Long-vestor: Cao Wubo never went to college. During an initial takeover of Genesis for the reverse merge he claimed in one ppt to have a master's from Qinghua, the Chinese version of MIT
Cao Wubo has an army background, and Jiangbo used to be the army's pharmaceutical company and Cao their sales rep before the govt ordered the army out of the pharma business, that's how Cao took over.
LCDA is "long chain dicarboxylic acid," the most prevalent of which is DDDA (dodecanedioic acid) used by Dupont as a building block for the polymer nylon 6,12. Dupont used to dominate the world DDDA market. In 2003, Cathay Industrial Biotech entered the market as the first commercial producer to do it from a bioprocess. Around that time, Dupont spun out their DDA dept to Koch Industries as Invista. Invista and Cathay are the two major players in the world market for DDDA.
If you look at Hilead's old published claims (on national Chinese science/govt/etc websites no less, which gives you an indicator of their credibility), their sales were orders of magnitude more than the actual world mkt size. Also they claimed purchase orders with Dupont several times more than Dupont's annual demand. Obviously you can ask Dupont's nylon purchasing dept about them...
Also, they claimed tens of thousands of tons of sales, a good deal of which were exports, in 2010. China customs records showed they exported only a few hundred tons or less.
Also, Hilead was founded in 2008 with one founder being a production manager at Cathay who was still working at Cathay at the time. The "Chinese Academy of Science guy" involved was from the microbiology institute--i.e. strain development. The strain work to make the product was well known for decades--Cognis, Henckel, Dupont, GE, Purdue University also had DOE grant to optimize that part as early as 1999. Their problem was not the microorganism (the only thing the Chinese academy of science guy knew) but downstream purification, because polymerization applications are very sensitive to any different impurity profile (coming from fermentation instead of the traditional butadiene process to make DDDA) so removing the impurities economically was a major hurdle to bio-DDDA commercialization.
No one involved in Hilead (including the Chinese academy of science guys--the microbiology institute only works on microorganisms and doesn't even have the downstream process equipment) even had the equipment needed, much less time to develop the process, when they somehow mysteriously built a plant with the whole process.
Also, it's completely different from pharma because the scale is much larger for a lower priced product, plus polymerization requirements are far more stringent than pharma--pharma compounds just have to be nontoxic, which isn't too difficult when all the impurities from fermentation are proteins and sugars and such.
for industrial chemical and high end polymer applications, the proteins and sugars are completely different from the usual petrochemical impurities the traditional downstream processes have been optimized decades for, so just qualifying the product was difficult.
This is why the Chinese academy of science guy in Hilead previously licensed his technology to several other companies (including Zibo Guangtong) all of whom quickly went bankrupt.
In fact, Hilead's products are apparently marketed using Cathay's *internal* codenames--(not trade/common names for the product)--i.e. Hilead has no idea what else to make but the exact thing they stole from Cathay at the time they stole it (two years ago).
Cathay's investors include Morgan Stanley, Goldman Sachs, and are currently in the process of suing Hilead. Hilead's defense submitted to the court has been a) the US passport of Cathay's management and b) a proclamation from Hu Jintao about protecting Chinese vs US IP interests. After an initial payment of about 7000 million RMB, the China construction bank has frozen the rest of the promised 2 billion RMB loan. Cao has subsequently sent business plans to almost every PE fund in China. No one has invested.
Hilead has password protected access to the LCDA description on the products page of its website: http://www.china-hilead.com/en/index.asp
A Liang and Laiyang police
re: last post
just google "qianlong" and "laiyang police" for all the relevant links.. Ah liang is sometimes spelled "A Liang" in translation, "qianlong" and "laiyang police" together have more consistent English spelling and should point you to the mass of articles about the local police response to an article critical of Hilead.
Jiangbo is also from Laiyang (and also founded by Cao Wubo)...thus, as anyone familiar with China in general and that city in familiar knows, it is questionable any "(local) government verified" reports coming out of there.
