Thursday, February 10, 2011
China Agritech: more photos - more detail
The sequence was that the American lawyer in Shanghai who I hired to do this project had a (junior) colleague in Anhui for New Year. Her family came from Anhui.
She visited the site. She got several photos of the plant by poking in the Window but did not supply a photo of the gate. I have included one - it is a metal-working plant as advertised. Alas she supplied me the photo of the gate from the website of the metal working company - not a photo she took herself.
So my Shanghai lawyer went to Anhui (standing room only on the train!) and took the photos himself today. He was - when seen taking photos - escorted quickly off site. However he found the mysterious China Agritech office.
Here is the building on site in which the China Agritech office resides.
There are more modern factories on site - but this is the office building.
China Agritech has its office on the second floor on the right hand side of this building. The office was deserted - it was after all the New Year holiday. It is not large - but this office is the only evidence that China Agritech had any facilities that we found.
There was no fertilizer plant on this site - even though this was clearly the low-rise site where - according to the SEC filing - China Agritech leased its Anhui Plant.
Finally the road to the site was not a rutted road as described in the Lucas McGee report - indeed it was a large site with more than one gate. Here is one gate - my contact was sent off site before he photographed the gate as photographed in the last post.
We have now clearly found China Agritech facilities - but they are NOT the plants as described in China Agritech filings. They are however at the addresses given for those plants in the Agritech filings.
John
Wednesday, February 9, 2011
China Agritech: a follow up
China Agritech is a NASDAQ listed Chinese company that is – according to its SEC filings - in the business of manufacturing and distributing organic fertilizer.
... annual production capacity as of December 31, 2009 was approximately 13,000 metric tons of organic liquid compound fertilizers whereas ... annual production capacity for granular fertilizers as of December 31, 2009 was approximately 200,000 metric tons, consisting of 100,000 metric tons in Anhui, 50,000 metric tons in Harbin, and 50,000 tons in our newly completed plant in Xinjiang.
That makes research a little harder. This post is a summary of my research efforts.
The research efforts of course wound up against the normal epistemological problems of proving the existence or non-existence of things. In this case, if you find the plants and you count the trucks entering and leaving the plants with amounts of fertilizer on them consistent with the company filings you have proved the existence of the company and disproved the short case.
If however you do not find the plants you have not proved the short case - the plants could be somewhere else - or closed for a reason - or you could have the address wrong or any other similar snafu. It is hard - nay impossible - to prove a negative.
So - if the short case is right - the best I could expect to do is find data consistent with the short case. I did not expect to be able to prove the fraud.
Sinochem (a claimed large customer) has told us that it does not sell any Agritech products
Government officials in China told us that Agritech does not have a license to manufacture granular fertilizers, which the company claims are its largest product line.
After visiting Agritech’s reported manufacturing facilities in Beijing, Anhui, Xinjiang, and Harbin, we found virtually no manufacturing underway. The single exception was the facility in Pinggu County on the outskirts of Beijing, where the plant was not in operation on the Friday when we (Lucas McGee) visited but local people told us that it has sporadically produced some liquid fertilizer over the last year.
Plants in Bengbu, Anhui (supposedly the largest), Harbin, and Xinjiang were completely shuttered.
In Anhui, which Agritech calls its principal production facility, $400,000 worth of plant and equipment would seem slim for 100,000 tons of production capacity. We visited and found a small plant on a rutted road outside Bengbu, completely deserted.
The shortseller premises are a small plant on a rutted road whereas my contact suggested that this was a more urban plant. It would be sensible to have a fertiliser plant at an address closer to the outskirts of town, after all fertiliser is a bulk commodity and organic fertiliser smells. Moreover it is used outside towns – so premises on the outskirts of town make more sense than this site.
Name | Package Size | Number | Volume (L) | Unit Price (Yuan /L) | Purchase Amount (Yuan) | ||||||||||||||
organic condensed liquid compound fertilizer (Broad Spectrum Type) | 15ml *300 packages/piece | 5,000 | 22,500 | 60 | 1,350,000 | ||||||||||||||
organic condensed liquid compound fertilizer (Broad Spectrum Type) | 180ml *50 bottle/piece | 100,000 | 900,000 | 55 | 49,500,000 | ||||||||||||||
organic condensed liquid compound fertilizer (Anti-disease Type) | 20 mil * 300 bag/piece | 25,000 | 150,000 | 66 | 9,900,000 | ||||||||||||||
Total (RMB) | 60,750,000 |
The company's photographic evidence
They are however not supportive of the proposition that this company produces 200 thousand tonnes (5 million 40kg bags) of dry fertilizer annually.
