Replies to post #59737 on China Growth Stocks

[ratobranco]

HRBN - Roddy Boyd brought up the margins issue in his bash piece. Of course, he's a rambling poet, he didn't actually present the numbers. So I checked them myself, using foreign income statements for Harbin's competitors available on businessweek.com. They are definitely out of line with peers.

I have no explanation. Do you?

I'm not saying there isn't an explanation. I'm saying I don't know what it is.

That's where DD comes in to play. In this environment, with all that has happened, I think appropriate DD requires us to find an answer to the argument. We can't just blow it off (like we might have blown off hearsay customer reports on RINO ;-)).

Either HRBN doesn't have the margins they claim to have, or they do have those margins, and there is an explanation as to why. Let's find it.

Maybe it's their exposure to high-speed rail. Rather than rest on that explanation, however, I want to see actual numbers for other companies that are similarly exposed to high-speed rail, to see if the numbers are in the same ballpark.

As for Goldman, how do you conclude that "the CEO got Goldman involved"? Baring is making the investment. Baring is footing the bill. My guess would be that Baring got Goldman involved.

Now, if Baring goes to Goldman and says "I want to make a PE acquisition and I want financing, can you help?" what is Goldman going to say? The fact that Goldman says "yes" doesn't mean that Goldman has even the slightest clue as to what lies underneath Harbin.

You have to rest the credibility of this deal on the name "Baring", on the fact that they are willing to take on this debt, not on the name "Goldman" (or "Morgan Stanley" or whatever). As we know from the "Timberwolf" case, Goldman is willing to sell utter shit to clients provided that all parties are factually aware of the purchase/sale conditions (what security, what price, etc.) and Goldman gets its cut. Goldman is just a coordinator/marketmaker in these deals, not an investor, and they will tell you exactly that when things get ugly.

As for going private, it absolutely does make sense for a CEO to want to go private if the company is a fraud--particularly a tax fraud. If you are a tax fraud, and people are on to it, you want to get off of the exchange ASAP, away from reporting, so that you don't attract problems for yourself in China. Look what happened to CSKI. If you believe their story, this whole experience of having to make extensive disclosures to defend against fraud claims is destroying their business.

Now, let me ask you this. Have you seen HRBN's SAT filings?

That's a key piece of information that we need here. My prior experiences with other names in this space make me wonder whether those filings will match ;-). I'm certainly not going to bet on it ;-)

[ratobranco]

HRBN - just to reiterate:

All things considered, I think the probabilities say that HRBN is legit, at least legit enough to justify the current stock price (any time you look closely at anything, you will find some discrepancies between what is reported and what is actual per GAAP, especially in China--but I think that's understood and accepted by all parties).

What I would like to see, and what I think would solidify this play DD-wise is,

1) A competitor that has exposure to high-speed rail and that has somewhat similar gross margins to HRBN.

2) HRBN's SAT filings. Their SAIC filings do not match (that's already been confirmed).

[ratobranco]

HRBN - it seems you were right that it was the CEO that got Goldman involved, rather than Baring, which I had assumed.

"Mr. Yang has further advised the Company that he intends to proceed with a proposal to take the Company private at the previously announced proposed price of $24.00 per share, that he will seek alternative sources of financing for the transaction, and that Goldman Sachs (Asia) LLC will continue to act as financial advisor to Mr. Yang in connection with the transaction."

At the same time, I think the fact that he is now saying that he will seek out alternative sources of financing is clearly a disappointment relative to what the market was expecting. Before, the market had thought there was a firm buyer in place, specifically Baring (though without a contractual commitment), but now the story is that Yang is going to go to the market looking for buyers, with Baring having the option to play at 10% if they want. Much shakier IMO.

I think if you buy Harbin right now, the buyout should be seen as an extra bonus. You have to buy the stock on its own corporate merits. Given the forward P/E of 5.20, it's definitely a buy, provided the financials are clean.

Many seem to see the ongoing buyout offer from the CEO as reason to believe that HRBN has clean financials. I think that makes sense, and I think the probabilities say HRBN is legit (although I still have no answer to the margins argument from the shorts--that's the one thing we need for a slam dunk: to find a company exposed to high-speed rail with similar GM's to HRBN).

At the same time, we have to remember that it would be in the interests of the CEO to go private if there were a specific kind of fraud--tax fraud--that presents the risk of damage to corporate standing (i.e. CSKI) if uncovered through SEC reporting. Also, we don't know how much of the CEO's personal money will go to the buyout. If he is putting in large amounts of his own money, that is one thing (very compelling), but if he is offering primarily his shares, and using other people's money to foot the bill, then that is an entirely different thing (not nearly as compelling).

The biggest upside IMO is not the buyout offer, but rather the possibility that Yang knows something, given his political position in China. Maybe he knows what sorts of contracts or orders are coming for his company in conjunction with the new five year plan, and disclosed that to Baring and other potential buyers. Maybe that's part of the reason why he wants to go private. Obviously bullish.

I am not a buyer yet because I think Roddy Boyd is going to put out an "I told you so" hit piece. That will be the bottom IMO.