On November 10, 2010 a website called Muddy Waters Research released the following report on a company called RINO International Corp:
Muddy Waters LLC has initiated coverage on RINO International Corp. (RINO) with a Strong Sell rating and a $2.45 price target.
RINO claims to be the leader in selling desulfurization (“FGD”) and other environmental equipment to Chinese steel mills. It reported 2009 revenue of $193 million. In reality its revenue is under $15 million, and its management has diverted tens of millions of dollars for its own use.
We value RINO based on the cash we believe remains in the company after the most recent raise.
· RINO’s FGD sales (60% to 75% of revenue) are much lower than it claims. We found that many of its customer relationships do not exist.
· Chinese regulatory filings show that RINO’s consolidated 2009 revenue was only $11 million, or 94.2% lower than it reported in the US. We show that the Chinese numbers are credible.
· RINO’s accounting has serious flaws that are clear signs of cooked books.
· RINO’s management is draining cash from the company for its own business and personal uses. The management is in flagrant breach of its VIE agreements, which require it to pay income to RINO (as opposed to taking it).
· RINO’s balance sheet has an astonishingly small amount of tangible assets for a manufacturer. Rather, it is filled with low quality “paper” assets that balance out the inflated earnings, and likely hide leakage.
· RINO is not the industry leader it claims to be in the steel sinter FGD system market. Rather, it is an obscure company in a crowded field, and is best known for its failed projects. Its reported margins are two to three times what they really are. Its technology is sub-par.
· We are not sanguine about management “borrowing” $3.2 million to purchase a luxury home in Orange County, CA the day that RINO closed its $100.0 million financing.
RINO opened at just over $11 after the report came out, sold off for a few days and is currently halted at $6.07.
Who is Muddy Waters Research ? This is all I know according to their website:
“Muddy Waters Research sees through appearances to a Chinese company’s true worth. Our research director, Carson Block, is an entrepreneur who’s practiced law and pioneered an industry in China. Our team members are likewise veterans of China’s business trenches who similarly understand how business is really conducted in China. Through their successes and struggles, they’ve developed the knowledge and contacts to navigate China’s muddy waters.
Muddy Waters Research is available to work with institutional investors on an engagement basis. “
After Muddy Waters dropped this bomb the company released the following which didn’t do much to make the situation look any better:
“ITEM 4.02 NON-RELIANCE ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A RELATED AUDIT REPORT OR COMPLETED INTERIM REVIEW.
On November 17, 2010 Frazer Frost, LLP, the independent auditors of RINO International Corporation (the “Registrant”), delivered a letter (the “Auditor’s Letter”) to the Registrant and each of its directors. The Auditor’s Letter states in part:
“In a telephone conversation on November 16, 2010, Mr. Zou Dejun, the Chief Executive Officer of the Company, informed Ms. Susan Woo of our firm, in substance, that as to the six RINO customer contracts discussed in the recent report of Muddy Waters LLC, the Company did not in fact enter into two of the six purported contracts, and a third contract among the six was explainable. When Ms. Woo inquired about the Company’s other contracts, Mr. Zou said he was not sure, but there might be problems with 20 - 40% of them. Assuming that these statements were reasonably accurate, it appears that our reports would have been affected if this information had been known to us at the date of our reports, although the effect on the financial statements is currently unknown and cannot be quantified without a thorough investigation. We further note that in a conversation the following day, November 17, 2010, involving Ms. Woo, several directors of the Company, Company counsel, and Mr. Zou, Mr. Zou stated that he was not sure the day before and went back to look into some things, and found that apart from the two problematic contracts, all other contracts are legitimate and can be verified.
The auditing standards of the Public Company Accounting Oversight Board provide procedures to be followed by an auditor to prevent continued reliance on audit reports in such circumstances. In view of the information provided by Mr. Zou Dejun, we hereby advise the Company to promptly notify any person or entity that is known to be relying upon or is likely to rely upon our audit report(s) for the periods ended December 31, 2008 and December 31, 2009 and reviewed quarterly financial statements for periods between March 31, 2008 to September 30, 2010 that they should no longer be relied upon, and that revised financial statements and revised auditor's report(s) will be issued upon completion of an investigation.”
On November 17, 2010 certain members of the Board of Directors, including Kennith Johnson, the Chairman of the Audit Committee, Jianping Qiu, the Chairman of the Board of Directors, and Mr. Zou Dejun participated in a conference call with Ms. Susan Woo, a partner of Frazer Frost, LLP in which the foregoing statements were discussed. The two other members of the Board were not available because they were traveling and therefore the Board of Directors could not take any formal action regarding the matters discussed in the Auditor’s Letter. The Registrant intends to have a telephonic meeting of the Board of Directors to further discuss such matters and related matters as soon as all of the members of the Board of Directors are available.”
The company was subsequently delisted by the Nasdaq, currently trades on the Pink sheets and is the subject of several class action lawsuits. Stock price as of today is $2.55.