For foreigners, try the "qianlong" and "laiyang police" google search and it may give you some idea.
Cao Wubo's other company, Hilead
To question the veracity of Jiangbo's reported finances (possibly the reason behind the T12 in the first place) I found this translation of the Chinese "swindle" article I mentioned--this is notorious in China for the Laiyang city police dept chasing the authors, Ah Liang and Liu Hong Chang, all over the country. for example (http://yong.hu/79.htm, or just google "ah liang" "laiyang police" and "qianlong")
Hilead Biotechnology Co., Ltd, another big swindle
in China’s biochemical industry?
By Qianlong
Hilead Biotechnology Company Ltd (hereinafter referred to as Hilead Biotechnology.) has recently built up a company financial and sales plan based on lies about the technology, distribution channels, profit and returns, and long term equity financing plan. The company inflated sales result and business plan have been distributed throughout the country since this April with one investment institution based in Beijing receiving 5 copies of it! This author after a professional analysis on this sales and business plan with support from a variety of data support, has exposed the serious lies made by the plan’s authors in Hilead Biotechnology Co., Ltd
Many companies became victims of the lies.
Long chain dicarboxylic acids (“LCDA”) are a class of widely used and important fine chemical raw materials. The traditional methods of producing LCDA has relied on chemical synthesis through difficult, multistep chemical reactions with low yields producing serious polluting byproducts. The chemical process can only produce a 12 carbon LCDA. Since the early 70s of the last century companies have explored the microbial fermentation production of these LCDA. Until today, Shandong Cathay Biotechnology Company Ltd (Cathay) in China is the only company that has successfully implemented the application of using bio-fermentation process to produce a variety of high purity LCDA products in the large industrialized scale their production began in 2003.
Hilead Biotechnology’s equity business plan says: in 2008, after acquiring a patented technology transferred from Prof. Chen Yuantong a retired employee of the Institute of Microbiology, Chinese Academy of Science, Hilead began to focus on the LCDA business including R&D, manufacture, sales, production. According to the business plan, Professor Chen’s technologies have won 7 state patents and got the second prize of the National Science and Technology Progress Award in 2006. The plan states that Chen’s many research results have been transferred to many Chinese companies with high productivity and resulting in great economic and social benefits. But the truth is, before Chen joined into Hilead Biotechnology, his transferred technology resulted in many failed industrialized projects of LCDA. Three typical cases are summarized below:
In 2003, Nantong Nenos Biotechnology signed a technology transfer agreement with Prof. Chen including strain, fermentation and crude LCDA extraction technology, but proven by field production trial, there is a large gap between the transferred technology claimed capability and actual performance. Nantong Nenos could not produce an acceptable product in industrial production. The company committed a high level of manpower and money to improve the crude LCDA extraction technology. They expected the technology to provide them with the capability to upgrade the product purity from 90% to 98% and above as noted in their posted information in the internet in 2009 and 2010 The technology was operated through a high-tech-exchange platform with city and province Government, but the production has never achieved desired results, because the product cannot match the customers’ high purity grade request.
After contracted with Chen in 2002, QingJiang Petrifaction(?) Company ran the production in 2005. However, their sales volume never exceeded 2 tons per year in the recent 3 years because the product quality could never meet the customer’s requirements. In 2009, their total sales volume was 700kg only. The signed contract included an agreement for Chen to sell the product but the process never meets the quality requirements of the new customers. The LCDA project manager of QingJiang Petrifaction complains in the strongest terms about the overall contract promises of Chen stating that, “as a scientific and technical professional Chen has no understanding of basic ethics”.
Zibo Guantong is a another company that has also contracted with Chen earlier. His transferred technology did not include the extraction technology, since Chen did not know how to extraction and purify the product at that time, so the transferee had suffered many setbacks and low sales due to quality issues. Three years after they built this plant, the company’s cash was zero and relevant assets were sold to the management at zero value. The project still keeps running now, however, but because of no improvement on the extraction process, the domestic sales in 2009 was very low and the international sale was zero.
