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OperationsStartDate:September5,2011 ReleaseDate:September26,2011

ChaodaModernAgriculture

11YearsofDeceitandCorporateFraud
TheBasics Ticker: 0682:HK Associate: AsianCitrus(0073:HK) MarketCap: HK$8.5Billion ReportedNetCash: RMB2.8Billion Float: 2.7Billion

ConsensusEstimates
Recent Price: HK$2.50 HK$6.31 152.4%

ConsensusTarget: ImpliedReturn:

AnonymousEstimates
AnonymousTarget: ExpectedReturn: Delisting 100%


YouShouldHaveExpectedUs Contact:anonanalytics@hushmail.com Website:www.anonanalytics.com

Disclaimer
Anyinvestmentinvolvessubstantialrisks,includingcompletelossofcapital.Anyforecastsor estimatesareforillustrativepurposesonlyandshouldnotbetakenaslimitationsofthe maximumpossiblelossorgain.Anyinformationcontainedinthisreportmayincludeforward lookingstatements,expectations,andprojections.Youshouldassumethesetypeof statements,expectations,andprojectionsmayturnouttobeincorrect.JustasktheFed. Allfacts,figures,andopinionsareasattheOpstartdate.Thisdocumenthasbeenprepared forinformationpurposesonly.Thisdocumentisnotanoffer,orthesolicitationofanoffer,to buyorsellasecurityorenterintoanyotheragreement.Thisinformationisatthedateof preparationandsubjecttochange.Whilewehavemadeeveryefforttoensurethatthe informationcontainedinthisreporthasbeenobtainedfromreliableandlegalsources,wedo notrepresentthatitisaccurateorcompleteandshouldnotbereliedonassuch.Donot assumethatanycompanymentionedhereinhasreviewedourreportpriortoitspublication. Wemakesnorepresentationorwarranty,expressedorimplied,inrespectoftheinformation containedinthisreportandacceptsnoliabilitywhatsoeverforanylossordamagearisingfrom anydistributionorrelianceonthisreportoritscontents. Weholdnodirectpositioninanyofthesecuritiesprofiledinthisreport.However,youshould assumethatasofthepublicationdateourassociates,partners,affiliates,consultants,clients, andotherrelatedpartiesholdshortpositionsinthesecuritiesorderivativeofsecurities profiledinthisreport.Youshouldfurtherassumewehaveanindirectinterestinthese positionsandstandtogainfromadeclineinthesharepriceofthesesecurities. Wedenyourrighttocopyrightprotectionlawsastheypertaintoredistribution.Accordingly, anypartofthisreportmaybereproducedincontextwithoutourconsent.

Introduction
Recently,ourrepresentativestraveledtoHongKongtomeetwithexecutivesofChaoda ModernAgriculture,oneofChinaslargestagriculturalcompanies.Chaodaplacesitselfasa leaderinfarmingandagriculturalinnovation.Atthemeeting,managementshowedushow fasttheCompanywasgrowing.Theytoldushowmanyproductionbasestheyoperated.They toldusabouttheirinvolvementinthe2008BeijingOlympics,aboutalltheawardstheyhad won.Phraseslikestateleveldragonheadleadingenterpriseandmostvaluablebrandin Chinawerepepperedthroughoutthemeeting.Weleftwithbooks,pamphlets,andCDsfullof marketingmaterialandnotes. Butitwasnttheirmarketingmaterialthatcaughtourattention.Itwasntthatthiscompany waschosenastheofficialvegetablecaterertothe2008BeijingOlympics.Itwasntthat ChaodahadbeenrankedasoneofthemostvaluablecompaniesinChina.Itwastheir numbers,whichwereeyepopping.Thisoncesmallcompanyhadmanagedtoredefinethe farmingmodel,andintheprocess,growntooneofthebiggest,mostlucrativeagricultural companiesintheworldacompanythatCreditSuissehailedasrevolutionary.Weshook handsandleftthemeetingwiththeimpressionthatChaodawaseitheroneofthegreatest companieswehadeverwitnessed,oralargescalefraud.

ExecutiveSummary
ChaodaModernAgricultureisoneofChinaslargestpublicagriculturalcompanies.Thisreport providesevidencethatitisalsooneoftheHongKongExchangeslargest,andlongestrunning frauds. Chaodahasanextensivehistoryofdeceivinginvestorsandshareholders.SinceitsIPO,there havebeenseveralresignationsbyauditors,executives,anddirectors.Weprovideproofthat managementhasconsistentlyliedaboutthereasonsbehindtheseresignations.Wefurther showthatmanagementhastimeaftertimemisledinvestorsabouttheCompanyscapital requirements.Tothisend,managementhasassuredshareholdersthatthecompanywas sufficientlycapitalized,onlytotapthecapitalmarketsoftenwithinseveralweeks. RoundsoffinancingarerequiredbecauseChaodaisoverstatingitscashbalance,exaggerating itsrevenue,andfalsifyingitsfinancialstatements.Weshowthatreportedrevenuenumbers makenosenseandprovidestatisticalproofastotheimprobabilityofChaodasreported margins. MuchofthemoneythatisraisedistransferredoutoftheCompanybymanagementandthird parties.Thesetransfersarecarriedoutunderthecoverofgrosslyinflatedcapexspending,and relatedpartytransactions.Weprovideproofthatpaymentsmadetoamajorsupplierowned bytheCEOaresimplybeingtransferredtoashellcompanywithnobusinessoperationsand deminimisassets. Furthermore,weshowthattheCEOhasusedshareholdermoneytoinvestinriskyprojects withoutcommensuratereturns.Oneoftheseprojectswasapoorlyoperatedorange plantation(AsianCitrus)thatevenPepsiCo.foundtoorisky.Whilethisprojectrobbed shareholdersofhighreturns,theyenrichedtheCEOthroughsimilarrelatedpartytransactions. Finally,weshowthatChaodaispayinganotherfraudulentcompanytoprovideitwithpositive marketingexposure.Inabizarretwistworthyofamysterynovel,thissagainvolvesNobel laureatesandsomeoftheWesternworldsmostrenownedacademics. Theoretically,ChaodamaybeworthHK$0.60pershare(currentlyHk$2.50)derivedfroma blendedNAVandDDMapproach.However,basedontheevidenceinthisreport,aswellas informationwehavedecidednottorelease,webelieveChaodamayfacedelisting.
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ChaodasBusinessModel
Chinahasahighlyfragmentedfarmingindustry.WhereasintheWestafarmerownsand operatesseveralhectaresoffarmland,inChinaafarmergenerallycultivatesoneortwomu. 1 ThisfragmentationpresentstwoproblemsfortheChinesefarmer:lackofdiversificationto highermargingoods,andlimitedtonobargainingpower. Giventhesmallareaoflandandlimitedhorticulturalknowhow,Chinesefarmersgenerally focusoncultivatingwhattheyknowusuallyrice.Iffarmersdeviatefromricetohigher marginproduce,theyriskthechanceofapoorharvest.Sinceafarmsprimarymandateisto feedthefamily,farmersavoidthisriskbystickingtowhattheyhavetraditionallygrown. Ifafarmerharvestsenoughproducetofeedthefamily,thesurplusisthensoldtothemarket. Unfortunately,thisprocessinvolvessmallquantitiesandseveralmiddlemenwhoeachtake theircutbeforetheproducemakesittotheretailers. Chaodasbusinessmodelisbasedonconsolidatingthefragmentedfarmland,diversifyingthe products,andcuttingoutthemiddleman.First,theCompanyleasesadjoiningfarmlandfrom farmersandupgradestheinfrastructure,addingirrigationsystemsandimprovingthesoil. Thenthefarmersarehiredback,trained,andpaidasalarytogrowavarietyofvegetableson thenewandimprovedland.Inthisway,thefarmersarefreetogrowhighmarginproduce whilebeingassuredincometosupporttheirfamilies.Thesalariesareusuallyhigherthanwhat thefarmersweremakingworkingforthemselveswhichencouragesthemtocooperatewith Chaoda. Afterharvest,Chaodausesitsaggregateproductionmuscleanditsnetworkofretailand wholesalecontactstoselltheproduceatamuchhigherpriceoftensixtimeshigherthan whatindividualfarmersget.Intheory,thatshowthemodelissupposedtoworkandcanbe verylucrative.Somuchsothatithasbeenreplicatedbyothercompanies,includingChina GreenHoldings(904:HK),ChinaMinzhong(MINZ:SP),andLeGaga(GAGA:NSDQ).Thatsthe goodnews.Thebadnewsisthatinpracticethemodelispronetofraudandcorruption. Forexample,sincelandisleasedbutneverowned,itcanbedifficult,ifnotimpossibletoverify howbigaproductionbasethecompaniesactuallyoperate.Furthermore,givenhow fragmentedthefarmlandis,itisnotalwayspracticalforagriculturalcompaniestonegotiate withallthefarmers.Instead,negotiationsandagreementsareoftencarriedoutwithlocal governmentofficials.Thesearetwoareaswherethemodeliseasilysusceptibletofraudand corruption. Whileourresearchindicatesthattheremaybeaselectfewlegitimatecompaniesinthisspace withgoodcorporategovernancepractices,wedonotbelieveChaodaispartofthisgroup.In reachingourconclusion,wehavevettedthousandsofdocuments,consultedotheranalysts,

