MarketFolly.com
11-12-2010, 12:51 PM
Many investors would claim that China is home to numerous fraudulent companies that are perfect short selling candidates. The problem though, is the ability to discern which company is potentially fabricating results versus those that are not. Akin to almost picking a needle out of a haystack, one research firm has undertaken this task by deeply examining various Chinese companies.
In an era where many Chinese companies use reverse mergers and shell companies to go public in American markets, Muddy Waters Research LLC (an appropriate name) has published a report on a company where they believe something is amiss. That company is RINO International Corporation (RINO) and shares of the company are down almost 32% this week, presumably mainly due to the release of the negative research report.
Essentially, the report claims that the company may have issued false and/or misleading statements to investors regarding its business and namely, its financial condition. For 2009, RINO reported $193 million in revenue in its annual report filed to the SEC for 2009. Yet with the China State Administration for Industry and Commerce, the company only reported $11 million worth of revenue for 2009. Various financial inconsistencies and questionable actions by management have been flagged in the report.
Here are the main talking points from the negative report on RINO, a stock currently trading around $11 that Muddy Waters feels is worth only $2.45:
- RINO claims to be the leader in selling desulfurization (“FGD”) and other environmental equipment to Chinese steel mills. RINO’s FGD sales (60% to 75% of revenue) are much lower than it claims. They found that many of its customer relationships do not exist.
- The company claims that its revenue has skyrocketed from $4m in 2005 to $11m in 2006 to $64m in 2007 to $139m in 2008 to $193m in 2009. Net income has also supposedly grown from under $1m in 2005 to $56m in 2010. Despite this supposed growth, RINO raised almost $100m from investors at a 14x P/E ratio in December 2009.
- Management “borrowing” $3.2 million to purchase a luxury home in Orange County, CA the day that RINO closed its $100 million financing.
Embedded below is Muddy Waters' exhaustive 30 page report on RINO:
You can download a .pdf copy at this link (http://www.muddywatersresearch.com/research/rino/initiating-coverage-rino/).
After the release of Muddy Waters' report, RINO issued a statement that they would conduct an internal review to examine the research firm's claims. On top of that, numerous lawfirms are investigating and preparing potential class action lawsuits on behalf of investors who purchased RINO shares and suffered losses. Given the vehement accusations in the report, it will be interesting to see what unfolds. Given the sensitivity of the report, full disclosure: Market Folly's constituents have no position in the company referenced. This certainly won't be the last time accusatory claims are levied against a Chinese company as various financial sleuths try to sniff out potential frauds.https://blogger.googleusercontent.com/tracker/5975869446501122263-1212338305637518069?l=www.marketfolly.com
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In an era where many Chinese companies use reverse mergers and shell companies to go public in American markets, Muddy Waters Research LLC (an appropriate name) has published a report on a company where they believe something is amiss. That company is RINO International Corporation (RINO) and shares of the company are down almost 32% this week, presumably mainly due to the release of the negative research report.
Essentially, the report claims that the company may have issued false and/or misleading statements to investors regarding its business and namely, its financial condition. For 2009, RINO reported $193 million in revenue in its annual report filed to the SEC for 2009. Yet with the China State Administration for Industry and Commerce, the company only reported $11 million worth of revenue for 2009. Various financial inconsistencies and questionable actions by management have been flagged in the report.
Here are the main talking points from the negative report on RINO, a stock currently trading around $11 that Muddy Waters feels is worth only $2.45:
- RINO claims to be the leader in selling desulfurization (“FGD”) and other environmental equipment to Chinese steel mills. RINO’s FGD sales (60% to 75% of revenue) are much lower than it claims. They found that many of its customer relationships do not exist.
- The company claims that its revenue has skyrocketed from $4m in 2005 to $11m in 2006 to $64m in 2007 to $139m in 2008 to $193m in 2009. Net income has also supposedly grown from under $1m in 2005 to $56m in 2010. Despite this supposed growth, RINO raised almost $100m from investors at a 14x P/E ratio in December 2009.
- Management “borrowing” $3.2 million to purchase a luxury home in Orange County, CA the day that RINO closed its $100 million financing.
Embedded below is Muddy Waters' exhaustive 30 page report on RINO:
You can download a .pdf copy at this link (http://www.muddywatersresearch.com/research/rino/initiating-coverage-rino/).
After the release of Muddy Waters' report, RINO issued a statement that they would conduct an internal review to examine the research firm's claims. On top of that, numerous lawfirms are investigating and preparing potential class action lawsuits on behalf of investors who purchased RINO shares and suffered losses. Given the vehement accusations in the report, it will be interesting to see what unfolds. Given the sensitivity of the report, full disclosure: Market Folly's constituents have no position in the company referenced. This certainly won't be the last time accusatory claims are levied against a Chinese company as various financial sleuths try to sniff out potential frauds.https://blogger.googleusercontent.com/tracker/5975869446501122263-1212338305637518069?l=www.marketfolly.com
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