[Flashback] Chinese Companies in Alleged Accounting Fraud: China Biotics and West China Cement


Posted by CHEN Liting, Year 3 undergrad at the School of Accountancy, Singapore Management University

China Biotics (CHBT) is a Fraud – Now sue Citron- We Dare You.

Posted in Citron Reports by CitronResearch on the September 14th, 2010

Yesterday, DYP and DGW were the number 1 and 2 losers in the market declining 54% and 41% respectively.  This only shows the fragility and lack of transparency that exists with small cap Chinese companies.  Citron will prove that China Biotics does not just lack transparency, but rather it is an outright fraud.Citron Research has been writing about stock fraud for over 9 years.  In that time, we uncovered numerous frauds that have subsequently been delisted and management charged by the SEC.  Yes, we have made mistakes in the past, as have even the best researchers, but we have NEVER been wrong about a fraud.

With that, Citron is confident to state “China Biotics is a fraud” If we are lying, then please sue us and we will prove it in court.  Or, put out a press release defending yourself and explicitly blame Citron Research, and we will sue you proactively to prove that you are committing securities fraud on the investing public.

We do not use the fraud word lightly, but frauds have a certain way of playing out, and sure enough CHBT management is following along right with the script.  You don’t have to be Sherlock Holmes or even Encyclopedia Brown to figure this one out.

The curious case of the missing stores and the ol’ switcheroo trick.
Two weeks ago in our first article, Citron questioned the “network of stores” that are claimed by CHBT –  the same stores referenced in years’ worth of SEC filings, but are also discussed in every analyst report.  More importantly, the stores that investors relied upon when they forked over $75 million for shares .  Citron does not believe that Roth Capital intentionally tried to defraud the public, rather they became collateral damage.    In the second line under use of proceeds, the registration statement states “to expand our retail operations”.

Once we questioned the stores existence, CHBT immediately put on their website a list of the “branded stores” as they state in their SEC filings.

Within hours Citron was able to determine that these were not their stores, 95% of them were just supermarkets and retail outlets.  We took it a step further and hired two private investigators to take pictures and prove what we knew.  Once we brought that to the attention of the investing public, the company changed their website again to eliminate the word “stores”…a play right out of the scamsters’ handbook.  They also eliminatedthe line  “The Company’s most recognizable customers include Bright Dairy, and Relax Xinqiao.” Why?  Now it just says “the following is a list of sample locations where you can find our product.“


Just to remove any doubt about “what they said” and “what they meant”, reference the company’s June 2010 investor presentation: http://www.chn-biotics.com/files/CHBT%20June%202010.pdf

Page 4, bottom:  China-biotics operated 111 retail outlets as of March 31, 2010, each outlet has an average payback of less than one year.”

Where are the stores?  Where is the money that goes to salaries and leases for these stores?  Whose pockets is it in???   Did we mention this is a fraud??

The curious case of the missing money… check this out.

When you put money in the bank you get interest… DUH.

China Biotics claims its cash in the bank is $159.7 million in the bank, according to its June 30 SEC filing – every dollar of which is supposedly available for corporate purposes.  Yet it reports interest of just $87,876. So where is the interest? . How can the company be earning interest of less than 1/10th of comparable companies?   Companies with large cash balances earn interest.  Interest rates on free cash balances in China earn 1% for 3 month to 1 year term deposits, and 2% for 1 to 2 year term deposits.

Simple math tells us that at 1% interest the cash should generate $400,000 per quarter in interest income.  At 2% this same cash balance should generate $800,000 per quarter.

So either the company is only getting 1/10th the interest rate that it should be getting in china, or 90% of the money is not IN THE BANK.  One would assume that the company is using some of the funds for working capital and to build out its new operations.However the SEC filing states that it is all in the bank!

CHOP earned $278,000 (1.44%) interest on $77.3 million in the last quarter.

XIN earned $554,000 (1.33%) interest on $166 million in the last quarter

CAGC earned $171,000 (1.32%) interest on $51.7 million in the last quarter.

Even Orient Paper earned $108K (1.55%) interest on its $7 Million cash in 2009…

The curious case of the conflicting financials

A great debate is now ongoing about disclosure documents filed in China and those filed in the US.  Citron has read the “plausible deniability” explanations from Roth and others about how variations in rollups and tax treatment might make for a partial misalignment of the numbers in these reports.  Other claims, such as fear of disclosing corporate secrets to competitors, seem nonsensical and downright moronic as anyone has free access to SEC documents.

The numbers are not just off because of different GAAP standards or maybe some accounting practice, the difference between the two is as wide as the Great Wall.  Just take a look.