AmuisastandardunitofmeasurementinChina,equaltoapproximately1/15thofahectare.

industryexperts,andlawofficesspanningvariousjurisdictionsandspecialties.Inadditionto whatispresentedhere,certaininformationhasbeenbroughttoourattentionwhichgivenits naturewehavedecidedtowithhold.However,basedonallavailableinformation,webelieve Chaodaismisleadinginvestorsandmisrepresentingitsoperations.Wewillpresentevidence showingmanagementhasactivelyliedtoinvestors,committedcorporatefraud,andenriched itselfattheexpenseofshareholders.


ChaodaAHistoryOfDeceit
WelaythegroundworkforouranalysisbyshowingthatChaodahasahistoryoflyingand misleadingshareholders.SinceitsIPO,therehavebeenseveralresignationsbyauditors, executives,anddirectors.Belowisasummaryoftheseevents. December15,2000Chaodagoespublic June3,2003PricewaterhouseCoopersresignasthefirmsauditor. TheEvent:TheresignationofPwCasearlyas2003isthefirstclearsignthatthereareissues withChaodasoperationsandreportedfinancialstatements. ManagementsResponse:InareleasedstatementmanagementclaimstheresignationofPwC wasaresultoffeedisputes. 2 TheTruth:Auditorsrarelyresignasaresultoffeedisputes.Thereissufficientcompetition amongtheBigFourandsecondtierauditfirmstoensuretheydontnickelanddimeclients. Moreover,auditorsdonotsuddenlysurprisecompanieswithanauditingbill.Thefeeisagreed uponbeforetheauditstarts. WeareconfidentthatthereasonforPwCsresignationhadnothingtodowithfees.We believethatPwCfounddiscrepanciesinChaodasfinancialstatementsandconcludedthatthe companywastooriskytoaudit.Toavoidpublicscrutiny,PwCandmanagementagreedthat thebestwaytoresignwasonthegroundsofafeedispute. Infact,apaperreleasedin2005bytheHongKongInstituteofCertifiedPublicAccountants statesthefollowing: TheStockExchangeofHongKongLimited(SEHK)andtheSecuritiesandFuturesCommission (SFC)haveraisedconcernswiththeHongKongInstituteofCertifiedPublicAccountants concerningannouncementsmadebylistedissuersoftheSEHKofthereasonsforchangesin auditors.Inmanycases,feedisputesarestatedtobethereasonforthechange.Concernhas beenexpressedthatcertainauditorshavebeenrelyingonpurportedfeedisputestodisguise therealreasonsforthechange.Asaresult,potentiallysignificantandfundamentalmatters aboutthelistedissuermaynotbedisclosedtoinvestorsandcreditorsandthemarketisnot thereforebeingkeptfullyinformed.Itisimportantthatthesituationconcerningthechangeof auditorsshouldbedisclosedinfulltoavoidthepossibilityofthemarketbeingmisled. 3

2 3

http://www.chaoda.com.hk/pic/Announcement/2003/a030605.pdf http://app1.hkicpa.org.hk/professionaltechnical/whatsnew/docs/1_207A.pdf

Ifaswebelieve,PwCusedfeedisputestoavoidbringingmaterialissuestotheattentionofthe boardandshareholders,thenPwCiscomplicitinthecontinuingfraudcarriedoutbyChaoda. September1,2003Anindependentdirectorresigns TheEvent:WongKongChi,anindependentdirectorresigns.Whenitrains,itpours,because thisresignationcomesthreemonthsafterPwCsallegedfeedisputeandinthemiddleofwhen Chaodaisnormallypreparingitsyearendresults. ManagementsResponse:Wecannotfindanystatementbymanagementregardingthe reasonforthisresignation.However,anotewasquietlyslippedintothe2003AnnualReport. TheTruth:WongisafellowmemberoftheAssociationofCharteredCertifiedAccountants,a memberoftheHongKongInstituteofCertifiedPublicAccountantsandacareerindependent director.Wonghassatasanindependentdirectoronvariousboards,includinghiscurrent positionatYipsChemical. 4 WearecuriouswhatreasonMr.Wonghadtoresignfromthe board,especiallyatatimewhentheyearendfinancialinformationwasbeingprepared. Chaodassilenceonthematteronlyaddstothemystery. September20,2004Anexecutivedirectorresigns TheEvent:ChuiNaLai,cofounderofChaoda,executivedirector,andwifeofMr.Kwok(CEO andChairmanofChaoda)resigns. ManagementsResponse:Inareleasedstatementmanagementclaimstheresignationisdue tohealthreasons. 5 TheTruth:Wenotethatintheweeksleadinguptotheresignation,ChuiNaLais compensationincreasedsubstantiallyfrom701,000 6 to3,338,000.Additionally,she transferredherentirestakeinKaileyInvestmentLtd. 7 toMr.Kwok, 8 effectivelyremovingher directinterestandassociationwithChaoda.Wedontknowwhattomakeoftheseevents,but wefindtheresignationduetohealthissuessuspectgiventhetransferandextraordinarypay off.Ms.ChuihassincemovedontoLeGaga(acompetitor)astheViceChairwoman.

4 5

http://www.webbsite.com/dbpub/positions.asp?p=5414&hide=N http://202.66.146.82/listco/hk/chaoda/press/p040920.pdf 6 2005AnnualReport,Pg.56 7 KaileyInvestmentLtd.isaholdingcompanybywhichMr.KwokholdsownershipinChaoda. 8 2004AnnualReport,Pg.25

June25,2005BakerTillyInternationalappointedascoauditor TheEvent:BakerTillyInt.joinsCCIFCPALtd.asjointauditor. July1,2005Anexecutivedirectorresigns TheEvent:ChenHang,anindependentdirectorresigns. ManagementsResponse:InapressreleaseChaodaclaimstheresignationisduetohis pursuitoffurtherstudy. 9 ItwouldseemthatMr.Hangisgoingbacktouniversity. TheTruth:Managementspurportedexcusefortheresignationisalie.Oursearchindicates thatshortlyafterresigningfromtheboard,Mr.Hangwentintoprivatepracticeasan agriculturalconsultant.In2008,hejoinedLeGagawhereheiscurrentlyVicePresidentof Operations. 10 Nofurtherstudy.Nonewdegree. September1,2005TheCFOresigns TheEvent:GordonWang,theChiefFinancialOfficerofChaodaresigns.Conveniently,this resignationcomesinthemiddleoftheannualreportbeingprepared. ManagementsResponse:Inapressrelease,Chaodaclaimstheresignationisduetopersonal reasons. 11 Thisisavaguestatementbutinvokestheimageofpersonalorfamilyproblems. TheTruth:Mr.Wangspersonalproblemsseemtohaveclearedupratherquickly,becauseless thanamonthafterresigning,hefoundapositionastheCFOofAcornInternationalInc,alittle knowncompanylistedontheNYSE 12 .Tobesure,thiswasnotapositivecareermovegiven Acornssmallsizeandrelativeobscurity.Accordingly,webelieveWangsresignationhadmore todowithproblemswithChaodasfinancialstatementsthanproblemsathome.Wanghas sincemovedbacktoacareerintheagriculturalsectorbyjoiningLeGagaasanindependent director.

