Did China-Biotics pay its debts?
Disclosure: Matt Berry
–
I have a short position in CHBT. Everyone is responsible for their owndue diligence and their own investments.
Color Printing
1
was disclosed last month
. It appears that China-Biotics
’
2
subsidiary is in arrears of some $55,000 USD. Not very much
… b
ut then again, the lower thedebt, the more puzzling the failure to pay. The debt may have remained on the books of Jinjia for as longas five years now. The small debt of the subsidiary, Shanghai Shining,
3
was listed as
“unlikely to be
recovered.
”
I paid for a professional translation of the section relevant to China-Biotics:
Despite the small amount concerned, the final report contains a breakdown of this single provision for thebad debt reserve of accounts receivable.
本
报告期末单项金额虽不重大但单项计提坏账准备的应收账
款明
细情况：
Unit: Yuan Currency: Chinese Yuan (renminbi)
单位：元
币种：人民币
Contents of accounts receivable
Book balance
Bad debt provision
(%)
Provision ratio (%)
Grounds for this provision
China-Biotics Inc
4
361,901.50 361,901.50 100
are unlikely to be recovered.
(Click on the Chinese in each cell for an alternative translation through Google. As for the company name, it links to a Googlesearch. You can click on through the Google hits to see that they connect to
“
Shanghai Shining
,” China
-
Biotics’
)
The most recent 2010 annual report, as well as the 2009 and 2008 reports, each mentioned the debt. Inthe 2008 Annual Financial Statement we find the same numbers and reference with
“
3
年以上
”
“More”
("Arrears Time.") I
found no mention of the debt in the 2007 report. Is that because the debt was not more than 3 years old atthe time? That might suggest that the unpaid debt was as old as 2005 (2008
–
3 = 2005). What is bafflingis that it is such a small amount, only about $55,000 USD at today's exchange rate. It does begin to makesense however with a little digging.Here is the cash which Shanghai Shining declared to the Chinese government agency, ShanghaiAdministration for Industry and Commerce (SHAIC).
5
2006 2007 2008 2009Cash claimed inChina in RMB962,397.53 260,926.98 936,935.39 548,308.11USD per unit,Dec. 310.128081973 0.136900036 0.14654161 0.146455769
Converted toUSD$123,265.77 $35,720.91 $137,300.02 $80,302.89
At the end of 2006, Shanghai Shining told Chinese officials that it had $123,000 cash. Now of course thecash in SEC filings is a
consolidated amount.
That makes it difficult to say that the money is not withanother subsidiary. However, for China-Biotics the only other subsidiary in the PRC at this time was
Growing Bioengineering (Shanghai) Company Limited, and it had no operations until 2010. It was noteven established until September 22, 2006.(Mar 2007 10-ksb)
It is difficult to believe that Shanghai Shining is not
supposed
to have the money. In SEC documents, netsales were said to be $
14,421,772
for the year ending March 31, 2005. By March 31, 2006 it was supposedto have pulled in $
21,862,38
5
…
with a net profit margin of 38%
. Cash in March 2005 was roughly 10million dollars; in March 2006 it was 20 million.(Mar 2006 10-ksb)
The only obstacle to grasping that Shanghai Shining was cash poor is an equally poor thinking process. If we use the company as the single source for our information, accepting only the facts downstream frommanagement, then we can easily be confused when outside information arrives to contradict us. If wedeliberately try to falsify our own position, with outside information and from a variety of sources, thenwe can quickly identify contradictions and filter out the weaker facts, leaving a pool of strongerconclusions. If done with rigor, this should result in a mental state where the possibility of being caughton the wrong side of the market has been lessened to a considerable degree. With China-Biotics, afteraccepting a
variety
of sources, a very different story emerges.Is it possible that around 2005, at about the time the company was preparing its reverse merger for March2006 that it was really cash poor? In case the preceding was not enough, here is a passage from a lawsuitwhich was professionally translated:
“Legal representative: Li Jianhua, manager.
Authorized agent: Shi Yu, attorney at Shanghai Lingyun Yongran Law Firm.Defendant: Shanghai Shining Biotechnology, Co. Ltd.Domicile: 999 Jinqiao Rd, Pudong New Area, Shanghai,
Legal representative: Song Jin’an, chairman of the board.
Authorized agent: Li Changzhi, employee of the company
“
Sales contract dispute case between the plaintiff Shanghai GM Biochemistry Product Co., Ltd.and the defendant Shanghai Shining Biotechnology, Co. Ltd, accepted by the Court on the 26thof July, 2005. On the same day, the plaintiff applied for property preservation; following review,the Court issued a civil ruling to freeze defendant bank deposits of 140,000 yuan or seal up
property of the equivalent value.”
6
140,000 yuan, that’s about $17,000 in 2005.
The court records show that the problem began before 2005,but what concerns us here is the financial state of Shanghai Shining in 2005. From July 2005 to March2006 when China-Biotics introduced itself to the US markets, we are looking at 8 months. We begin that8 months with evidence of a deadbeat and end with declarations to the SEC of outrageous wealth.In SEC filings,China-Biotics claims $10,271,503 cash and cash equivalents on March 31, 2005. Yet in
China the judge felt it necessary to freeze $17,000?
How could this be? … Why? …
What long journeyhad Shanghai Shining begun?
“On October 5, 2009, the Company closed an underwritten public offering of 4,600,000
shares of itscommon stock at a price of $15.00 per share. On October 26, 2009, an additional 690,000 shares weresold pursuant to the exercise of an over-allotment option at the same price. Net proceeds of the offering,including the over-allotment, after deducting underwriting discounts, but excluding estimated offering
expenses, were approximately $74.9 million.”(
That’s
real
money.
I’ll just leave
it at that.Short: CHBT
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Did China-Biotics pay its Debts?
Evidence that China-Biotics was unable or unwilling to pay its debts when it approached US markets through a reverse merger.
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