Sino Clean Energy (NASDAQ: SCEI) Chairman Baowen Ren published a letter to shareholders on May 3rd challenging the findings of Geo Investing and a separate research report published by Alfred Little.
In this article we address specific statements and allegations made in Chairman Ren’s letter to SCEI’s shareholders:
SCEI’s Alleged Third Party Logistics Companies
SCEI claims its two largest third party logistics companies are Xi’an Kaifeng Transportation Company, Ltd., (“Kaifeng”) and Sheng Yang Xin Yu Transportation Co., Ltd. (“Xinyu”). SCEI even provided documents for these companies sealed with their official chops. The chops provide the formal Chinese names of the companies as “è¥¿å®‰å‡¯ä¸°è¿è¾“æœ‰é™å…¬å¸” and “æ²ˆé˜³å¸‚æ–°å®‡è¿è¾“æœ‰é™å…¬å¸“. We investigated these companies with the following results:
- Xi’an Kaifeng Transportation Co., Ltd. (è¥¿å®‰å‡¯ä¸°è¿è¾“æœ‰é™å…¬å¸): Our investigator visited the Administration for Industry and Commerce (“AIC”) offices of both Xi’an City and Shaanxi Province to search the data bases for “Kaifeng” using its Chinese name “è¥¿å®‰å‡¯ä¸°è¿è¾“æœ‰é™å…¬å¸. Our investigator found no such company in either of the data bases of the two AIC authorities. Since Kaifeng’s company name includes “Xi’an”, which is the name of the capital city of Shaanxi province, PRC law requires the company be registered in the AIC of Xi’an City (and/or its subsidiaries) and/or AIC of Shaanxi province. Further, if Kaifeng is registered with either AIC office, the data base of these authorities would have the company’s information. The print-screen of our search of the AIC of Xi’an City data base follows:
To obtain this screen, an AIC officer helped our investigator enter Kaifeng’s official Chinese name “è¥¿å®‰å‡¯ä¸°è¿è¾“æœ‰é™å…¬å¸” and clicked the search ï¼ˆæŸ¥è¯¢ï¼‰ key. There was no matching name.
We also conducted a search of the AIC of Shaanxi Province’s data base. The print screen follows:
To obtain this screen, an AIC officer helped our investigator enter Kaifeng’s official Chinese name “è¥¿å®‰å‡¯ä¸°è¿è¾“æœ‰é™å…¬å¸” and security code “7730”, and clicked the search ï¼ˆå¼€å§‹æŸ¥è¯¢ï¼‰key. Once again, there was no matching name.
Investors also can try their own luck looking for Kaifeng online. The online database of AIC of Xi’an City is http://www.xags.gov.cn . Investors can click on “ä¼ä¸šåŸºæœ¬ä¿¡æ¯æŸ¥è¯¢” on this page and do the search. The online database of the AIC of Shaanxi Province is http://www.snaic.gov.cn/helper/wangsgsyw/gongsxxflcx/qiyjbxxcx.jsp. Investors can type Kaifeng’s Chinese name in the relevant block and do the search for themselves. There is apparently no company with Kaifeng’s Chinese name in either data base.
Our investigator continued his search and found Xi’an Kaifeng Logistic Center (è¥¿å®‰å‡¯ä¸°ç‰©æµä¸å¿ƒ) whose name is similar to Kaifeng and where some transportation companies are located. He called one company located in the Xi’an Kaifeng Logistic Center and the woman who took the call said the logistics companies operating out of the facility only have open trucks that could not be used to transport liquids such as CWSF. The transcript of this conversation is included with this article (see Kaifang transcript below).
- Shenyang City Xinyu Transportation Co., Ltd. (æ²ˆé˜³å¸‚æ–°å®‡è¿è¾“æœ‰é™å…¬å¸): We did indeed find a company that has the name claimed by SCEI in the Shenyang AIC data base. We even found the shipping company’s website, http://xinyubanjia.com/cn/about.asp. There is a problem that is evident on the company’s website. According to the website, Xinyu does not own or operate the type of tanker trucks needed to transport CWSF (liquid). Instead, the company operates common container trucks. There is a page on the company’s website that lists the types of trucks it operates (http://xinyubanjia.com/cn/product.asp) which does not include tanker trucks.
Our different investigators called Xinyu and talked to a woman who confirmed the company only has container trucks suitable for transporting solid goods. So if you want to move furniture from one location to another, Xinyu is your shipper. If you want to transport liquids you need another shipper. The transcript of this conversation is enclosed to this letter. (see Xinyu transcripts 1 & 2 below)
Our investigator then visited the address listed on Xinyu’s website (No. 34-1, Jixiang Road, Dadong District, Shenyang City). Our Investigator found Xinyu’s office is in one unit of a large apartment building. The pictures of the apartment building are enclosed. We also obtained the SAIC files of Xinyu and its shareholders are Debao Zhang and Peizhi Gao. The business description of Xinyu is defined as “regular goods transportation and cargo agent” and there is no indication that Xinyu has the capacity to transport liquids such as CWSF.