http://www.hkexnews.hk/listedco/listconews/sehk/20050630/LTN20050630159.pdf http://people.forbes.com/profile/hangchen/149020 11 http://www.hkexnews.hk/listedco/listconews/sehk/20050817/LTN20050817118.pdf 12 http://people.forbes.com/profile/gordonxiaogangwang/1011


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December29,2006CorporateSecretaryresigns TheEvent:SusannaChingCheMan,ChaodasCorporateSecretaryresigns. ManagementsResponse:Wecanfindnoexplanationforthedeparture. TheTruth:WedontknowwhyMs.Chingresigned,butshecurrentlyworksforthe GovernmentofHongKongontheAdministrativeAppealsBoard. 13 June21,2007Bothauditorsresign TheEvent:BakerTillyInt.andCCIFCPALtd.bothresignascoauditors. ManagementsResponse:Inareleasedstatementmanagementonceagainclaimsthe resignationofbothitsauditorsistheresultoffeedisputes. TheTruth:Letussuspendbeliefforaminuteandtakethisclaimseriously.Wechallenge managementtoanswerthefollowing: Backin2003whenitwasannouncedthatPwCwasresigningastheCompanysauditor, ChaodalostapproximatelyHK$200millioninmarketvalueintwodays.Havingpreviouslygone throughthisexperience,howmuchcouldtheauditorfeeshavebeentojustifythebillionsof dollarsofshareholdervaluethatwaswipedoutfollowingthisresignations? EitherthisisoneofthemostrecklessmanagementteamswehavewitnessedorChaodaisa fraudandmisstatingthescopeofitsbusiness. Hello,ImLeonardNimoy.Thefollowingtaleistrue.AndbytrueImeanfalse. Itsalllies.Buttheyreentertaininglies.Andintheend,isntthattherealtruth? Theanswerisno. TheSimpsons

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http://www.admwing.gov.hk/eng/links/aab_mem.htm

MisleadingShareholdersOnFinancingNeeds
OneofoursourcesstatesthatataconferencewithChaodainthefirsthalfof2010, managementdiscussedtheirlofty3yearexpansionplans.Whenaskedhowtheyproposedto financetherapidgrowth,wewereassuredtheCompanyhadmorethanenoughoperating cashflowandcashonhandtomeetanycapexrequirements. OnAugust17,2010,shortlyafterthatconference,theCompanyraisedUS$356Mthrougha combinationofstocks,options,andnotes.Unbelievably,onApril27,2011,theCompany proposedafurtherroundoffinancing. Whilethesecondproposalwaswithdrawnlessthanaweeklatercitingmarketconditions,we findthatmanagementhasconsistentlymisledinvestorsregardingChaodascapital requirements.Timeaftertime,managementclaimedthecompanywassufficientlycapitalized, onlytotapthecapitalmarketsshortlyafterwards.Threeexamplesfollow:

Example1
WhatWasSaid:FromanOctober22,2008SouthChinaMorningPostarticletitledChaoda EyesAdditionalFarmland: ChairmanKwokHosaidChaodawoulduseinternalresourcestofundtheexpansionof 100,000muamidtheglobalfinancialcrisis.Itcurrentlyhas494,800muofvegetableland,tea gardensandfruitorchards.Onemuisonefifteenthofahectare. Itsimpossibletoraisefundsrightnow,soourplanismappedoutinaccordancewithourown ability,MrKwoksaid. TheFujianbasedcompanyhadenoughcashtoredeemitsconvertiblebonds,worth1.37billion yuan,dueinMay2009,hesaid.AttheendofJune,Chaodahadcashandequivalentsof1.28 billionyuan,downfrom1.67billionyuanayearearlier. Iamaveryconservativeman,saidMr.Kwok.Wehaveadequatefinancialresourcesforthe bondsredemption. WhatWasDone:Fourmonthslater,Chaodanetted341millionthroughagypsyswap.Right beforetheannouncement,twoexecutivedirectors,KuangQiaoandIpChiMingsoldtheir entireholdingof3.2Msharesand0.7Mshares,respectively. 14

http://sdinotice.hkex.com.hk/di/NSNotice3AList.aspx?sa2=nd&sid=10102200&corpn=Chaoda+Modern+Agricultur e+(Holdings)+Ltd.&corpndisp=%u8d85%u5927%u73fe%u4ee3%u8fb2%u696d(%u63a7%u80a1)%u6709%u9650%
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Example2
WhatWasSaid:Duringthe2008/2009interimconferencecallinMarch2009,Mr.Kwok stated,weareconfidentthatwithinternalresourceswewillbeabletorepaytheCBaswell asthehighyieldbondandmaintainapropergrowthrate. 15 WhatWasDone:InJune2009,theCompanyraised1.5billionthroughashareplacement. Twoweeksbeforetheannouncement,IpChiMingdumped80,000ofhis90,000shares. 16

Example3
WhatWasSaid:Duringthe2009/2010interimconferencecallinMarch2010,theCFO(Andy Chan)explainedthatevenafterretiringthehighyieldbonds,therewasenoughcashonhand andfundsfromoperationstointernallyfinanceanygrowthactivities.Thispositionwas reaffirmedtooneofourcontactsaslateasJune,2010. WhatWasDone:Twomonthslater,Chaodaraised2.4billionthroughacombinationof bonds,shares,andoptions.TheCompanyalsotriedtoraiseanother1.3billioninApril,2011, butfailedcitingmarketconditions. WefindthesuddennatureofthesecapitalraisesbizarregivenChaodasgrowthmodel. Managementstatesthatittakesapproximately6to12monthsfromconsiderationand planningtoactuallyleasingfarmland.Duringthisperiod,ateamexaminestheclimate,water source,andlandtoensurecultivationiseconomicandviable.Oncetheleaseissigned,Chaoda hastowaitforthefarmerstoharvestwhattheyhavealreadygrown.Thisstepcantake another12to18monthsbeforeChaodabeginscultivatingtheland.Theentireprocessisslow andtakesapproximatelytwototwoandahalfyears.Accordingly,managementwouldknow farinadvanceofitsfinancialpositionandcapitalrequirements.

u516c%u53f8&sd=01%2F04%2F2003&ed=12%2F11%2F2010&sa1=cl&scsd=16%2F11%2F2000&sced=16%2F11%2 F2010&sc=0682&src=MAIN&lang=ZH&pg=2 15 http://www.chaoda.com.hk/pic/420110a.mp3 16 http://sdinotice.hkex.com.hk/di/NSNotice3AList.aspx?sa2=nd&sid=10102200&corpn=Chaoda+Modern+Agricultur e+(Holdings)+Ltd.&corpndisp=%u8d85%u5927%u73fe%u4ee3%u8fb2%u696d(%u63a7%u80a1)%u6709%u9650% u516c%u53f8&sd=01%2f04%2f2003&ed=12%2f11%2f2010&sa1=cl&scsd=16%2f11%2f2000&sced=16%2f11%2f2 010&sc=0682&src=MAIN&lang=ZH&pg=1

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FalsifyingFinancialStatements
AddingtoourconcernsofmanagementsopaquefinancingactivitiesaretheCompanys reportedcashbalances.Weareconfidentmanagementisinflatingtheamountofcashthe CompanyhasaswellasfalsifyingChaodasfinancialstatements.

