Summary

• CGA’s response to our original report has consisted of blanket denials and potentially staged investor days, completely devoid of primary source evidence to disprove our thesis
• After CGA excluded its only analyst from attending its investor days, the analyst cut her rating to “Sell” from “Buy”
• The company’s latest shareholder letter, which does not seriously address a single one of our claims, is a desperate rant against short selling  “terrorists” subject to “prosecution” by Chinese police
• We offer concrete evidence to dispute CGA’s claim that we published our report in reaction to the company’s dividend announcement
• We continue providing our evidence to regulators as we have in the past

China Green Agriculture (CGA) – Legitimacy of Business Challenged

For those of you that are unfamiliar with the China Green Agriculture (CGA) story, we recently published two reports that challenged the legitimacy of the company’s business. Long a subject of controversy, we believe CGA to be materially misrepresenting its business to U.S. investors.

In our first report dated October 1, 2014, we offered 344 days of time-lapse surveillance of the company’s high margin Jinong factory, combined with current and former employee interviews. The culmination of this evidence strongly suggested that “something is rotten” in CGA’s fertilizer production numbers. In addition, we also questioned the company’s monstrous $113 million marketing related deferred assets that are currently being rapidly amortized and expensed from the company’s balance sheet into thin air.

In our second report out just last week, we started to ask serious questions about the 26,175 branded retail stores CGA claims to have. Namely, where are they? Do they even exist?

Since we notified CGA that we were interested in discussing matters with them on September 30, the company has issued a total of 9 press releases in the last 22 days.

CGA’s latest press release was issued mid-day last Friday, in the form of a shareholder letter from CEO Li Tao. You can view the letter in its entirety here. We think the absurdity of the letter speaks for itself.  In between repeatedly challenging our on the ground research techniques, Li Tao calls us names like “terrorists,” “bogus liars,” and “saboteurs,” without refuting any of the substance of our reports.

We encourage everyone to read the letter in its entirety and then ask themselves, “Are these the musings of someone that I would want as my public company CEO?”

Meanwhile, the only analyst following CGA apparently has already asked herself this question and immediately cut her rating to “sell” on Monday, after being excluded from attending CGA’s “Investor Days”:

Our attempts to register for the event were not acknowledged.  We are aware of others that attempted to attend the event, but were also unable to register.  Indeed, prior to the investor event announcement, we had made numerous attempts to contact the Company by e-mail and telephone.  None of our messages were answered.  We asked a senior executive of another public China company to contact China Green Agriculture with a reference for Crystal Equity Research and we presented the Company’s legal representation in the U.S. with details of our questions.  None of these overtures were acknowledged, despite the U.S. attorney’s assurances that our questions would be answered.

The analyst appears to now share our negative view of CGA’s highly doubtful $113 million investment in marketing related deferred assets:

The appearance of misconduct casts a different light on other corporate actions, namely the significant investment in a marketing program that has required over $100 million dollars in cash investment over the past three years. Granted the number of participating retail store has increased dramatically to over 26,000 at the end of the last fiscal year.  Yet the expenditure is significant on a per store basis given costs of signage and displays in China.  If the investment leads to higher sales in the long term, then it is easily justified.  However, the lack of transparency around the program and the change in accounting treatment now look deceptive.  The marketing program is organized in such a way that it could be easily compromised by fraudulent retailers or unethical employees.

Given that it appears the Company’s legal representation may be complicit in management’s efforts to avoid investor scrutiny, we also have less confidence in the Company’s financial reports. The reclassification of the marketing program assets from PP&E to deferred revenue was overlooked previously as an understandable mistake.  Now we have concerns that the auditor could be more a conspirator as well.  That casts new doubt on the integrity of the financial reports

CGA Chairman Li Tao’s shareholder letter makes an extraordinary amount of unsubstantiated and defamatory claims (i.e. that we faked our video footage and that we’re engaging in criminal espionage).  We want to immediately address the one key issue he raises squarely on the head: CGA claims that we published our report as a reaction to the company declaring a dividend that same morning. The reality is just the opposite.

CGA’s press release from Friday states:

Certain short sellers published an article on October 1, 2014, that falsely alleged us of misrepresenting results of our operations and our sales. We have carefully analyzed that article and found it contains numerous factual misstatements. The article was a malicious attack to our Company’s operations and business model with largely distorted and inaccurate information. Certain presentations in the article were obtained by the short sellers via criminal means, such as corporate espionage and sabotage. The law enforcement in China had already taken the case and is currently prosecuting against this espionage crime.

The truth about this claim is that we had been trying to get in touch with CGA’s management and IR for weeks leading up to the release of this report. We attempted to reach CGA through several methods, without once receiving a response from the company. Days before we were to release our first report on CGA, we decided again in good faith to reach out to the company and see if they could address some of our questions. This is a step that both long investors and short sellers absolutely do not have to undertake, but one that we often do, in order to affirm our findings prior to publishing our reports. If you notice our recent reports on XXII and SBOTF, we spoke to IR or management in both cases.  We truly believe that getting the company’s side of the story is a worthwhile task, as sometimes public filings and press releases can be misinterpreted or management may offer an alternative explanation of events.