Finally, having noticed that the SAIC registered address for Xinyu’s (No. 1 Dongta Street, Dadong District, Shenyang City) is different from the address listed on the company’s website, our investigator visited that address. What he found was a small office of around 200 square feet with Xinyu’s sign above the gate (pictures of office enclosed). There were no employees present and the office was apparently closed. People who work around this address confirmed that the office is almost always closed and that occasionally an old man may come to the office. Also, there were no trucks parked in the area. The sign above the gate lists a telephone number (2431-2229) which is the same number included in Xinyu’s SAIC registration record. Our investigator called the number many times during business hours and there was no answer. He then contacted China Unicom (Shenyang 114 call center) to confirm the number on Xinyu’s sign and learned that the number is not registered under Xinyu.
Our investigator made one final attempt to call Xinyu’s number on its website in the evening since the website said the number works 24/7. This time he reached the same woman he talked to when he first called Xinyu and she confirmed the two office addresses he visited. Once again she stated that Xinyu cannot ship liquids as the company has no equipment [tanker trucks]. (see Xinyu transcript 3 below)
Names of Top Customers
SCEI asserted that we did not work hard enough to find its top customers and provided the Chinese names of the customers in Chairman Ren’s letter to shareholders. Upon examination of the Chinese names provided by the company we determined that the English equivalent names used in the SEC filings are not in conformity with standard translation. How can investors find the accurate Chinese names for SCEI’s customers based on non-conforming English translated names? In any event, following are some customer names provided in SCEI’s Form 10-K filing and the English translation of the Chinese names provided in the company’s letter to shareholders.
Name in the 10K
Chinese name provided by SCEI
Accurate English Translation
Northwest Rubber General Factory
Shaanxi Urban Development
Shaan Xi Tongchuan Urban Development Co., Ltd.
Xi’an Institute of Architecture
Huaqing College, Xi’an University of Architecture Technology
China Northern Airline
China Northern Airline Limited.
Note: this company does not exist after 2002. The investor can check its history in this link:
Seasonality of Business
The commentary by management regarding the seasonality of demand from residential customers in SCEI’s 2010 Form 10-K and in the Chairman’s letter to shareholders is confusing. The 2010 Form 10-K states: “The demand for CWSF from residential heating customers tends to be seasonal in nature, with peak demand occurring between the months of October through March, which are the peak heating periods in the markets which the Company currently serves. Demand for CWSF during peak periods is approximately 30% to 40% higher than during non-peak periods. Demand for CWSF from industrial customers tends to be fairly stable throughout the year, as their application of CWSF is often unrelated to heating.”
However, in the Chairman’s letter to shareholders, residential demand in Q I is 60% more than Q II and Q IV is 66% more than Q III. See the following data included in the letter to shareholders.
Notwithstanding whether residential demand during the heating season quarters is closer to 40% or 60% more than during the non-heating season, we think the drop off in usage during the non-heating season should be even more dramatic. That’s because we question management’s claim that residential demand during the non-heating season would be driven by use of CWSF for residential cooking and hot water. Investors should note that, unlike in the U.S., very few residential buildings in China provide residents with hot water through centralized boilers. Instead, most residents have an electric and/or liquid natural gas water heater to provide hot water for their units. That leaves the possibility of CWSF usage for residential cooking during the non-heating season but only large institutions with many people would use CWSF fueled boilers to heat water and cook food in their cafeterias. We therefore have difficulty accepting the quarterly residential sales volumes claimed by the company particularly during the non-heating season.
Why Statements from Local Shop Owner are Credible
Why would one challenge the comments made by a shop owner of an adjacent business who spends most of his time across the street from SCEI’s Tongchuan production facility? The shop owner observed a general lack of activity at SCEI’s facility over a long period of time until the company hosted an event for US investors. The shop owner stated, “That event was held in conjunction with local government officials as more than 20 hired tanker trucks took position along the coal storage line.” He further stated that, “The two empty CWSF trucks went back and forth.” Finally he said, “SCEI also hired a fork lift truck for the occasion (since it appears that SCEI does not have any fork lift trucks) to shove coal into storage.” The shop owner stated that the staged event was put together in order to make US investors believe that SCEI has substantial and ongoing operations. Please note that the shop owner’s statements are consistent with the video surveillance evidence that was compiled by IFRA and disclosed by Alfred Little in his recently published research articles concerning SCEI and its operations.