Why did they fail? The poor extraction technology could not produce a high quality product.
“A completed technology of LCDA production from biotechnology has “3 steps” according to professional peers: 1), Develop a microbial strain and fermentation process to produce a fermentation broth contained LCDA; 2), separate the LCDA from fermentation broth and get the general grade product; 3), remove the impurities, so that to upgrade product quality can meet polymerization process request. This purified product is needed in over 90% of the market of LCDA.
The technology of the first step was solved by experts abroad many years before Dr Chen’s work. They even created a genetically engineered bacteria, with conversion rate close to the theoretical value, but the separation of the in the second step and the purification in the third step was never solved and the process was not pursued. Chen’s patent is only limited in the technology of strain and fermentation, duplicating early research, but has nothing to say about the core technology of extraction and purification. “This resulted in an immature technology that did not meet market needs. Many investors were misled to build production plants which could not make product that could be sold resulting in a waste of capital. It’s no doubt that they fail at the third step” of purification, the professional pointed out. This failure prevented Chen from being elected as an academician. His series of patents were challenged since the microbe already existing in nature.
Who owns the core technology?
In Hilead’s equity financing proposal, it declares, “at Jun, 2008, Prof. Chen Yuantong was appointed as CSO (Chief Scientist Officer) of Hilead Biotech; On Jun. 12, 2009, the former stock holder, Zhenzhi Wang transferred her 4% shares, worth RMB 9.6 million, to Chen; in Nov. 11, 2009, the registered capital of the company increased form 160 million to 360 million RMB and Chen provided an amount of 8 million RMB capital, accounting for 2.22%.
Mr. Chen Yuantong not only sold his technology to Hilead, but became their major shareholder as well. When Hilead launched their product, they were able to make the highest grade product. Has Mr. Chen made a progress in the technology of LCDA production? Has he made some improvements since selling the tech to previous customer? The answer is definitely not, the major reason the precut made quality is Mr. Wang Zhizhou joined Hilead lately.
According to the equity financing proposal, the company expanded its registered capital from RMB 58 million to RMB 160 million on July 28, 2008. Mr. Wang Zhizhou, as a new shareholder, invested RMB 800,000 in the company, accounting for 0.5% of total share.
After the survey by the reporter, we found out that Mr. Wang Zhizhou was still a senior employee of Shandong Cathay Biotechnology Co., Ltd. (hereinafter referred to “Cathay”) when he became a new shareholder of Hilead. At that time, Mr. Wang Zhizhou worked in Cathay as the deputy General Manager in charge for LCDA production and production expansion project. Mr. Wang Zhizhou took all of construction drawings, equipment procurement and installation information, for all of Cathay’s core technologies to solve the extraction and purification problems. In August 2008, Wang suddenly disappeared from Cathay without any notice. Soon later Wang appeared in Hilead titled as “general engineer” in charge of LCDA technology, plant design, infrastructure construction, facility installation, and production. After that, Hilead hired two other staff members of Cathay who had worked in Cathay as the key technician during Cathay’s expansion project.
According to a special report drafted by the Ministry of Science and Technology (MOSC) which was submitted to China State Council, said “there’s nearly 60 chemical and biochemical companies in the world had tested or used the LCDA products produced by Cathay. They all recognized that Cathay’s LCDA quality performances are reliable and stable. It is also said that the process technology of making LCDA in China has achieved an international advanced level. This event indicates that after using biological tech produced dodecanedioic acid, China has achieved a new and higher level in the bio-chemical industry". It is also reported that Cathay has significantly eliminated the technical bottleneck of fermentation production for making LCDA, as well as effectively solved the difficult problem of separating and refining. The full process was patented. This allowed Cathay to be the first Chinese and worldwide company to achieved a mass scale production by using biological method to produce LCDA, and first to successfully promote the products to the global markets. Cathay is currently the only company that has a bio-process that can compete with chemical process produced LCDA in cost and quality.