CashBalanceDontBankonit.
Exhibit1showstheamountsChaodahasraisedthroughtheyears,thefinancingmethod,and thestatednetcashbalancejustpriortotheraise. Exhibit1 Reporting ReportedNet NetRaise Discount/ DateofFunding Type Period Cash() (Equivalent) Rate 2011H1 2,835M April27,2011 1,300M ProposedNotes* n/a 2010H2 2,029M August17,2010 2,421M Bonds,Shares 11.6% 2009H1 398M June18,2009 1,517M SharePlacement 12.9% 2009H1 398M February19,2009 341M GypsySwap 11.0% 2006H1 (360M) May3,2006 1,172M CB 16.0% 2005H1 611M February7,2005 1,530M SeniorNotes n/a 2004H1 359M June14,2004 1,020M ProposedBonds* n/a 2004H1 359M January15,2004 595M GypsySwap 5.7%
Source:Companystatements,CapitalIQ

ThemostglaringredflagspertaintothefinancingactivitiesonAugust17,2010,andApril27, 2011.OnAugust17,2010Chaodaraised2.4billionthroughacombinationofbondsand sharesinahighinterestenvironment.Thisraiseisalarminggiventhe2billionnetcash positionthecompanyclaimed.AddingtothisisthatChaodatriedbutfailedtoraiseanother 1.3billionseveralmonthslater.Thistime,theCompanyclaimednearly3billioninnetcash onitsbalancesheets.Ifthereportednumberswerecorrect,Chaodashouldhaveeasilybeen abletofinanceitsexpansionusingcashonhandandcashflowfromoperationswithoutany needtotapthecapitalmarkets. 17 FuelingthemysteryandourconvictionthatChaodaisfalsifyingitsfinancialstatementsarethe eventssurroundingthefirstcanceledbondofferingin2004.InJune2004,management canceledbondofferingsasaresultofmarketconditions.Thisofferingwasmeanttoraise1 billion.Toputthissuminperspective,itwasapproximatelyequaltoChaodas2004FYnet income.

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ChaodaspendsapproximatelyRMB3billionincapexanddrawssimilaramountsfromoperatingcashflow.

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Managementofferedthefollowingstatementrelatingtothecancelationofthebond placement: ItwasstatedintheAnnouncementthattheCompanyintendstousethenetproceedsarising fromtheProposedBondIssuetofinancetheexpansionoftheagriculturalproductionbasesof theCompanyanditssubsidiariesandforgeneralcorporatepurposes.Basedonthecurrent cashreserveoftheGroup,itistheviewoftheboardofDirectorsthattheCompanysdecision nottoproceedwiththeProposedBondIssuewillnothaveanyimpactontheoperationand businessoftheGroup. 18 Wedonotunderstandhowfailuretoraisecapitalofthismagnitudewouldnotaffectbusiness. Generally,whencompaniesarenotabletosecurethisamountoffinancing,itcripplesgrowth. NotChaoda.Despitenotbeingabletoraisethecapitalin2004,theCompanyreported revenuegrowthof38%in2007,theyearthatinvestmentspendingin2004wouldhavebeen realized 19 .Coincidentally,thisisthelargestgrowthratethatChaodahaseverrecordedinits historyasapubliccompany.Howthismiraclewasachievedwhilelockedoutofthecapital marketsisbeyondlogic. !$#@ingMarginsHowDoTheyWork? Exhibit2 IndustryGrossMargins
70% 65% 60% 55% 50% 45% 40% 2003 2004 Chaoda Source:Companyreports 2005 2006 2007 2008 2009 2010 LeGaga 2011 ChinaGreenHoldings Minzhong

18 19

http://www.hkexnews.hk/listedco/listconews/sehk/20040720/LTN20040720084.pdf Investmentsmadein2004wouldhavebeenrealizedin2007asweexplainedonthebottomofpage10re: Chaodasgrowthmodel.

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Managementsmiraclesarenotlimitedtoneckbreakinggrowthinlieuoffinancing.Theyalso presentthemselvesinChaodasgrossmargins.Exhibit2showsChaodasmarginsrelativeto peers.Whatimmediatelysticksoutishowhighandconsistentthesenumbersare.Overthe lastdecade,Chaodahasmanagedtomaintainitsmarginswithina4%range.Numberssohigh andsounfailingarevirtualunheardofinthecommoditiesbusinessandmostlyexistinthe LandofMakeBelieve. Todemonstratejusthowimprobablethesenumbersare,weranthenumbersthrough statisticalmodelingsoftwaretocomparethemarginparametersbetweenChaodaandChina Green,anindustrypeer.Theresultsarepresentedbelow. Exhibit3 StatisticalModelingOutput

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Exhibit3showsthestandarddeviationofChaodasgrossmarginsisapproximately1.3%, comparedto4.7%forChinaGreen.Basedontheseparameters,Chaodawillreportgross marginswithina65.7%68.5%range99%ofthetime.THISRANGESPANSAMERE3.2%. Asapointofreference,ChinaGreens99%confidenceintervalisamuchmorereasonable 48.6%59.0%.ThisrangespansChaodasthreefold.Saveforthelargestmultinational conglomerates,Chaodasreportedmarginsarenotjustunlikelyforavegetableproducer,they areunlikelyforanycompany,inanyindustry.Thesenumbersareevenmoreimprobablewhen youconsidertheCompanyslongoperatinghistory.ItappearsthatChaodaisunaffectedby supply,demand,droughts,qualityissues,badharvestseasons,oranyformofnaturaldisaster. Basedontheprecedinganalysis,weareconfidentthatChaodascashbalances,reported revenueandauditedfinancialstatementsareinflatedandcompletelyinaccurate.Weurge investorsnottorelyonthisinformation. ApparentlynothingaffectsChaoda.IftheseguysstartedfarminginJapan,the countrywouldneverexperienceanotherearthquakeortsunamiagain. Associateanalyst
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BillionsRaised
FromthetimeofitsIPO,Chaodahasraisedover7.3billion(~US$1.1B)througha combinationofstocks,options,bondissues,andmoredisturbingly,gypsyswaps.The numerousroundsoffinancinghavebeenexpensiveandhighlydilutive,nearlytriplingthe numberofsharesoutstandingoverthelasttenyears. Sowhereisthemoneygoing? WehavereasontobelievethatMr.Kwok,selectmembersofmanagement,andthirdparties aretransferringmoneyoutofChaodathroughinflatedcapitalexpenditures,andrelatedparty transactions.Evidencefollows.

BillionsMissing

InflatedCapitalSpending
FrominceptiontoFiscal2010,Chaodahasspentover9billion(US$1.4B)oncapital expenditures.Thisfigureincludesirrigationsystems,greenhouses,processingcenters,office buildings,andmachinery.Tothatdate,thecompanyclaimsaproductionbaseof664,225mu. Thistranslatestocapexspendingofapproximately13,700permu. Asapointofreference,Exhibit4showssimilarmetricsforChaodasclosestcomparables. Exhibit4 IndustryCapexSpending Chaoda Minzhong ChinaGreen ExChaodaaverage
Source:Companyreports

ProductionBase (mu) 664,225 27,981 92,700

CumulativeCapEx ('000) 9,103,150 238,372 1,074,402

Capexper Mu 13,705 8,519 11,590 10,055

Greenhouse coverage 7% 10% 12%

16

Oncomparison,Chaodaspends37%morethantheaverageofitspeersoncapexwhile followingaverysimilargrowthstrategy.Choadasreportednumbersarehighlysuspectgiven theextremelycompetitivelandscapeofChinasagriculturalindustry.Thesenumbersmakes evenlesssensewhenyouconsiderthat(i)agreaterportionofChaodascostbaseishistoric, and(ii)theCompanyistwicethesizeofitspeers.Wearesurprisedthatacompanythatboasts itissobigthatitcanevengetconcessionsfromWalMart 20 supposedlypayssomuchmore permu. Ifweusetheaveragefigureof10,055asareferencepoint,theamountoftotalcapex spendingneededtoestablishandmaintainChaodasproductionbasesshouldhaveatmost cost6.7billion(~US$1B). WesayatmostbecausewearegivingthebenefitofthedoubttoChaoda.Evenignoring points(i)and(ii)above,thisnumberisstillquestionablyhigh.WenotethatChinaGreenand MinzhongbothhavehighergreenhousecoveragethanChaoda.Greenhousescantriplethe yieldofopenfields,andproducehigherqualityproducts.However,thecostsassociatedwith establishingthemaregenerallyfourtimeshigherthanopenfields.Greenhousecoveragefor ChinaGreenandMinzhongstandat12%and10%respectively,asopposedtoonly7%for Chaoda 21 .Thisiswhyevenour6.7billionestimateislikelytoogenerous. Basedonthiscomparison,thereisan2.3billion(~US$350M)unexplainedblackholeon Chaodasbalancesheet.Webelievethisamount(andlikelymuchmore)hasbeensiphoned outoftheCompanybycertainmanagersandthirdpartiesundertheguiseofcapitalspending. Evenatpresent,Chaodascostsseemtobeunjustifiablyhigh.InarecentcalltoChaoda,our representativesweretoldthatmanagementexpectscapexspendingtobe28,000permu. Callstopeersgaveusarangeof13,000to20,000permu. Wesuspectmanagementhasmadeitapolicytogrosslyinflatecapexcostsasacoverto transfermoneyoutofChaoda.