After seeing all of this I put myself on the distribution list on the Muddy Waters website:
http://www.muddywatersresearch.com/
And then yesterday I received the following alert:
Muddy Waters Initiating Coverage on CCME – Strong Sell
Published: February 3, 2011
Muddy Waters LLC has initiated coverage on China MediaExpress Holdings, Inc. (CCME, Financial) with a Strong Sell rating and an estimated value of $5.28.
· Muddy Waters, LLC believes that CCME is engaging in a massive “pump and dump” scheme whereby it significantly inflates revenue and profits in order to enrich management through earn-outs and stock sales.
· We estimate that CCME’s actual 2009 revenue was no more than $17 million (versus $95.9 million it reported).
· The data CCME provides to advertisers shows that it has fewer than half of the 27,200 buses it claims to have.
· The CTR reports that the Company uses to support its claims contain gross errors that we conclude are due to manipulation by the management.
· We estimate that over half of CCME’s network buses do not actually play CCME content. Rather, drivers play DVD movies that are often provided by passengers.
· We caught CCME’s management telling a particularly egregious lie – that its new website (www.switow.com) has entered into an agreement with Apple (or one of Apple’s) distributors. Neither is true.
· Similar to RINO, CCME is an obscure company in its industry. Media buyers who would have to know it if CCME were to be believed have never even heard the Company’s name before.
· CCME’s core audience is sub-Greyhound Bus demographic.
The stock price dropped from $16 to $12 in very short order yesterday. There has not yet been a response by CCME management which will be interesting to read.
I run a pretty concentrated portfolio so there is no way that I will ever touch a US listed Chinese company like this. What I would say to anyone who is long the stock and is reading this is that I’ve seen things like this a few times over the past 15 years (short selling accusations of fraud) and I have not yet once seen a situation that ends well for shareholders.
In May of this year the largest hedge fund manager in China presented at the Value Investing Congress. I am referring to Lei Zhang of Hillhouse Capital Management who started his firm with $30 million in now manages $4 billion. His fund has returned 52% annualized since 2005 and holds a concentrated portfolio typically adding only 3 to 5 positions a year. Part of Zhang’s investing approach involves shorting fraudulent companies. And according to him up to 80% of the Chinese companies listed in the U.S. are frauds to one degree or another.
Drink that in for a second. The largest and most successful Chinese hedge fund manager believes 80% of the Chinese companies listed in the United States are frauds.
Where there is smoke there is almost always fire. I hope small investors don’t get burned in this case. If I was holding shares prior to learning of these accusations I believe the correct move would be to accept a small loss and get out rather than wait around and risk losing my entire position.
Muddy Waters LLC has initiated coverage on RINO International Corp. (RINO) with a Strong Sell rating and a $2.45 price target.
RINO claims to be the leader in selling desulfurization (“FGD”) and other environmental equipment to Chinese steel mills. It reported 2009 revenue of $193 million. In reality its revenue is under $15 million, and its management has diverted tens of millions of dollars for its own use.
We value RINO based on the cash we believe remains in the company after the most recent raise.
· RINO’s FGD sales (60% to 75% of revenue) are much lower than it claims. We found that many of its customer relationships do not exist.
· Chinese regulatory filings show that RINO’s consolidated 2009 revenue was only $11 million, or 94.2% lower than it reported in the US. We show that the Chinese numbers are credible.
· RINO’s accounting has serious flaws that are clear signs of cooked books.
· RINO’s management is draining cash from the company for its own business and personal uses. The management is in flagrant breach of its VIE agreements, which require it to pay income to RINO (as opposed to taking it).
· RINO’s balance sheet has an astonishingly small amount of tangible assets for a manufacturer. Rather, it is filled with low quality “paper” assets that balance out the inflated earnings, and likely hide leakage.
· RINO is not the industry leader it claims to be in the steel sinter FGD system market. Rather, it is an obscure company in a crowded field, and is best known for its failed projects. Its reported margins are two to three times what they really are. Its technology is sub-par.
· We are not sanguine about management “borrowing” $3.2 million to purchase a luxury home in Orange County, CA the day that RINO closed its $100.0 million financing.
RINO opened at just over $11 after the report came out, sold off for a few days and is currently halted at $6.07.
Who is Muddy Waters Research ? This is all I know according to their website:
“Muddy Waters Research sees through appearances to a Chinese company’s true worth. Our research director, Carson Block, is an entrepreneur who’s practiced law and pioneered an industry in China. Our team members are likewise veterans of China’s business trenches who similarly understand how business is really conducted in China. Through their successes and struggles, they’ve developed the knowledge and contacts to navigate China’s muddy waters.
Muddy Waters Research is available to work with institutional investors on an engagement basis. “
After Muddy Waters dropped this bomb the company released the following which didn’t do much to make the situation look any better:
“ITEM 4.02 NON-RELIANCE ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A RELATED AUDIT REPORT OR COMPLETED INTERIM REVIEW.