Putting the discussion with the shop owner into context, on the day of our investigator’s visit there were no SCEI employees on the site. There was only a gate guard available at the site who is employed by the construction company and knew nothing of SCEI’s business. The only person our investigator could talk to who would have knowledge of SCEI’s business was therefore the shop owner of a business that is just across the street of SCEI’s Tongchuan facility. We would have sought out the shop owner in any event as talking to locals who should have knowledge of a company’s operations is part of our standard on-the-ground due diligence process. In this case, the shop owner was the only person available to our investigator.
The Geo Team’s approach of seeking input from locals is not unique to the SCEI case. We also successfully employed that method in our research report on SBAY that was published on March 24, 2011 (http://portal.geoinvesting.com/companies/SBAY_Report.aspx). The stock is now halted, as the SEC investigates their story. Further giving credence to seeking out knowledgeable locals is that auditors are beginning to do this. Following is a relevant excerpt from an auditor’s letter regarding the audit of a Chinese RTO engaged in the water treatment business:
“In the January Letter, Friedman stated that comments made by a security guard at the [company’s] Plant and by the Company Representative led Friedman to question the accuracy of the sales revenue the Company had recognized for the equipment sale and installation project at the Plant.”
One final thought regarding locals is that non-employees who have or should have knowledge of a company’s operations have no vested interest in or risk in what they say. They simply disclose what they have observed, seen and heard over time. They have nothing to gain from what they say and they have no reason to fear reprisals as employees would. Locals can therefore be very knowledgeable, helpful and credible sources of information.
GeoInvesting begins all of its investigations, including of SCEI, with objectivity and professional skepticism. The GeoTeam develops a due diligence plan and sends a competent, Chinese professional investigator(s) to do the necessary on-the-ground due diligence and investigative leg work. We use the unfiltered and unbiased findings of our investigators to raise questions and draw conclusions. Once we have compiled results we publish alerts/research reports to inform our subscribers of what we did and found. We often continue our due diligence to pursue open issues and add clarity to our findings. In the case of SCEI, added due diligence uncovered what we believe are deliberate actions by management to mislead investors:
- One of SCEI alleged third party transportation companies appears not to exist.
- The second SCEI alleged third party transportation company appears to be unable to meet SCEI needs due to its small size and inability to transport liquid goods.
- It appears that SCEI fabricated or misused company chops.
We will be turning our evidence over to SCEI’s auditor, PRC authorities and the SEC.
Transcript — Conversation with the Xi’an Kaifeng Logistic Center
Here is a transcript of the phone call at around 9:40 AM, May 5, 2011 (Beijing time). This is the conversation between an investigator of ours (“A”) and the lady from one company in the Xi’an Kaifeng Logistic Center (“B”. The telephone number our investigator called is found from the webpage under this link. http://dx88.56888.net/parkCompanylist.aspx?CityCode=40286&ParkID=37. It seems that there are many companies located in the Xi’an Kaifeng Logistic Center.
In this conversation, “A” is our investigator and “B” is the lady from a company in the Xi’an Logistic Center.
A: Is that Kaifeng Logistic Center?
B: Yes. What I can do for you?
A: I want to know whether we have the tanker truck to deliver CWSF. Our company is planning to transport CWSF in the near future.
B: from where to where?
A: Within Shaanxi province, from Tongchuan to Xi’an and Xianyang.
B: we do not do this business. We transport goods with the empty open truck (æ•žç¯·è½¦).
A: Do you know in the who Kaifeng Logistic Center, which company has the tanker truck?
B: Logistic Center is to transport goods with empty truck (ç©ºè½¦é…è´§) and there is no tanker truck. You shall call the big professional transportation company.
A: Is it to say that the whole Kaifeng Logistic Center does not have this (tanker truck)?
B: No. No. Xi’an has many logistic centers and none of them has tanker truck.
A: ok. It is to say that the whole Kaifeng Logistic Center does not have it.
B: Yes. You only can find it (tanker truck) from the big logistic company.
B: we don’t have tanker truck.
A: I understand that Kaifeng Logistic Center does not have tanker truck. I will look for some other companies. Thank you.
Transcript 1 — Conversation with Shenyang City Xinyu Transportation Co., Ltd.
Here is a transcript of the phone call at around 9:20 AM, May 4, 2011 (Beijing time). This is the conversation between an investigator of ours (“A”) and the lady from Shenyang City Xinyu Transportation Co., Ltd.(“B”) The telephone number our investigator called is the number on the website of Shenyang City Xinyu Transportation Co., Ltd.
In this conversation, “A” is our investigator and “B” is the lady of Shenyang City Xinyu Transportation Co., Ltd.
A: Hello…is that Xinyu Transportation Company?
A: is that Xinyu Transportation Company?
B: Oh…Yes, this is the moving company.
A: Oh…yes…I want to know that whether your company can deliver liquid?