20 21

2004Corporatepresentation,slide28 http://wenku.baidu.com/view/54665ec2d5bbfd0a795673a7.html

17

RelatedPartyTransactions
Perhapsmoreegregiousthantheinflatedcapexspending,areChaodasrelatedparty transactions.Thelargestrawinputcostinfarmingisfertilizer,equatingtoapproximately10% ofrevenue.Despitetheirsmallersize,mostcompaniesintheindustrycontractbetween10to 20fertilizersupplierstoensurecompetitionandquality.ChaodacontractsonlyoneFujian ChaodaAgriculturalProduceTradingCompanyLimited(FujianFertilizertoavoidconfusion). FujianFertilizerisanorganicfertilizercompanythatismajorityownedbynoneotherthanMr. Kwokthroughaholdingcompany. Chaodastatesthatthereasonforthisexclusiveagreementistoensureastablesupplyof qualityfertilizer.Asevidencedintheproceedingpages,weareconfidentthattheCEOisusing thesecontractstotransfermoneyoutofChaoda. Exhibit5 ValueofFertilizerContracts(000)
800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source:Companyreports

Exhibit5showsthatsince2001,approximately3.2billion(~US$500M)worthoffertilizerhas beenpurchasedfromFujianFertilizer.Whilethismuchmoneyhasbeenpaid,wedontknow howmuchfertilizerhasactuallyexchangedhands.Thisisbecausethetermsoftheagreement asstatedinChaodasannualreportsarenotonlyopaque,butcompletelyabsurd.


18

Fromthe2010AnnualReport: The2009AgreementenabledtheGrouptoobtainastableandreliablesupplyoforganic fertilizers.Thepriceoftheorganicfertilizerssuppliedunderthe2009Agreementwasagreed betweenthepartiesatthetimewhenapurchaseorderwasplacedanditwouldnotexceedthe exfactoryprice(netofdeliverycosts)atwhichthesametypeoforganicfertilizerswassupplied byFujianChaodaTrading(FujianFertilizer)toindependentthirdpartieswhenthepurchase orderwasplacedbyFuzhouChaoda. Wehadtodoadoubletakewhenwereadthisstatement.Tomakethenatureofthese contractsperfectlyclear:Chaodadoesnotpaymarketpriceforitsfertilizer.Infact,ifour readingoftheagreementiscorrect,Chaodahasnosayinthepricing.ItisMr.Kwoksfertilizer companythatsetsthepricebasedonwhatitcanselltootherentities.Thistypeofpaywhat wesaypricingmechanismisunheardofandripeformanipulation. Asanexample,ashellentitycaneasilybesetuptobuyanotionalamountoffertilizerfrom FujianFertilizeratfarabovemarket.FujianFertilizercanthenturnandsupplyChaodabased onthoseelevatedprices.Giventhenatureofthesecontracts,itisimpossibletoknowwithany degreeofconfidencehowmuchfertilizerisactuallychanginghands. Managementwasdodgyindiscussingthepricingmechanismbuthaspreviouslystatedthat Chaodapurchasesfertilizerforapproximately1,500permetrictonne(MT).Again,wehave noconfidenceinthisnumber,butquotesfromotheragriculturalcompaniesandsuppliers gaveusanaveragerangeof700to1,300forveryhighqualityorganicfertilizer,shipping included.Evenifmanagementsfigureistobebelieved,thenatminimumChaodahastodate overpaidbyatleast500million(~US$77M)foritsfertilizerpurchasesandalmostcertainly muchmore,asweshownext.

19

FujianChaodaAgriculturalProduceTradingCompany: TheMostLucrativeCompanyThatNeverExisted
FujianFertilizer,acompanymajorityownedbyMr.Kwokistheexclusivemanufacturerand supplieroffertilizertoChaoda.Mr.KwokisalsoamajorsuppliertoAsianCitrus,anassociate companywediscussonpage22.Iftheseclaimsweretrue,FujianFertilizerwouldbeoneof thebiggestorganicfertilizercompaniesnotonlyinChina,butglobally.Itisneither. WehaveproofthatFujianChaodaAgriculturalProduceTradingCompanyisnothingmorethan ashellcompanyusedtotransfermoneyfromChaoda.OursourceshaveacquiredFujian FertilizersSAICdocuments,completewithofficialseal. 22 Thesedocumentsshowthecompany hasnobusinessoperationsanditsassetsconsistalmostentirelyofaccountandother receivables.Exhibit6showsatranslatedversionofthecondensed2009financialstatements.

Exhibit6

176,955 (77) (176,878) (176,878) 1,552,471 247,372,204 477,284 249,502,649 11,559 249,514,408 251,031 249,064,304 249,469,429 249,469,429 3,000,000 249,514,408

2009IncomeStatement(inYuan) MainBusinessIncome MainBusinessCost ManagementExpense FinancialExpense Profit NetIncome AccountsReceivable OtherAccountsReceivable Inventory TotalCurrentAssets TotalFixedAssets TotalAssets AccountsPayable OtherPayables TotalCurrentLiabilities TotalLiabilities PaidInCapital TotalLiabilitiesandEquity

22

2009BalanceSheet(inYuan)

BusinessesoperatinginChinamustprovideannualfinancialstatementstotheStateAdministrationforIndustry andCommerce(SAIC).

20

Farfrombeingamajorplayerinorganicfertilizer,FujianFertilizeronlyhas477,284 (~US$72K)worthofobsoleteinventoryonhand.Howthiscompanysuppliesthenumbers Chaodaclaimsisbeyondus.WhateveramountoffertilizerisbeingsuppliedtoChaodaislikely throughlocalanimalfarmswithMr.Kwokonlyactingasanintermediary.Ofcourse,theirony hereisthattheChaodamodelwasbuiltonthepremisethatintermediariesarean unnecessarycostandaddlittlevaluetothesupplychain. SupportingourhypothesisisthefactthatFujianFertilizerreportsnetfixedassetsof11,559 (~US$1,750).Eitherthiscompanycanmanufacture,process,packageandshiphundredsof thousandsofMToffertilizerusingUS$2,000worthofequipment,oritsashellcompany feedingtheCEOspockets.Wellletinvestorsdecide. Asanaddedkicker,shareholderswilllikelyappreciatethatoverthelastdecade,asMr.Kwok wasdumpinghisstakeinChaoda,hewasbuyingouthispartnersinFujianFertilizer.Clearly, Mr.Kwokknowswherethemoneyisgoing. Exhibit7 Mr.KwoksOwnershipStake
100%

80%

60%

40%

20%

0% 2001 2002 2003 2004 Chaoda 2005 2006 2007 2008 2009 2010 FujianFertilizer

Source:Companyreports

21

AsianCitrusMuddyingTheWatersWithCitron
IfmisleadinginvestorsandtransferringfundsoutofChaodawerentenough,hereweprovide evidencethatmanagementisignoringitsfiduciarydutybyinvestinginprojectsthatbenefit executivesattheexpenseofshareholders. InJuly,2001,ChaodapaidHK$101million(~US$13M)fora49%stakeinNewasia(Asian Citrus902:HK),anownerandoperatoroforangetreeplantations.Managementjustifiedthe purchaseasfollows: Theacquisitionofa49percent.shareholdinginNewasiaalsoofferstheCompanyan investmentopportunitywithgrowthandprofitabilitypotentialinamodernorangefarmin theGuangxiregion,PRC,andtoexpanditsfarmland. 23

ModernOrangeFarmReally?
In2001,AsianCitruswasanythingbutamodernorangefarm.Thecompanyconsistedofa singleplantation(HepuPlantation)thatwasneglectedandonlyhadyoungorangetrees(the yieldsprovidedbyyoungorangetreesareuninspiring). Infact,HepuPlantationwasoriginallyownedbyTropicana.In1998,PepsiCo.acquired TropicanafromSeagramforUS$3.3billion.Thefollowingyear,PepsiCo.sentateamtoHepu Plantationtoanalyzetheproperty.Theteamconcludedthattheoperationsrequired additionalinvestmentswhichwerenoteconomicallyviableandthattheprojectwastoorisky. Accordingly,theyabandonedtheoperationandhandedtheplantationovertotheHepu governmentforfree.Aslateas2000,theHepugovernmentwaslookingforinvestorsto develop,manage,andoperatetheplantation. 24 Modernorangefarm?Wedontthinkso. Furthermore,uponacquisition,Chaodahadtowritedown162million(US$23M)orover50% ofitsshareofnetassets.Wefindithardtobelievesuchamodernorangefarmwouldincur somuchnegativegoodwill.

