It is obvious that the issues surrounding HOGS have developed into a multi-faceted
story that can become difficult to digest. That is why we feel it necessary to peel
the HOGS onion one layer at a time so investors can appreciate the breadth and importance
of each layer individually. In this installment we discuss our view of Chardan Capital’s
take on the HOGS story as well as a look at Chardan’s track record in the ChinaHybrid
space. After this article, we will follow-up with evidence regarding what we feel
are material misrepresentations made by HOGS management.
On September 27, 2011 Chardan Capital quietly
downgraded HOGS from Buy to Neutral and cut HOGS price target to $9.00 from
$14.50. The irony of this move is
that it was only on August 9, 2011 that Chardan reiterated its "buy" rating
on HOGS as Global Hunter Securities was being criticized for downgrading the company.
Now it seems Chardan has had second thoughts about its seemingly unquestioned acceptance
of whatever story the HOGS management team spins for the market. Could this be a
sign that Chardan's motive for their initial reiteration of the buy rating was to
support the stock?
To illustrate our point, referencing an August 26, 2011
Bloomberg article titled Zhongpin May Attract Private Equity Takeover Bid,
let's look back to what Chardan had to say later on the same day that HOGS management
hosted a conference call to address issues brought up by various negative research
"We believe the long-term opportunity for consolidation within the Chinese food
processing industry is too attractive for Zhongpin not to attract either a private
bid or investment from an international partner," Tim Tiberio, a New York-based
analyst for Chardan Capital Markets LLC, who has a "buy" rating on the stock, said
in a report."
Chardan also stated that:
"Along with exploring business relationships with companies like Tyson Foods Inc.
and Hormel Foods Corp., Changge-based Zhongpin may also be considering proposals
to take the company private, Tiberio said."
We believe that Chardan based most if not all of its assumptions on an unquestioned
acceptance of comments made by HOGS management during the conference call in which
management made casual comments regarding its willingness to entertain going private
transactions or pursue international partnerships with leading global players such
as Hormel (NYSE:HRL) and Tyson (NYSE:TSN).
Management's quote from conference call:
"for example such as a Tyson and Hormel foods Zhongpin has been in business relations
That's not much for even casual investors to hang their hats on much less an experienced
analyst who should know better than to embellish and play back to the investment
community such empty platitudes. It appears to us that Chardan's analyst simply
took comments made on the conference call out of context and reported them as if
HOGS was in fact in substantial discussions with Hormel and Tyson, and/or was seriously
considering a going private transaction. We understand that Chardan is not exactly
neutral in its analysis of HOGS since they acted as an agent in the company's March
2011 equity offering. However, we are surprised that Bloomberg ran what appears
to be HOGS management's unsubstantiated comments as a
NEWS FLASH. A member of our team first contacted a Tyson Foods representative
in China. This person commented briefly that he was unaware of any relationship
with Zhongpin, and then referred us to a high ranking associate at Tyson's U.S.
headquarter who was qualified to address our questions. He commented that they "have
no formal working business relationship with Zhongpin.", and they wanted to
know more about HOGS' claims.
Should we repeat this? This is the actual direct quote from the email correspondence
with a U.S. contact from Tyson:
"We have no formal working relationship with Zhongpin. I am not sure how they are
referencing TSN, but would be curious to know. Thanks."
Tyson Foods Inc.
Investors are more than welcome to verify this on their own.
Looking at the situation from Tyson Food’s perspective, even if they are approached
by Zhongpin, the channel checking required to support any relationship with HOGS
would no doubt put them off. Just look at what the investment community has had
to endure; material SAIC vs. SEC filing discrepancies, capex issues, WOFE deception,
and multiple capital raises without solid reasoning, just to name a few. Tyson would
certainly be aware of all of these
red flags. Furthermore, having a relationship with Tyson or Hormel would
not validate Zhongpin's claimed profitability. It would just mean that they have
some level of top line operation.
We consider Chardan's action to issue its comments just hours after the completion
of the conference call to be an apparent attempt to support the stock. Chardan's
analysts should examine what "has been in business relations with" really
means and how real a possible going private transaction is. We just can't see how
they could have examined such complete issues so quickly on the same day of the
conference call. Once again, it appears that an analyst is taking statements by
a ChineseHybrid's management team at face value and parroting them back to the investors.
We can’t help but note that on the conference call the Chardan analyst never challenged
HOGS explanation of its SAIC filings and why the profits reported to the SEC were
so much greater than what was reported to local Chinese authorities. In the end
isn’t this all about whether or not HOGS SEC filings are accurate and can be relied
upon? Once again, Chardan and many other investors simply took management's words
and documents at face value and adopted the party line that is most supportive of
HOGS's share price. Chardan is apparently willing to endorse HOGS SAIC commentary
and defense without supportive documentation. As far as we can tell, HOGS management
has not published any of its SAIC information, yet Chardan appears willing to accept
HOGS SAIC explanation without any verifiable documentation.