On November 17, 2010 Frazer Frost, LLP, the independent auditors of RINO International Corporation (the “Registrant”), delivered a letter (the “Auditor’s Letter”) to the Registrant and each of its directors. The Auditor’s Letter states in part:
“In a telephone conversation on November 16, 2010, Mr. Zou Dejun, the Chief Executive Officer of the Company, informed Ms. Susan Woo of our firm, in substance, that as to the six RINO customer contracts discussed in the recent report of Muddy Waters LLC, the Company did not in fact enter into two of the six purported contracts, and a third contract among the six was explainable. When Ms. Woo inquired about the Company’s other contracts, Mr. Zou said he was not sure, but there might be problems with 20 - 40% of them. Assuming that these statements were reasonably accurate, it appears that our reports would have been affected if this information had been known to us at the date of our reports, although the effect on the financial statements is currently unknown and cannot be quantified without a thorough investigation. We further note that in a conversation the following day, November 17, 2010, involving Ms. Woo, several directors of the Company, Company counsel, and Mr. Zou, Mr. Zou stated that he was not sure the day before and went back to look into some things, and found that apart from the two problematic contracts, all other contracts are legitimate and can be verified.
The auditing standards of the Public Company Accounting Oversight Board provide procedures to be followed by an auditor to prevent continued reliance on audit reports in such circumstances. In view of the information provided by Mr. Zou Dejun, we hereby advise the Company to promptly notify any person or entity that is known to be relying upon or is likely to rely upon our audit report(s) for the periods ended December 31, 2008 and December 31, 2009 and reviewed quarterly financial statements for periods between March 31, 2008 to September 30, 2010 that they should no longer be relied upon, and that revised financial statements and revised auditor's report(s) will be issued upon completion of an investigation.”
On November 17, 2010 certain members of the Board of Directors, including Kennith Johnson, the Chairman of the Audit Committee, Jianping Qiu, the Chairman of the Board of Directors, and Mr. Zou Dejun participated in a conference call with Ms. Susan Woo, a partner of Frazer Frost, LLP in which the foregoing statements were discussed. The two other members of the Board were not available because they were traveling and therefore the Board of Directors could not take any formal action regarding the matters discussed in the Auditor’s Letter. The Registrant intends to have a telephonic meeting of the Board of Directors to further discuss such matters and related matters as soon as all of the members of the Board of Directors are available.”
The company was subsequently delisted by the Nasdaq, currently trades on the Pink sheets and is the subject of several class action lawsuits. Stock price as of today is $2.55.
After seeing all of this I put myself on the distribution list on the Muddy Waters website:
http://www.muddywatersresearch.com/
And then yesterday I received the following alert:
Muddy Waters Initiating Coverage on CCME – Strong Sell
Published: February 3, 2011
Muddy Waters LLC has initiated coverage on China MediaExpress Holdings, Inc. (CCME, Financial) with a Strong Sell rating and an estimated value of $5.28.
· Muddy Waters, LLC believes that CCME is engaging in a massive “pump and dump” scheme whereby it significantly inflates revenue and profits in order to enrich management through earn-outs and stock sales.
· We estimate that CCME’s actual 2009 revenue was no more than $17 million (versus $95.9 million it reported).
· The data CCME provides to advertisers shows that it has fewer than half of the 27,200 buses it claims to have.
· The CTR reports that the Company uses to support its claims contain gross errors that we conclude are due to manipulation by the management.
· We estimate that over half of CCME’s network buses do not actually play CCME content. Rather, drivers play DVD movies that are often provided by passengers.
· We caught CCME’s management telling a particularly egregious lie – that its new website (www.switow.com) has entered into an agreement with Apple (or one of Apple’s) distributors. Neither is true.
· Similar to RINO, CCME is an obscure company in its industry. Media buyers who would have to know it if CCME were to be believed have never even heard the Company’s name before.
· CCME’s core audience is sub-Greyhound Bus demographic.
The stock price dropped from $16 to $12 in very short order yesterday. There has not yet been a response by CCME management which will be interesting to read.
I run a pretty concentrated portfolio so there is no way that I will ever touch a US listed Chinese company like this. What I would say to anyone who is long the stock and is reading this is that I’ve seen things like this a few times over the past 15 years (short selling accusations of fraud) and I have not yet once seen a situation that ends well for shareholders.
In May of this year the largest hedge fund manager in China presented at the Value Investing Congress. I am referring to Lei Zhang of Hillhouse Capital Management who started his firm with $30 million in now manages $4 billion. His fund has returned 52% annualized since 2005 and holds a concentrated portfolio typically adding only 3 to 5 positions a year. Part of Zhang’s investing approach involves shorting fraudulent companies. And according to him up to 80% of the Chinese companies listed in the U.S. are frauds to one degree or another.
Drink that in for a second. The largest and most successful Chinese hedge fund manager believes 80% of the Chinese companies listed in the United States are frauds.
Where there is smoke there is almost always fire. I hope small investors don’t get burned in this case. If I was holding shares prior to learning of these accusations I believe the correct move would be to accept a small loss and get out rather than wait around and risk losing my entire position.