AttractiveInvestmentOpportunityComparedToWhat?
WequestionmanagementsclaimthatAsianCitrusprovidedanattractiveinvestment opportunity.ThegraphbelowshowsanROEcomparisonbetweenChaodaandAsianCitrus.

23 24

http://www.hkexnews.hk/listedco/listconews/sehk/20010727/LTN20010727074.doc http://www.hkexnews.hk/listedco/listconews/sehk/20091123/LTN20091123014.pdf

22

Exhibit8 ROEComparison
30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2002 2003 2004 2005 2006 2007 Chaoda 2008 2009 2010 AsianCitrus

Source:Companyreports.AsianCitrus2002and2003figureshavebeenrevised upwardstoreflectChaodasinvestmentnetofnegativegoodwill.

ChaodasreturnonequityhastrumpedAsianCitrusbyleapsandboundssincetheacquisition. Ifmanagementwaslookingforanattractiveinvestmentopportunity,whydidtheynotinvest thefundsinChaoda?WhydidmanagementinsteadinvestinacompanythatevenPepsiCo. consideredtoorisky?GivenChaodasnumerousroundsoffinancing,thereclearlywere lucrativeinternalinvestmentopportunitiesavailable.Itshardtobelievethatmanagement hadshareholdersbestinterestsinmindwhentheyacquiredthestakeinAsianCitrus.Soif shareholdersdidntbenefitfromthisacquisition,whodid?

RelatedPartyTransactions,PartII
The49%stakegaveChaodasignificantinfluenceoverAsianCitrus.Thisinfluencewas cementedwhenIpChiMing,oneofChaodasexecutivedirectorswasappointedVice PresidentofAsianCitrus.Ifthatnameringsabellitisbecauseaswementionedonpages10 and11,hewasthesamedirectorwhoonmorethanoneoccasiondumpedhissharesof Chaodaaheadofmaterialnewsreleases.Insteadofbeingreprimandedandpossiblyfacing chargesofinsidertrading,hecontinuestoactastheVicePresidentofAsianCitrus. Predictably,Mr.Kwokhasusedthisinfluencetopositionhisfertilizercompanyasoneofthe mainsupplierstoAsianCitrus.Overthelast9years,AsianCitrushasbought238million (US$37M)worthoffertilizerfromanotherofMr.Kwoksfertilizercompanies.Wenotethat theselucrativecontractshavethesamequestionablepricingmechanismthatwasenteredinto withChaoda,asperpage19.
23

WebelieveMr.KwokunderstoodtheeconomicsofAsianCitrusnotfromshareholders perspective,butfromhisown.WhenChaodaleaseslandfromfarmers,thelandisinrelatively goodconditionsinceitsbeingmaintained.However,theHepuplantationwasonneglected, poorlandthatlackedminerals.Togetthelandfertileenoughtogrowhealthyoranges,thesoil hadtoberevitalizedandinjectedwithnutrients.AsshowninExhibit9,thistranslatedinto largeamountsoffertilizerdumping,whichprobablyhadMr.Kwokpoppingafewbottlesof Cristalashepennedthedealwithshareholdermoney. Exhibit9 FertilizerPurchasedfromMr.KwoksFertilizerCompany


14% 12% 10% 8% 6% 4% 2% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 Fertilizer(%ofrevenue)

Source:Companyreports.Notethelargevolumeoffertilizerpurchasedin2002FYto
revitalizetheland

OnefinalnoteregardingAsianCitrus:ConcernshavepreviouslysurfacedthatChaodahas exaggerateditslandbankanddoesnotgrowalltheproduceitclaims.Infact,itmaybebuying itsproducefromthirdpartiesandresellingthem.Managementhassystematicallydenied theseallegations.However,buriedinAsianCitrus2005AIMlistingdocument,weseethatin 2002and2003,69,000and11,000oforangeswerepurchasedfromAsianCitrusbyoneof Chaodasoperatingsubsidiaries. 25 Whilethesumsaresmall,theserelatedpartytransactions wereneverdisclosedinChaodasfinancialstatements.Thisglaringomissiondoesnotinspire confidencethatmanagementhasbeenhonestwithinvestorsregardingitsproductionbases. Allyourbasesarebelongtolulz.

25

http://www.asiancitrus.com/pdf/listing_documents.pdf

24

ChaodasBrandBuildingStrategy: PayAnotherFraudulentCompanyToMakeYouLookGood
Thefollowingistrulyworthyofamysterynovel.Enjoy. Ineachofitsannualreportssince2004,Chaodahasmadeitapointtoletshareholdersand theworldknowthattheChaodabrandisrankedasoneofChinas500MostValuable Brandsandworthbillionsofdollars.Weweresomewhatsurprisedanagriculturalcompany couldmakesuchalist,especiallysincevegetablesgenerallyarentbranded.Wecant rememberthelasttimeweshoppedforbrandnamespinach. Basedonourresearch,notonlydowedoubtthecredibilityoftheserankings,webelievethat asafinalinsulttoshareholdersmanagementisactivelypayingfeestoaquestionable companytoplaceChaodaonaillegitimatelistforbraggingrights. Exhibit10showsChaodasannualrankingandpurportedbrandvaluesince2004. Exhibit10 ChaodasRankandBrandValue 2004 2005 2006 2007 2008 2009 2010 2011 Rank 220 177 124 123 120 84 83 82 Value(billions) 2.8 3.5 4.6 4.9 6.1 8.1 9.6 12.3

EnterWorldBrandLab
TherankingsarecarriedoutbyacompanycalledWorldBrandLab(WBL).Fromtheirwebsite: TheWorldBrandLab,establishedinNewYorkCityintheyearof2003,istheleading independentconsultancyofbrandvaluationandmarkeing(sic)strategyintheworld.We providepreciseadvicesonbrandingtoallkindsofcommercialorganizations,NPOsand governments.Inparticular,weguidecommercialorganizationsmaximizingtheirshareholders' valuebytheeffectivemanagementsontheirownintangibleassets.Inadditiontothe
25

consultancyonbrandingstrategies,werallyprofessionalsaroundtheworldineconomics, corporatemanagement,legislationandmediatoengageintheresearches,promotionsand protectionofbranding. 26 Syntaxandspellingaside,twothingsimmediatelystruckusasstrange.First,nomarketing expertswecontactedhadeverheardofthisleadingindependentconsultancy.Second,fora brandingcompany,thewebsitelookslikeithadbeencreatedbyahighschoolstudent.After somedigging,werealizedwewerewrong.Thewebsitehadinfactbeencreatedbyacollege student. ADNSregistrysearchrevealsthatwww.worldbrandlab.comwasfirstcreatedonSeptember 20,2006twoyearsafterthefirstChinas500MostValuableBrandslistcameout.In anotherwords,thiscompanydidntevenhaveafunctionalwebsitewhileitwasoperatingits leadingindependentconsultancy. Exhibit11 DNSRegistryDataforworldbrandlab.com

26

http://www.worldbrandlab.com/aboutus_2.htm

26

WBLisasubsidiary(forlackofabetterword)ofagroupcalledWorldExecutiveGroup(WEG). WhileWBLdidnothaveawebsitewhenthefirst500listwascompiled,WEGdid.Another DNSsearchrevealsthatthewebsitewasregisteredonNovember28,2002byanindividual namedHaiSenDingthefounderandCEOofWBLandWEG. Exhibit12 DNSRegistryDataforworldexecutive.org

First,wenotethatthetraffictothesesitesissolowthattheydontevenregisteronAlexa statistics.Second,Exhibit12showsthattheregisteredaddressofworldexecutive.orgis: 60WadsworthStreet,No.18F Cambridge,MA UnitedStates

27

GivenWorldExecutiveGroupsgrandiosename,onewouldalmostexpectthistobethecorner officeofatoweringglassbuildingintheheartofaprimecommercialdistrict.Itisinfactthe addressofadormroomatMIT. Exhibit13 60WadsworthStreet,Cambridge,MA,UnitedStates

MITDorms:managingmultinationalbrandingfirmsbetweengames
ofbeerpong.