Further, Chardan has made no attempt to contact the GeoTeam to consider the possibility
that we could offer insight to the SAIC analysis. If they listened to the call closely
or had any knowledge whatsoever regarding SAIC filings or had possession of the
filings, as we have for several months, we believe that Chardan would have to seriously
question HOG's CFO Warren Wang's SAIC net income analysis. Especially since FUQI,
a company for which they co-managed an equity offering for in 2007, was accused
by some of manipulating SEC margins despite the fact that SAIC revenues were on
par with SEC revenues. Guess what Chardan; all you would have had to do was pull
FUQI's SAIC filings and you would have learned that just like HOGS, FUQI's SAIC
and SEC revenues were in line but
net income was not. This presents as a classic example of a real company
manipulating margins to please investors.
It is troubling that analysts can be so superficial in their work and even incompetent.
Chardan's analysts should consider the possibility that the representations of ChinesHybrid
management teams may be misleading and even false. There was one direct quote
from Mr. Wang that clearly supports our case that HOGS manipulated SAIC filings
and may be deceiving investors. We will have more information on this
in an upcoming article. We suggest that Chardan download the conference call replay,
listen to the boiler plate SAIC discussion about 5 minutes into the call and then
press rewind until they hear what we heard. We are confident that Chardan's experienced
analysts can figure this puzzle out, or maybe their recent downgrade of HOGS is
already testament to their comprehension of the issues.
Before investors give credibility to Chardan's recommendation on HOGS, including
the new $9.00 target, they should consider Chardan's less than stellar track
record, much of which took place in the SPAC/RTO world. Consider Chardan's role
in the following:
- Formed the SPAC that housed APWR, which was halted, delisted and now trading
around 30 cents.
- Served as
co-underwriter for a 2007 FUQI public offering. FUQI was delisted for
not being able to file quarterly and annual financial statements with the SEC since
late 2009. Allegations of fraud have surfaced and two auditors resigned. This case
is eerily similar to the HOGS case we developed; real revenues but
allegedly fabricated margins.
- Formed the SPAC that brought SEED public through a merger with Chardan's
acquisition group, and then proceeded to give SEED a buy rating and $18 price target
on May 28, 2010. SEED's CFO recently resigned in July 2011. The stock recently hit
a new low of $2.10 and has been a consistent disappointment to investors.
- Formed the SPAC that spawned CABL which is now CABLF, trading at
$0.17 and voluntarily delisted from NASDAQ on July 18, 2011.
- Formed SPAC, Chardan 2008 China Acquisition Corp. (originally intended to merge
with a Chinese company, but later chose to merge with a U.S. based mortgage processing
company, symbol DJSP) in 2008. DJSP has been delisted and has class
action law suits against it for its connection with robo-signing of foreclosure
documents. The stock currently trades at $0.08.
- Was involved in the $30 million secondary offering of LIWA in April
2010. The LIWA story is still unfolding, but has recently been the subject of much
debate between long buyers and short sellers and is currently trading near 52 week
- Formed the SPAC that housed AUTC and raised funds for the company
in April 2005. Chardan put a Buy rating on AUTC on 3/25/11, raising its price target
from $30 to $40. They terminated coverage on 7/1/11. AUTC was halted for a time
and still has not met its 2010 20F filing deadline. The stock has been delisted
and lost nearly half of its value on September 12, 2011. The company currently trades
- Was involved in the HOLI (then named HLS Systems International,
Ltd.) IPO and raised equity funds for that company. The stock has tumbled lately
amid allegations of fraud.
- Raised money for AAMA, a stock that now trades at $0.02
- Served as co-manager for the KGJI January 2011 secondary offering
and the stock plummeted within days of the offering. A director of the company has
since resigned due to his concerns regarding the pricing of the secondary offering.
see issues we raised regarding the KGJI story.
- Served as co-manager of the CAVO October 2010 secondary offering.
CAVO has since been delisted and trades under $1.00.
- Served as placement agent for the August 2010 CBBD private placement. CBBD now trades
- Was involved with CNWHF, now a $0.10 stock.
- Served as co-placement Agent for the January 2010 private placement for
BOPH. We have no information on this company.
- Formed the SPAC Hambrecht Asia Acquisition Corp. that housed SGOC,
A company where our on-the-ground due diligence was not positive.
- Served as underwriter for the December 2006 FFHL IPO. See
fraud allegations that quickly surfaced on this name.
- Served as placement agent for HOGS March 2011 equity offering.
Will HOGS be the lone wolf? TBD
Note: much of the information confirming Chardan's involvement with these companies
is readily available on
their web site. For those of us keeping score on the China front, that's
zero wins, 15 losses and 2 undecided.
Even though the weak market sentiment played a large role in why these stocks underperformed,
the point of this list is that we expect more from investment banks, as many investors
place trust in their due diligence. They should have never brought many of these
companies to U.S. soil. We seriously question Chardan's ability to perform due diligence
in this space and believe investors should follow our lead.
As we said in our original report; we believe HOGS might play the going private
game, one that Chardan is now participating in unwittingly or otherwise. Sure, based
on SEC filings we can see why some Private Equity firms might get roped into such
discussions, but once competent analysts dig into the story and explore HOGS PRC
financial filings they will no doubt find what we have. We feel this closely mirrors
the Chardan-backed FUQI story. FUQI was a real company accused of fabricating margins
and exaggerating profitability, and is now currently delisted!
Disclaimer: Short HRBN
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