After our attempts to reach CGA’s management received no response, we decided to make one last attempt by contacting one of the company’s long time investors, to see if he could convince management to talk to us.  Management assured this investor that they would speak to us, but we never heard back from the company.

Here is a consolidated timeline of what happened, with the corresponding e-mail proof below:

• 9/29/14 mid business day — Not being able to get in touch with CGA, we reach out to a long time investor via phone.
• 9/30/14 early business day — The investor sends a copy of an e-mail (copied below) sent to CGA management asking them to get in touch with us.
• 9/30/14 rest of business day — No response from CGA management.
• Late night 9/30/14 — We are eventually guaranteed (by the investor) a phone conversation with CGA management the next morning, 10/1/14.
• 10/1/14 morning — We do not hear back from CGA, and instead are blindsided by the company’s dual press releases announcing a dividend and business update. The investor sends another e-mail (copied below) to CGA management scolding them for not reaching out to us.
• 10/1/14 late morning — Certain that management has no intention of speaking with us, we publish our first report.

The investor sent the following e-mail to CGA CFO Ken Ren on September 30, 2014 (a day before our first report was released):

Ken,

This is very important.

I had a discussion with Dan Davis [sic] of GeoInvesting.

Dan is both a long and a short investor. Unlike many of the short sellers, Dan really does his homework. He is a very, very smart guy. When he says something, he is almost always correct.

I believe Dan has a negative view of some of the things going on at CGA. Many of his questions are similar to the ones that I asked you when we had our call.

I think it is very very important for you and Li Tao to reach out to Dan IMMEDIATELY. When I say immediately, I do not mean next week. I mean ASAP. STAT– today or tomorrow. I know this is a holiday week in China, but I do not believe you have a week to wait.

I have no specific knowledge of what Dan is planning to do. I do not know if he is planning to write a report or if he does, what his position would be. However, you do not want to take the chance that a short report on CGA would come out. As you know, once a short report comes out it costs a company a lot of money to defend it and to defend the lawsuits that normally follow.

I also believe it is important that Li Tao is involved in the call. Some of the questions that Dan has can only be answered by Li Tao.

As I said, I do not have any specific knowledge of what Dan is thinking. I do, however, know that Dan is someone you want as a friend- or at least as a neutral bystander. He is not someone you want as an opponent. I say this because Dan always backs up his work with serious research.

I recommend strongly that you and Li Tao reach out to Dan. Dan told me he tried to reach you and you have not returned his calls. I think this is a mistake.

If you two would like me to be on the call with Dan, I am happy to do so. However, I think it is important that you contact Dan as soon as possible and ask Li Tao to join the conversation.

Here is a copy of the above e-mail, which you can click to enlarge:

The investor then told us that Ken Ren had agreed to a call the next morning (October 1) with CGA management.  We had agreed internally to wait to publish our report until after we had spoken to management and taken time (days if necessary) to make any necessary changes to the report incorporating the findings from our conversation with management.

We waited all morning on October 1 for any correspondence from management. Instead, CGA issued a PR announcing a very unusual dividend, not payable for over 4 months (a clear bid to “squeeze the shorts”) alongside another PR with a typically vague CGA business update. We justly interpreted the two press releases as a rejection of our invitation to speak.  Only then did we decide to proceed with the publication of our first report, with haste, as we wanted to alert investors as soon as possible to the misrepresentations we had uncovered over the course of a year investigating CGA.

After CGA failed to contact us, the investor CC’d us on the following email to CGA:

Ken,

I am very upset that you have not called Dan. You have embarrassed me and made me lose a lot of face.

As I told you, I believe Dan is a very serious and disciplined investor. He has a very good record as both a long and a short investor. He does his homework and is always willing to listen to answers from companies.

I see that you have decided to pay a dividend. I think that is excellent. However, I think you have to talk to people who are investors in your company, even if you think they are or could be short sellers.

I am still urging you to reach out to Dan. This will benefit you in two ways. First, it may help to solve some of the problems. Second, it may help you to understand the issues that are upsetting some investors.

Please reach out to Dan.

Here is a copy of that e-mail, which you can click to enlarge:

After the investor had a chance to read our first report, here is his e-mail to us:

Obviously, the dishonesty in CGA’s recent shareholder letter speaks for itself. We could dismantle the other claims listed therein, but we feel our time is better served alerting the U.S. regulatory authorities to these events.

Being a public company in the U.S. is a privilege.  CGA’s management’s false transparency with investors speaks for itself and is not how legitimate companies deal with shareholders.  Rather than welcome the inquiry of a short seller, which seasoned CEOs running legitimate businesses have done in the past, CGA has instead taken the ad hominem route.  Could you imagine the CEO of Scotts Miracle-Grow (SMG) or Potash Corp. (POT) signing off on a shareholder letter calling short sellers “terrorists” or claiming that the police are “prosecuting” researchers who took pictures of their factories or spoke to their employees?   If Chinese police are really investigating our work, we’re happy to share it with them, just as we’re providing our research to the SEC and other regulatory agencies.

We continue to be short CGA.