Several of the photos are of packaging and distributing very small quantities of liquid fertilizer. Here is one example.
John
Some people have noticed - that unbeknown to me - my Chinese contact took the photo of the gate from a website.
I have attached the document the Chinese contact sent me. Here it is
http://www.calameo.com/books/0005679007df8943103d9
I agree the document is IDENTICAL to the one taken from the website. I instructed him clearly to TAKE photos -
He just says "Here is a picture of the gate". He never told me he TOOK the picture of the gate. Though my instructions to him were clearly TAKE PHOTOS.
I will follow up with photos HE TOOK.
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The current state of play is this: The lawyer in the states had a colleague swing by the factory on her way home. She was visiting her family in Anhui for Chinese New Year and SHE provided photos including photos of the metalworking. She also provided the photo of the factory gate - a photo that perplexed me because it was NOT a photo that matched the photos in the Lucas McGee report.
My lawyer in Shanghai cannot explain why the photo came from the website and was not taken on her phone.
He is trying to follow this up. I will have a further follow up details when available.
Sunday, February 6, 2011
Flagrant breach of copyright by TeacherSoft
The Search Signal Doesn’t Overrule Other Signals
Let’s step back. There’s no “Google signal” but rather a “search signal” that Google activity is mixed into. That search signal is further mixed in with other ranking signals, a dilution that is crucial to why Bing so strongly rejects Google’s claim that it is copying its results.
Most of Bing’s searches — popular so-called “head” searches — are not heavily influenced by the search signal, Bing says. There are many other signals that come into play.
“Movies” would be an example of a head search. That’s a search that’s done by thousands of people each day, and a search topic with lots of “signal” to measure. Bing can determine if pages are relevant to that term based on the words that appear on the page itself; how many people link to some of these pages with the word “movies” in the link; how authoritative those links seem to be, and more.
Bing can also examine how people click on its own results that it lists in response to that search. If a page doesn’t get as many clicks as would be expected, it might get dropped further down on the list. Pages that get more clicks than expected can be a sign that users find them more relevant than Bing’s ranking algorithm did originally, and so that can be used to boost them.
In addition to these and other signals, Bing can also turn to the surfstream to perhaps give a boost to pages that it sees are well visited by Internet Explorer users.
“Bombilate” would be an example of a “tail” search, a search that’s rarely done, and on an unusual topic. Here, there are fewer signals to assess. Only a few pages might be found. These pages might have few links pointing at them. Since the term isn’t searched for often, measuring clicks on Bing’s own results might not help much much. This is a case where the surfstream — as well as the search signal within it — might count more.
Saturday, February 5, 2011
China Agritech. The "sniff test" and other questions for Anne Zheng and Carlyle
I barely noticed that Lucas McGee Research had put out a note accusing China Agritech (Nasdaq:CAGC) of being a fraud.
Lucas McGee is a new name for me - but their report is a classic of the genre. They visited the factories (addresses in the annual filings) and there was nothing there. These are plants that supposedly generate 50 thousand tonnes of "organic fertilizer" per year.
A truck carries a bit under 20 tonnes fully loaded. That is 2500 trucks per year - in and out of the plant - so maybe 10 per working day bringing in the "raw material" and taking out the pellets. You think you might notice some activity - but alas there was none.
All very interesting - but most interesting is that - at least according to China Agritech's annual report - Carlyle - the most influential private equity firm in the world - have an equity stake in this company and a nominee on the board. Her name is Anne Wang Zheng - and she is young (33) and a VP of Carlyle Asia Growth. She works at the Shanghai office.
Now Carlyle - again according to the filings - has actively traded
I am not going to vouch for the fraud. I have not visited the factories so I do not know. (I confess however to being short the stock for the usual accounting-raised-eyebrows-reasons.)
I see five possibilities - though it is possible that readers - or Carlyle - see more. I have sent an email to Anne Wang Zheng asking for her views but have received no reply. Here are the five possibilities:
1. The short-seller allegations are false. (That is the short's note is a fraud.)
2. The short-seller allegations are true but Carlyle is not actually represented on the board of China Agritech. The China Agritech filings that say they are represented are in error (a fraud committed by China Agritech). It would not be the first time I have seen people named as directors or officers of a fraudulent company when they in fact have nothing to do with the company. In this case the company is fraudulent but Carlyle/Anne Zheng are honest.