2008 Filings Disclosures SAIC SEC
Cash 100,000 64,300,000
Accounts Receivable 1,000,000 13,200,000
Revenues 500,000 42,300,000
Gross Profits 200,000 30,000,000
Net income (1,200,000) 17,500,000

Now the “longs” or in this case people who are about to apologize to Citron will argue that these are not audited and the company is lying to China and telling the truth to US regulators and the investing public.


CHBT’s SAIC filings are audited.  Just go to page 80 of the filings and you will see the audit report of a top 100 Chinese accounting firm. http://chinesecompanyanalyst.files.wordpress.com/2010/08/chbt-aic-filings-in-english-translated2.pdf

And as for lying to the Chinese Government but not the SEC, you want us to believe that management who lives and pays taxes in China, where white collar crime can be punishable by death, will lie to the Chinese Government but they will not lie to the SEC?  And why are we supposed to believe this ?  C’mon … if only the stock market was always this easy.
The fate of CSKI is an interesting tell.  That company too had massive discrepancies between SAIC and SEC disclosures.  Now, the company finally confesses that “some distributors”, under pressure from Chinese regulators, suddenly don’t want to play ball, a resigned CFO, an ugly restatement, a formal investigation and subpoena from the SEC, and a 50% haircut later, reality has extracted its price … on the suckers.  Good luck suing ‘em now.

The Company’s Response

Well heck, they had to say something.  On Friday September 10, the company released a statement commenting on their stock.


In it they don’t defend their alleged stores claim explicitly.  Instead they state that there are “market rumors”.  Where are the rumors?? These are facts.   The generic press release blaming the shorts is so old, tired, and predictable.   Cmon, you could have at least signed a distribution deal with Santa Claus to bring your products to all the boys and girls of the world.

Corporate Credibility

One of the big corporate news story over the past few months was the firing of Mark Hurd from HP for fudging an insignificant amount on an expense report.  While this might have been a bit extreme, it shows Wall Street operates with zero tolerance for lying.

What amazes Citron is that the longs in this stock are proud of management’s ability to selectively lie.  It is OK to lie about the stores… because it is now just a small part of their future revenue projections.  Well, it wasn’t such a small part of the company’s revenues when they used that very track record from those “branded stores” to raise $75 million from US investors.

(we think the only fair thing for the company to do is offer the secondary buyers their money back immediately. )

Meanwhile, is it also OK to lie to the Chinese Government?  We are sure there will be a great story as to where the money is now.

Citron believes that the whole business model is a lie from top to bottom and management has zero credibility to say anything different.

Don’t forget the old adage:  At every poker game there is a sucker, and if you don’t know who the sucker is, it is you… You have been warned.

Cautious Investing To All


For those of you who still believe in the “stores”, I guess we all need some blind faith, here is some fun reading.

The Results, and the photos

43 of the locations published on the company’s website, until recently claimed to be “branded outlet” locations have now been surveyed, with photos:

Company stores (like those pictured on the company’s website) 2
Supermarkets or drugstores carrying one or two products on a small shelf space  : 16
A store offering no CHBT product whatsoever on its shelves 17
No retail at that address, or nothing at all 8
Store-within-store or kiosk  (Yes our visitors politely asked) 0


This is not a rumor.



West China Cement denies fraud claims, shares fall 16 percent

Wed, Aug 8 2012

HONG KONG (Reuters) – Shares in mainland cement maker West China Cement Ltd (2233.HK:QuoteProfileResearchStock Buzz) fell as much as 16 percent on Thursday following a report by a U.S.-based short-seller accusing the firm of fabricating its financial statements.

West China Cement, the latest Chinese company to be targeted by short-sellers, said the report by California-based Glaucus Research Group was groundless and was based on inaccurate data.

“The report adopted a very general approach to its analysis of the group’s bank balance and this is clearly misleading,” the company said.

West China Cement, which had a market value of $774 million before trading began, closed down 1.5 percent on Wednesday morning ahead of a trading suspension. The stock was last down 8.5 percent at HK$1.19 at 0138 GMT.

Deloitte Touche Tohmatsu, which was appointed earlier this year as the auditor for West China Cement, was closely monitoring developments, Deloitte China said.

A spate of accounting scandals at U.S.-listed Chinese companies has made auditors more alert to the risk of financial irregularities and the consequences for them if they’re found to be negligent.

Glaucus Research was not immediately available to comment.

Italian cement maker Italcementi (ITAI.MI: QuoteProfileResearchStock Buzz) agreed in May to acquire a 6.25 percent stake in West China Cement as the group moved to strengthen its position in the world’s largest building materials market.

Earlier this week, shares of Nu Skin Enterprises Inc (NUS.N: QuoteProfileResearchStock Buzz) fell as much as 12 percent after short-seller Citron Research published a report alleging that the personal-care products maker was operating an illegal multi-level marketing scheme in China.

Nu Skin said in a statement that its China operations were in compliance with local regulations.


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