According to the registered business information in China State Administration of Industry & Commerce, the business scope of Hilead did not include LCDA business when it was established in April 2008. However, right after Mr. Wang Zhizhou becoming a shareholder of Hilead in July 2008, some miraculous changes took place. The company changed its business scope and added LCDA operation including R&D, production, sale, import and export into their business plan in Dec 12, 2008. Later, in Oct 2009, Hilead started to run phase 1 production and achieved high quality grade products. After a third capital increase in Nov 11, 2009, the registered capital of Hilead became RMB 360 million.
Hilead alleged that their production technology are from Chen and Chinese Academy of Sciences (CAC) and it has nothing to do with Wang, but the process diagram appeared in its equity financing plan has been clearly labeled with “P”-grade and “S”-grade products. These labeling codes are not the worldwide accepted name of LCDA in industrial area, but is a designation created by Cathay for internal use only. These two code means “general product” and “satisfactory product accordingly”.
“It’s obviously a flagrant plagiarism and a poorly disguised theft of technology, pretty much like drawing a dipper with a gourd model” pointed out some experts, “Hilead has tried to use the mask of Chinese Academy of Sciences and Chen Yuantong to make up their ugly face, but still have difficulty in meeting competition”.
What is the existing diacid market size?
In the equity financing plan, Hilead shows that with the growth rate around 18.9% the world wide total output value of the LCDA can achieve $850,000,000 by the end of 2009. They claim the statistics reported from some organizations shows that the total demand of the LCDA worldwide is 200,000 tons by 2009. With the growth of the downstream value chain, it would be a huge potential market with the demand of 400,000-600,000 tons each year during the predictable 10 years.
But some professional insiders have challenged the authenticity of the data. First of all, the total output of the LCDA is always around 25,000-30,000 tons per yearthrough the last century. The total sales volume is only 20,000 tons in 2009, which means 10 times exaggeration by Hilead. [ the math is wrong here. 200,000 MT x $5/kg is $1 billion] second, the market of the LCDA and the production cost stands steadily during the past 30 years, how can it be possible that the demand would develop so rapidly in the coming 10 years?
The market potential and the sales data from some professional insiders show the following factors: for C12: Invista from the USA shared 40% of the market with the sale volume about 8,000 tons. Cathay from China shared 25% of the market with the sale volume about 5,000 tons. Evonik from Germany and UBE from Japan have shared the rest 35% of market with volume about 3,000 tons for each and for internal using only. For C13, Cathay shared the 90% of the market with the sale volume about 2,000 tons. The sales and demands of C12 and C13 makes up of the main market of the LCDA which covers more than 95% of the market. The four main producers are Cathay(with output capacity of about 15,000 tons), Invista Lycra (with about a capacity of 17,000 tons), Evonik and UBE(with a capacity of 3,000 tons for each) , All are produced through chemical methods except Cathay. And the sale volume of four main producers above just reach half of their output, which shows the existing market, is oversupplied.
Where did the Hilead claimed products go?
In the equity financing business proposal, Hilead said: After starting up last year (2009), the intention of the contracted orders from domestic and abroad amount to 5 million tons, current orders are continued to rise. Major customers include DuPont, Degussa, Kunshan TAIDA Chemical Co., Ltd., Shandong Dongchen Engineering Plastics.
Customs statistics data showed: in 2009, Hilead Biotechnology did not export that amount of product. In 2010, ending May 31, the total Hilead export value is 370,000 RMB. At a price of 42,000 RMB per ton with VAT. This converts to an amount of exports of LCDA from Hilead Biotechnology of not more than 9 tons. Despite Hilead’s claims of a signed contract with Dupont, this reporters has learned that DuPont in United States did not sign any purchasing contract with Hilead, and also did not purchase any amount over 1 kg of LCDA from Hilead. Germany Evonik (Degussa) only purchased 4 tons products from Hilead. Kunshan TEDA ordered only a few hundreds of kilograms of products from Hilead. Totally 50 tons purchased by Shandong Dongcheng in 2009 does not come from Hilead.