3. Carlyle is represented on the board of China Agritech - but remain - at least until the publication of the short's note - ignorant of the fraud. In which case Carlyle/Zheng look incompetent - but not criminal. Zheng in fact might be competent if the deception conducted by China Agritech were very well executed. Being actively deceived even in her role as a board member makes her gullible - but being deceived is not a criminal offence and if she took reasonable steps to acquaint herself with the situation but was deceived regardless she does not even have civil liability.
4. Carlyle is represented on the board - but found out during the time they were represented on the board that it was a fraud and did nothing about it. In that case either Carlyle or Zheng (or both) are accessories after the fact to fraud.
5. Carlyle and/or Zheng knew that the company is a fraud from inception - and purchased the stock and sold the stock in that knowledge. It could be that Zheng knows and Carlyle does not in which case Zheng has committed fraud against Carlyle (and its clients).
I have racked my brain as to which of these possibilities is the truth. I think it is now incumbent on Carlyle to answer - and I will happily reprint their answer.
If you asked me my best guess it would be 3 above. Zheng was an unwitting board member - and she may have been actively deceived. I only arrive at that by applying Hanlon's razor: "never attribute to malice that which is adequately explained by stupidity."
Of course there may be an explanation outside the 5 above. Billy Bragg sang that "a man can spend a lot of time wondering what was on Jack Ruby's mind". And he can.
A blogger could spend a lot of time wondering what was on Anne Zheng's mind. I have - but I figure it is easier to ask.
So I am asking...
John
PS. I have refrained from the (obvious) jokes comparing the company's accounts to a crock of the product (fertilizer) because I am not prepared to vouch for the fraud. I have not wafted my nose in the product - but my guess is that if a plant did actually process tens of thousands of tonnes of chicken s--t pellets and you asked the locals about how active the plant was they would look at you as if you were strange. Can't you smell it?
Visiting the plants and not being able to smell it would be proof enough. In this case you should be able to smell fraud (or at least smell the absence of fraud).
If you believe Lucas McGee this one does not pass the "sniff test".
Corrections: Carlyle did not - as far as I can tell - ever sell any shares - they purchased more - but only through the exercise of options. I have corrected the post accordingly. Thanks for the comment.
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Second postscript: The company has decided on 1 above. I repeat their press release below. If Anne Zheng wants to confirm this publicly as a director appointed by Carlyle I will happily post:
BEIJING, Feb. 4, 2011 (Nasdaq:CAGC - News) ('China Agritech', or the "Company'), a leading organic compound fertilizer manufacturer and distributor in China, today announced the following statements in response to the short sellers' elaborate article purposefully delivered during the Chinese New Year Holiday.
China Agritech and its subsidiaries are operating normally. A number of analysts, professional investors, industry experts, and the Company's independent accountants have toured the Company's facilities in the past. The Company has never received any challenges regarding either the existence or the scale of production of its facilities. In addition, management has confirmed that the Harbin facility has never been listed for sale.
The sales growth of the Company's organic fertilizers remains robust. In response to the short sellers' allegation that the Company's distribution centers are non-existent, there have already been 10 newly established distribution centers (including a flagship distribution center) in Henan Province alone.
In response to the short sellers' allegation that the Company's subsidiary YiNong does not exist, YiNong in fact is headquartered in Beijing with strong governmental support. In August 2010, the Company announced that it had entered into a strategic agreement with the Beijing Municipal Government to establish within Beijing the headquarters of its nationwide network of distribution centers.
In response to the short sellers' allegation that the Company does not have a license to manufacture granular fertilizer, the government-issued production license number for China Agritech's granular fertilizers is clearly marked on each of our product's packaging.
All distribution partners have signed legitimate and verifiable contracts with the Company. Sales records have been transacted per legal and accounting standards in China. Sales agreements with major distributors such as SinoChem can be viewed on the SEC's website at www.sec.gov.
Relevant evidence such as government-issued production license number and photos taken during the production process will be made available on the Company's website in the near future.
The Company appreciates shareholders' long-term support and stands ready to defend and uphold shareholders' value.
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