China-Biotics, Inc. (CHBT)

[Florinda]

More allegations against CHBT's legitimacy. The article is called: "China-Biotics vs. Spreadtrum Communications: "Why AIC Filings Matter"

The author, "Chinese Company Analyst", tries to make his case by comparing CHBT's AIC filings with another Chinese company's AIC filings (SPRD's). His purpose for using SPRD is that he thinks it is a legitimate company and it submits its AIC filings to the same local government as does CHBT. His basic premise is that SPRD generates a significant amount of income and its AIC filings give assurance to investors that their SEC filings are accurate since they pretty much mirror one another, whereas CHBT's AIC filings show a huge discrepancy with their SEC filings and indicate fruad. His rationale is that if AIC filings don't matter--as some have claimed--it makes no sense for SPRD to report such a high income and incur a heftier tax liability thereby if CHBT can get away with reporting to the same officials 10 times less the income they are reporting with SEC filings. In short, he argues that CHBT management is deeply concerned with giving its local government officials accurate information because such officials have the power to severely punish them whereas foreign governments and investors don't have that kind of power so lying to them doesn't pose a real threat.

It's a fairly long article. Here are some lengthy excerpts:

As I’ll discuss, Spreadtrum’s AIC report and financial statements provide evidence that SPRD is a legitimate Chinese company that generates substantial revenue and owns a significant amount of assets. Their filings give investors comfort that the company is accurately representing itself in its SEC financial statements.

CHBT’s AIC report and financial statements, on the other hand, indicate a company that is far smaller than its SEC filings indicate. Whereas SPRD’s AIC filings show a company generating more than $100m of revenue, CHBT’s filings show a company generating less than one-tenth of its SEC-reported revenue.

Both companies file with the same local AIC office. The reports are in the same format, and include similar sets of documents. Yet one shows a legitimate company, and the other shows a legal entity that has minimal business operations. Any long investor in CHBT, or critic of the legitimacy of AIC filings, has to ask himself the following question: Why would CHBT provide false information in its AIC filings when SPRD doesn’t?

The answer is that CHBT management is providing accurate information to the AIC. It seems to me that the fake information is in the SEC filings that they provide to public investors and the U.S. government, a government that does not have legal recourse to a Shanghai-based company....


Evidence for why AIC filings do matter

I don’t think any aspect of our AIC filings gives the impression that companies can outright lie in the financial statements they file with the AIC. Each company provides lengthy and accurate information on their registered capital, leases, shareholders, company bylaws, etc. It’s a tremendous leap of faith to believe that the AIC requires accurate reporting in these aspects, but is indifferent as to whether a $40m revenue company reports sales of only $1m in its financial statements.

Here are additional reasons why we should take CHBT’s AIC filings seriously.

1. CHBT management and insider shareholders live in China. The AIC filings are filed with the Chinese government, whereas the SEC filings are filed with the U.S. government. Management is concerned about violating Chinese law and providing false information to the Chinese government. But, as it appears to me, they are indifferent to defrauding the US government and breaking US law. A Chinese resident does not have to obey U.S. law any more than a U.S. resident is required to obey Chinese law. That’s why they report the accurate numbers to the Chinese government, and what I believe are fake numbers to the U.S. government. There are practically no repercussions to Chinese management teams that defraud foreign investors. Numerous U.S.-listed RTO companies, like CXTI, CYXI and CHFI, have seen their management teams vanish with the companies' assets, and suffer no legal repercussions. Defrauding U.S. investors is not a violation of Chinese law, whereas defrauding the Chinese government is.

2. The AIC financial statements are audited. The audit reports can be found on pages 56-57 and 73-74. Click here for English translations of these pages.

3. On page 70 (English translation is here), near the front of the 2008 Annual Inspection Report, we have a picture of Yan Yihong (the former CFO, and sister-in-law of the CEO), along with her detailed personal information and the following testament:

I hereby confirm and promise that all the contents contained in the annual inspection report do not contain anyfraudulent information and all the financial statements and other materials submitted are true and effective, and that I’m willing to bear any legal and related responsibilities caused due to the inaccuracy of such documents.


This is followed by the signature and personal seal of CEO Song Jin’an, as well as a seal of the company. I can’t fathom how the Chinese government would require such a testament in the Annual Inspection Report, but then allow a company to file false financial statements.

As I see it, it’s far more believable that CHBT is defrauding the US government and US investors, both of which have no legal recourse to the company’s management. The Chinese government certainly has legal recourse to Yan Yihong and Song Jin’an. The existence of this sort of testament at the front of the AIC Annual Inspection reports is a strong sign that AIC financial statements do matter....

Conclusion

Naturally, I have found that AIC filings are not the only signs that CHBT is falsifying its SEC financial statements. Citron Research raises excellent non-AIC-related issues with the company here. To me, the notion that probiotics nutritional supplements allowed CHBT to achieve revenue growth of 30%-50% annually over the past 4 years while achieving Microsoft-like EBITDA margins of 40%-45% is nothing short of absurd. The company raised $75m of cash in 2009 when it already supposedly had that much sitting in the bank, with no compelling reason for the new capital raise and dilution. Its reverse merger was organized by the same investors who’ve provided capital to renowned fraud Orient Paper, and its auditor is also the same as ONP’s (not to mention China Expert Technology’s). But we’ll get to these points in the future.

For now, I aim to make the case that AIC filings matter. The documents provided in this article provide an indication of what information AIC filings provide, and why investors should pay attention to them. SPRD’s AIC filings show a legitimate business that manufactures and sells semiconductors. On the other hand, CHBT’s AIC filings, as I see it, show a virtually non-operational legal entity which its management has used to defraud public investors, as well as the SEC, and to raise $75m of cash from US investors.

The whole article is here:

http://seekingalpha.com/article/223068-china-biotics-vs-spreadtrum-communications-why-aic-filings-matter?source=email

There are something like 42 comments in response to this article (which I did not read).

Steve