The sales amount of Hilead to main customers is less than one percent of their claims, Who did they sell the rest to? From these limited sales their equity financial plan said they achieved sales of 125 million RMB and got 41 million RMB net profits from October 2009 to March 2010.
In this connection, the professional peer pointed out that Hilead has fabricated sales channels, the data is false, sales and profit margins are so outlandish that “it is likely that, to play a financial game that they sold products from left hand to the right hand."
Could Profitability be really that strong?
In the equity financing business plans, Hilead Biotechnology said: company plans to raise 3 billion RMB, to complete the capacity of 60,000 tons/year of LCDA production in three phases over 5 years. The first phase of the project is 10,000 tons / year, and the production has startup officially in October 2009, it has achieved sales of 50 million RMB, net profit 17 million RMB in the same year. The second phase is of 20,000 t / y. Its construction launched in November 2009, and will complete with the world's largest production base of LCDA in June 2010. It is expected to achieve net profit of 300 million RMB in 2010. As for the phase III, the capacity will be 30,000 tons / year. at the end, the total production capacity will be 60,000 tons / year, the annual output value will reach 30 billion RMB, and profits are more than 1 billion RMB.
"It is a cake drawn by imagination." Industrial analysts pointed out. First, the profit target of 2009 year was exaggerated. The company received a 2.05 billion RMB loan at a the basic commercial loan interest rate (three-year) is 5.4%, It means Hilead will suffer with 110 million RMB interest for each year; in addition, with the existing 2.2 billion assets’ depreciation by 15 years, they will face 140 million RMB depreciation expense each year. In 2010, if they produced 20,000 tons, this adds up to the full load of raw material, power, auxiliary materials, labor and management costs to a minimum of 32,500 RMB / ton (referenced from Zibo Guangtong company’s data after their bankruptcy, their cost and profit are lowest in the market, excluding tax), Hilead Biotechnology’s expenditure of non- interest cash cost will be no less than 650 million RMB, the total cost should be higher than 900 million RMB. According to their two times export average price in 2010, (34,000 RMB / ton, with tax), even if Hilead is at full capacity for whole year, and the entire product could be sold, the maximum sales can only be 680 million RMB. Therefore, it appears to be proven that in this year Hilead will face 120 million RMB deficits, instead of 300 million RMB profit.
Secondly, even if they have the total capacity, their targeted profit number is still a boast. The global market size has not reached 60,000 tons / year. Who could consume this amount of product? Without enough sales, how can they achieve stated profits?
Are the huge loans really to build the business?
In the Hilead equity financing business plan, Hilead said that as the bio-chemical industry leading company, they have received subsidies over 10million RMB from the National Development and Reform Commission. They expect to receive governmental subsidies of more than 300 million RMB in the next two years. The project has become the “chief governor’s project” at the province, city and county level, as well as a high priority project in the local governor’s eye. In terms of loans, currently the State Development Bank (SDB) has provided 750 million RMB to them. They promise a follow-up 5 billion RMB will be provided during project Phase II and Phase III. In June 2010, Hilead states in their website that they just received 1.3 billion loans from SDB.
Added above two items together, Hilead has already received 2.05 billion RMB in loans from SDB. Hilead is targeting to get 5 billion RMB of loans. Do they really need so large of a loan? The answer from industrial professional is no.
First, the investment for a facility this size is not that much. Hilead claimed they have completed a capacity of 10,000 tons LCDA production line, the assets value is 2.2 billion RMB. There are industry benchmarks, every 10,000 tons capacity, including the total investment and infrastructure, the total capital would be around 400 million RMB . Why did Hilead spend one billion or even 2 billion? Using the same standard for 60,000 tons capacity, the investment will not be more than 2.4 billion RMB. Why has Hilead asked for 5 billion RMB loan?