Granted,evenFacebookstartedinadorm,anditsnotunusualforstartupstoembellishthe scopeoftheiroperations.Butthatwasthen.Andthisisnow.Themostrecentcontact informationshowsWEGwithseveraloffices,includingoneinHongKongandNewYork. WecontactedtheHongKongofficeonlytohaveaconversationwithareceptionistwhohad neverheardofWBLorWEG.Infact,wefoundoutthatthepersonweweretalkingtoworked forSBCInternational,anoperatorofvirtualoffices.Forthosewhoarentfamiliarwiththe term,fromtheSBCwebsite:


28

Virtualofficeisatailormadeserviceforthecompaniesthatdonothaveanoperationaddress inHongKong[SBCcreates]animpressionoflocaloperationwhichhelpstoenhancethe corporatestatusaswellastheconfidentofthebusinesspartnersTheuseofourconference roomcanhelptocreatearealandstableimpressiontotheyourclients 27 Basically,forafeeSBCgivesyouafakesecretary,aPOBox,aphonenumber,andaccesstoa conferenceroomtomakeyourbackalleyoperationseemlegitimate.Yes,thisisdefinitelyhow credibleglobalenterprisesoperate. Next,wecontactedWEGsheadquartersinNewYork,locatedat44WallStreet,Suite1204. WecalledthepropertymanagerwhotoldusthathehadneverheardofWEGorWBL. Moreover,thebuildingdoesntleaseoutindividualsuites,theyleaseoutentirefloors.The managertoldushehadaskedtheoccupantsonthe12thflooronmorethanoneoccasionto stoplabelingindividualroomsassuitesduetoissueswithmaildelivery.Accordingtotheir records,floor12wasleasedtoacompanycalledNationOnline. Exhibit14 DNSRegistrySearchofTheWorldExecutiveGroupInc.

27

http://sbc.com.hk/English/

29

ADNSregistrysearchshowsthatNationOnlineisawebsiteregisteredunderHaiSenDing.As itturnsout,NationOnlineisnttheonlyotherwebsite/businessMr.Dingruns.Aspresentedin Exhibit14,archivedrecordsshowtherearealmost1,000domainsassociatedwithhisname. Nearlyallofthedomains/businesssiteswevisitedarepoorlyconstructed,lacking,orsimply nonoperational.Ironically,onesitewevisitedwww.bosslink.comhadalogothatwasclearly plagiarizedfromE*Trade. Exhibit15 ComparisonofBossLinkandE*TradeLogos

WefinditironicthattheCEOofaselfpurportedglobalbrandingagencywouldblatantly plagiarizesuchawellknownbrand. DeanJones:I'vebeenreviewingDarren'sinternshipjournal.Doinglaundry, mendingchickenwire,highteawithaMr.Newman? Kramer:Well,itallsoundsprettyglamorous,butit'sbusinessasusualat KramericaIndustries. DeanJones:FarasIcantell,yourentireenterpriseislittlemorethana solitarymanwithamessyapartmentwhichmayormaynotcontaina chicken. Seinfeld
30

WorldBrandLabDownTheRabbitHole
Allthesesatelliteissuesaside,wehavesomeseriousconcernswithWBL/WEGscredibility, honesty,andrankingmethodologies. Withregardtorankingmethodology,wesimplycantfindanyspecificstospeakof.Generally, legitimatecompaniessuchasForbesandFortunemaketheirmethodologiesclear,available andreplicable. 28 However,acomparisonofWBLslistsyearoveryearmakesuswonderifthey evenhaveone.Companiesthatappearedonthelistoneyearwithbilliondollarvaluations, disappearedthenext.Companiesthataresecondtierintheirindustrytrumped,muchlarger competitors.Othertimes,minorcompaniesappearedoutofnowhere. Webelievethecompaniesonthelistfallintotwogroups:ThefirstgroupisyourPetroChinas andChinaMobiles.Thisisthegroupthataddslegitimacytothelist.Thesecondgroupis smallercompanieswhopayfeestobeonthelistandgainpublicity.ThisisthegroupChaoda belongsto.SomeoftheseissuesaswellasthelegalityofWBLweretouchedoninaGlobal TimesarticletitledBrandAppraisalCompanyDeemedaFraud. 29 Allthissaid,wedotipourhattoWBLformakingourjobeasier.Insteadofcompilingalistof Chinasmostvaluablebrands,WBLhasinadvertentlycreatedalistofcompanieswhere managementiswillingtowasteshareholdermoney.Suddenly,screeningforfraudhasbecome aloteasier.

HowaFraudulentCompanyFooledSomeoftheWestsGreatestAcademics
PerhapsthemostbizarreandinterestingchapteroftheWEG/WBLsagaiswhothe organizationclaimsasitschairmanandassociates. Onitswebsite 30 ,thecompanystatesitsteamincludesexpertsandconsultantsfromHarvard, Yale,MIT,ColumbiaUniversity,Oxford,andCambridge.Listedonitsmainpageare: RobertMundellProfessoratColumbiaUniversityandNobelLaureate EdmundPhelphsProfessoratColumbiaUniversityandNobelLaureate JohnDeightonProfessoratHarvard ThomasC.SchellingProfessoratHarvardandNobelLaureate StephanWoolgarProfessoratOxford RaviDharProfessoratYale

28 29

http://www.fortunedatastore.com/ds/samples/Methodology.pdf http://business.globaltimes.cn/chinaeconomy/201104/452581.html 30 http://www.worldexecutive.org/

31

Exhibit16 WEGsMainPage

Certainlymanyofthesenameswillsoundfamiliar,astheyaresomeofthemostrecognized professorsandacademicsnotonlyintheWest,butarguablyintheworld.Theseindividuals areoftentappedbymediaoutletsforexpertadviceandappearasregularsonnewsnetworks. Oursourceshavebeenabletoreachmostoftheseindividuals.Belowisasummaryandquotes ofwhatweweretoldregardingWBL.Inordertoprotecttheirreputation,wehavewithheld thenamesofwhosaidwhat. Person1:ThispersonwasundertheimpressionthatWBLwasabonafideconcernbased mainlyinBeijing,Shanghai,HongKong,andNewYork.Healsoclaimedtohavedonesome workwiththemonstrategyadviceandbrandvaluation,butwouldnotelaborate. Person2and3:BothclaimedtheyhadbeencompensatedtogivespeechesataWBL conference,buttheywereinnowayassociatedwithWBL. Person4:Onshowinghimthewebsitewithhispicture:IcantreadtheChinese,soIdont knowwhattheysaid.TheonlyconnectionIcanmakeisthatBobMundelarrangedavisitwith (Person5)andmetoChina,threeorfouryearsago,andmaybeIspoketothemthen,or something.OtherwiseIvenoideawhotheyareorwhytheypostedmypicture.
32

