China Kangtai Cactus Bio-Tech Inc (fka CKGT)

[lukematt]

CKGT: Form 10-Q for 2008 Q2 is NOT Transparent


On August 14, 2008, after reading CKGT’s newly released Form 10-Q, I tried to unload my CKGT shares for a healthy profit at $0.89. Unfortunately, the “market manipulators” shortly thereafter moved their large “Ask” block down to $0.88, and I refuse to play the “chase me” game.

Why do I want to unload my shares, especially considering that I am a long-term investor, not a day trader?

Well, some of the items in CKGT’s 10-Q are really starting to smell bad.

1. Gross margins are down.

Three months ended June 30, 2008.....30.41%
Three months ended June 30, 2007.....36.54%

Six months ended June 30, 2008.......32.84%
Six months ended June 30, 2007.......34.74%

The company, of course, wants to put the best spin on these deteriorating numbers, so the 10-Q tells us that “Our gross profit…increased” while completely neglecting to discuss gross profit **margin**.

2. I can accept lower gross margins if a reasonable explanation exists for the higher “Cost of Sales”. Here is CKGT’s explanation from the 10-Q:

“Cost of sales increased by $1,129,240 or 47.9%....The increase was mainly due to the increase in the sale of raw cactus.” I really want to understand this statement, but I don’t. At a minimum, CKGT should have provided a more thorough explanation.

3. For the line item “Accounts Receivable”, CKGT’s allowance for returns and doubtful accounts is a whopping 18.21% of total accounts receivable. That’s **ridiculous**.

4. General and administrative expenses are up 79.31% for the three months ended June 30, 2008 and up 115.13% for the six months ended June 30, 2008.

Again, I can accept higher G&A expenses if a reasonable explanation exists. However, in CKGT’s case, we now start to get into the really stinky stuff.

According to CKGT’s 10-Q, “The increase in general and administrative expenses was mainly due to increase in salaries and related benefits.” Of course, the 10-Q conveniently neglects to specify the total number of workers at China Kangtai Cactus Bio-Tech Inc., which we could compare against previous quarters.

Therefore, I’ll speculate with my own explanation.

From CKGT’s 10-Q:
Jinjiang Wang, CEO
Hong Bu, Chief Financial Officer
Chengzhi Wang, General Manager

All three of these individuals are also on the company’s Board of Directors. Jinjiang Wang is the Chairman of the Board.

From Securities and Exchange Commission Schedule 14F-1:
“Jinjiang Wang is the father of Chengzhi Wang. Hong Bu is the wife of Chengzhi Wang.”


Now, I live in a former Communist country, and I have personally witnessed time and time again how family-run companies like to “feather the family’s nest” at the expense of the company. Therefore, until CKGT provides a detailed explanation otherwise, I will assume that “the increase in general and administrative expenses due to increase in salaries and related benefits” mainly gilded the Wang/Bu family.

5. Last but definitely not least….

The price that Harbin Hainan Kangda (a 100% owned subsidiary of CKGT) paid to acquire a land use right from Guangdong Province is **OUTRAGEOUS**.

Specifically, on May 16, 2008, they paid $7,255,081 for a land use right covering approximately 152,000 square meters of land.

By contrast, in June 2006, CKGT paid $1,475,000 for 240,000 square meters of land (and a factory and…).


Now, you understand why I tried to dump my shares at $0.89. I expect the share price will be significantly lower in the future.