Second, the capital cost burden is too heavy. The above example has been done to calculate for the year 2010: Even if Hilead Biotechnology runs at full capacity this year, they will still suffer a 220 million RMB losses. If production and sales does not achieve 100%, losses will be even greater. Why would Hilead be willing to bear such a heavy burden?
Third, they have no capability to repay the loans. Business loans should have sufficient mortgage or guarantee. With a 360 million RMB as registered capital, to one’s surprised, Hilead Biotechnology has already obtained total of 2.05 billion RMB, the question goes to Hilead: How do you repaythis huge loan?
In this connection, the insider pointed out that the all of the signs show that their real objective is not in business, but in misappropriating.
Jiangbo has a "subsidiary," Shandong Hilead Biotechnology Co. (which itself has a myriad of,..."factual consistency" issues--reference at end of document), founded and led by Cao Wubo while he was acting CEO of Jiangbo. Cao Wubo (founder and Chairman of the board of Jiangbo) remains the majority shareholder of Hilead. Jiangbo officially owns zero shares of Hilead, despite public announcements that Jiangbo invested substantial funds in Hilead.
Short version: it's possible Jiangbo paid for Cao's majority stake in a new company. Jiangbo officially owns no part of that company, Cao Wubo personally does. There is the distinct possibility that Cao Wubo might actually be a US citizen (a good portion of Chinese businessmen actually try very hard to get US citizenship), which could potentially make him far more sue-able in the US, may be something a class action lawyer might want to look into...
Long version:
It is possible Cao Wubo actually used Jiangbo company funds as registration capital for his personal equity stake in Hilead without informing Jiangbo shareholders, based on the following:
1. Jiangbo is listed neither on the official shareholder register nor recorded as ever owning equity (or investing in) Hilead according to Hilead's business plan and official registration document. According to those documents, majority ownership in Hilead belongs to Cao Wubo personally.
2. According to the official registration document of Shandong Hilead Biotechnology Co. Ltd., Cao invested 325.6 million RMB cash in Hilead. To our knowledge, Cao's only source of income outside of Hilead is Jiangbo, and Cao Wubo was acting CEO of Jiangbo (publicly listed on NASDAQ at the time) when he founded Hilead.
3. The only disclosed relationship between Jiangbo and Hilead in Jiangbo Pharmaceuticals, Inc. Form 10-K filed September 28, 2010 is a lease of two warehouses from Hilead for a total of $103,000 USD
4. an announcement of Hilead's environmental approval on the official Laiyang government website on Nov. 2, 2009 stated that Hilead was Jiangbo's subsidiary and it's initial registration capital, amounting to 160 million RMB, was funded by Jiangbo.
reference for Hilead (in Chinese but google translate can give you the rough gist):
July 21, 2010 Qianlong.com article ?????? (“Hilead Biotechnology Co., Ltd, another big swindle in China’s biochemical industry?”) by Ah Liang and Liu Hong Chang, since removed and reposted over the web.
The paraphrased summary goes along the lines of "Cao Wubo started this company Hilead (incidentally, this is not pharmaceuticals but industrial Biotech, which Cao somehow became an expert in. His partner Chen Yuantong, an ex member of the Chinese Academy of Sciences Microbiology Institute with no industry experience, has a distinguished track record of licensing his technology for their product to half a dozen companies over the course of a decade, pretty much all of whom have gone bankrupt.) Hilead also claimed profits orders of magnitudes above his total sales and purchase orders from global multinationals for several times the world market size, swindled a massive loan from the China development bank with the help of his local buddies (Laiyang city, same as Jiangbo), and probably intended to make good on that by going public in the US eventually via reverse merger or somesuch. Sound familiar? Oh, and their IR firm is the same one Jiangbo initially used...