TheonlypersonwewilldiscussbynameisRobertMundell,asitsanexerciseinfutilityto protectthenameofsomeonewhoistheChairmanofWEG/WBL.Thatsright,RobertMundell thesameNobelLaureatewholaidthegroundworkfortheintroductionoftheeurocurrency isevidentlytheChairmanofthisorganization.Wecouldnotreachhimtoindependentlyverify thisclaim,butseveralcrediblesourceshaveconfirmedhimastheChairman.Wedontknow whattomakeofMundellsinvolvementwithsuchaquestionablecompany,butwesuspect HaiSenDingmaybeusingMundellasanemeritusfigureheadinanefforttolegitimizeWBL, andlikelykeepinghiminthedarkregardingthecompanysdaytodayoperations.Whilewe arewillingtogivethebenefitofthedoubttoMundell,wesuspectHaiSenDingwillhavesome explainingtodointhenearfuture.ItwouldappearMr.Dingisfollowingthe#1marketing strategyoffakeChinesecompanies:legitimizeyourselfbyassociatingwithwhiteguysin suits. 31

ComingFullCircle
WBLrecentlyreleasedits2011listofChinas500MostValuableBrands.Chaodahassince issuedanannouncementboastingitsranked82nd,withabrandvalueof12.3billion(more thanitsentiremarketcap) 32 .Onthisannouncement,theCompanysmarketvaluejumped HK$688millioninasingleday.WewouldliketotakethisopportunitytocongratulateChaoda onthisaccomplishmentandhopetoreadmoreaboutitwhentheyreleasetheir2011Annual Report.Wearesureitiswelldeserved.

31 32

http://www.theatlantic.com/magazine/archive/2010/07/rentawhiteguy/8119/ http://www.chaoda.com.hk/n4/main.asp?id=725&yjbh=16&ejbh=152

33

Valuation
Withouthavinganyfaithinmanagement,thefinancialstatements,orthecashbalance,it becomesdifficulttovalueChaodawithanydegreeofconfidence.Withthatcaveat,thetwo mostreasonablevaluationmethodswouldbeaNetAssetValueapproachandadividend model.

NAVApproach
Historically,Chaodahashaddifficultysecuringbankloans.Thisisprimarilyduetotheissues withlandownership,anditscorporatestructure. Atthebeginningofourreport,wementionedthatChaodadoesntactuallyownanyofthe landitcultivates.Itsallleasedfromfarmers.Inaliquidationscenarioequityholdersand creditorswouldnotbeabletoclaimthisland.Infact,theCompanywouldbeonthehookfor thesignificantlongtermcontractsitsignedwiththefarmers.Moreover,thebulkofChaodas longtermassetsareattributedtofarmlandinfrastructure,suchasirrigationsystems.Without ownershipoftheland,thistooislost. ThenthereistheissueofChaodascorporatestructure.OftenmistakenforanHshare company,ChaodaisactuallyaPchipstockandtechnicallynotrecognizedbyChinaasa nationalenterprise 33 .Asshownonthenextpage,theorganizationconsistsofalabyrinthof PRCsubsidiariesandoffshoreBVIentities.Ifcurrentseniorconvertiblebondholderscarefully readthroughtheCBProposal,theywillnoticethatalltheguarantorstotheirholdingsareBVI entities.NotasingleoneofthemisaPRCoperatingsubsidiary.Wedoubtthisisacoincidence. EvenifChaodahadthecashbalanceitreports,itwouldbenearlyimpossibleforcreditorsto collect.Alawyerweconsultedexplainedtous,Ivehadthesetypesofcasesbefore.Itsnot aboutcollecting10centsonthedollar.Itsaboutcollecting0centsonthedollar. ThesearethereasonsevenChinesebanksrefusetolendtoChaoda. TheoneassetChaodaholdsthatwecanconfirmisitsstakeinAsianCitrus,whichoverthe yearshasslippedfrom49%to13.4%interest.However,withaVPwholovestradingoninsider information,questionablerelatedpartytransactionswithMr.Kwoksfertilizercompany,and discrepancieswefoundinitslistingdocuments(whicharebeyondthescopeofthisreport), wehaveourownconcernswithAsianCitrus.Butassumingrecentmarketprices,Chaodas stakeisworthapproximatelyHK$870millionorHK$0.57pershare.Ofcourse,thistypeof theoreticalvaluationstillleavesinvestorswiththeverypracticalissueofcollectability.What happensifmanagementcontinuestosellthestakeandabscondwiththeproceeds?

33

Pchipstocksareassociatedwithanabnormallyhigherleveloffraud,embezzlement,andforgeryrelativetoH Shares.

34

35

DividendModel
WebelievethataslongasChaodacontinuestooperate,itwilllikelycontinuetopaydividends atleastintheinterim.Ofcourse,thisisnothingtoapplaud.Chaodasannualdividendpayout ofapproximatelyHK$0.06persharerepresentslessthan5%ofreportednetincome.Despite holdingsteadyinthelastfewyears,thatshalfofwhatitwasin2006.Still,assuming0% growthandagenerous10%discount,webelievethesharepricetobeworth:

ThisexerciseinEquityValuation101aside,wefeelthatadelistingisimminent.

IndustryRisksandCaveatEmptor
Theresultoftheresearchwecarriedoutonthissectorleftusshakingourheadsandfeeling uninspired.Investorsneedtounderstandthatfirstandforemost,Chaodaisnotinvestment opportunityitsanationalservice. ForthePRCgovernment,thesetypeofcompaniesareexpectedtohelpfeedthepopulation. Thatswhymostofthemaretaxexempt. Forthelocalgovernmentsthesecompaniesareexpectedtocomeintoincreasecropyields andraisethestandardoflivingforfarmersintheirjurisdiction.Thisleadstohigherreportable GDPfiguresforthemunicipalitieswhichletsgovernmentofficialskeeptheirjobs.Youdont wanttobethemayorwhocouldnthitthisyearsGDPgrowthquota.IfChaodadoesntplay ball,itmaysoonfindthatthereisnomorelandtobeleasedfromtheauthorities.Inthis business,corruptionisrampantandshareholdersareonthebottomrungofthetotempole. TheideathatChaodasprimarymandateistocreateshareholdervalueisnaveatbest.
36

Conclusion
Chaodaslonghistoryasapubliccompanyismiredinliesandcorporatefraud.Underthe coverofinflatedcapexspendingandrelatedpartytransactions,managementhastransferred morethanUS$400MoutofChaoda.Insodoing,theCompanyhasoverstateditscashbalance andfalsifieditsfinancialstatements.TheCEO,withthesupportoftheboardofdirectorshas investedinriskyprojectsthathaverobbedshareholdersofreturnsinordertolinehisown pockets.Inanattempttocovertheiregregiousactions,managementhaspaidafraudulent companytoprovideChaodapositivemarketingexposure. CorporatefraudhasbecomeproblematicinboththeMainlandandHongKong.Both governmentshavewiselyrenewedcallsfortougheractioninthefaceofthisgrowing epidemic.ThefactthattheHKExchangeandtheSFChaveallowedthisobviousfraudto operateundertheirwatchwillnotgounnoticed.Tomaintainmarketconfidence,weexpectin thecomingweeksandmonthsfortheSFCtoconducttheirowninvestigationintoChaodas operationsandbusinessactivities.Inadditiontowhathasbeenpresentedhere,wehave reasontobelieveChaodawillnotbeabletosurvivescrutiny.Accordingly,weexpectthis Companytoeventuallybedelisted.
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LastWords
Inpreparingthisreport,wehavebeenaidedbyvariousparties.Thesepartiesworked independentlyofeachotherandwereunawareofthenatureoftheendproduct.Thiswas bothfortheirprotectionandours.Whilewellcompensated,wewouldliketotakethis momenttothankthosewhohelpedus.Atthispoint,youprobablyknowwhoyouare. AsthecasesofSeanHoareandLiGuofushowed,thistypeofbusinesscanbeashortone.To us,nothingismoreimportantthanprotectingoursourcesandthosewhohaveassistedusor maydosointhefuture.Atthebeginningofthisreportwementionedthatwearein possessionofcertaininformation,whichgivenitsnaturewehavedecidedagainstpublishing. Instead,theinformationhasbeenencrypted,storedonline,andprotectedwithacodeword. Considerthisinsuranceforus,ourassociates,andourconsultants.Ifwefeelthesafetyand anonymityofanypartyhasbeenjeopardized,wewillreleasethecodewordintothepublic domain.

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