B: What liquid?
A: we need the big tanker truck. Our product is CWSF.
B: Then, we can not deliver.
A: then, your company is only a common moving company which can not deliver liquid? You do not have the tanker truck?
B: Yes. We do not have tanker truck. We only can deliver family belongings.
A: Only can deliver family belonging? And no tanker truck?
B: yes…a company moving family belonging…
A: ok. A moving company without tanker truck. I understand. I am sorry to bother you.
B: If you want to move your family belongings. You can call me.
Transcript 2 — Conversation with Shenyang City Xinyu Transportation Co., Ltd.
Here is a transcript recorded around 9:20 AM (Listen) May 6, 2011 (Beijing time). This is the conversation between one of our investigator (“A”) and the same lady from Shenyang City Xinyu Transportation Co., Ltd.(“B”) . The telephone number our investigator called is the number on the website of Shenyang City Xinyu Transportation Co., Ltd.
In this conversation, A is our investigator and B is the lady of Shenyang City Xinyu Transportation Co., Ltd.
B: Hello (noise)
A: Hello, is this Xinyu Transportation Co., Ltd.?
B: Hello (noise)
A: Hello, can you hear me? Is this Xinyu Transportation Co., Ltd.?
B: What? (noise)
A: Is this Xinyu Transportation Co., Ltd.?
A: Xinyu Transportation C., Ltd.?
B: Yes. Transportation company. (æ˜¯çš„ï¼Œæ¬å®¶å…¬å¸)
A: Is this Xinyu Transportation Co., Ltd.?
B: What I can do for you? (ä»€ä¹ˆäº‹å§ï¼Ÿ)
A: Oh. I want to know whether your company can transport liquid?
B: No. we do not transport liquid.
A: Do not transport liquid?
A: then, you do not have tanker trucks?
B: No. No. we do not have.
B: Yes. No.
A: Then, what can you transport?
A: Then, generally, what can you transport?
B: Moving furniture, not transportation (æ¬å®¶ï¼Œä¸è¿è¾“)
A: Moving furniture? (æ¬å®¶æ˜¯å§ï¼Ÿ)
B: Yes. If you move your furniture, it is ok.
A: Moving furniture is ok?
A: Oh. Ok. I know this. Thank you.
B: If you move your furniture, it is ok.
A: ok. Thank you.
Transcript 3 — Conversation with Shenyang City Xinyu Transportation Co., Ltd.
Here is a transcript of the phone call at around 7:20 pm and 7:40 pm, May 6, 2011 (Beijing time). There are two conversations between one of our investigators and the same lady from Shenyang City Xinyu Transportation Co., Ltd. our investigators talked to on the mornings of May 4 and May 6, 2011. The telephone number our investigator called is the number on the website of Shenyang City Xinyu Transportation Co., Ltd.
In this conversation, “A” is our investigator and “B” is the lady of Shenyang City Xinyu Transportation Co., Ltd..
A: Hello. Is this Xinyu Transportation Co., Ltd.?
B: Yes. It is Xinyu Transportation Co., Ltd.
A: Our company needs to relocate and needs to move lots of things. This morning One of our employees visited the office at No. 1, Dongta Street, where has a sign of Xinyu Transportation Co., Ltd.. That office is closed. Is it your office?
B: Yes. It is our office. When did you visit that office?
A: This morning. Our guy waited in there for more than two hours. The door is not open at all.
B: Oh…maybe our guy was busy this morning and did not open the door.
A: We also called the number on the sign for many times and no people pick up the call. Is 2431-2229 is one of your number?
B: Yes. It is…No one pick up the call?
A: Yes. Are you sure the office at No. 1, Dongta Street is your office?
B: Yes. It is our office. Both offices are ours. If you need to move something, you can just call this number and you do not need to call that number. When you need to move?
A: Next Wed. Our company needs to move lots of things.
B: We can set up a time and I can go to your company to check what you need to move.
A: OK. Right now, it is already Friday evening. It is a weekend. I can call you again on Monday.
B: OK. You can call this number. We can make an arrangement Monday.
A: thank you. Sure, I will call your Monday.
B: call me Monday.
(20 minutes later, another call)
A: Hello. I just call you around twenty minutes ago.
A: I am the guy who just called you around twenty minutes ago. Our company needs to move lots of things next wed.
B: Oh. Yes.
A: I forget to ask. Except furniture, our company also has some liquids need to be transported. Do you company has tanker trucks? Can you company transport that?
B: Liquid? No. We cannot, as we do not have the equipment.
A: Even the office at No. 1, Dongta Street also cannot move that?
B: No. We are just a regular moving company (æˆ‘ä»¬å°±æ˜¯ä¸ªæ™®é€šæ¬å®¶å…¬å¸).
A: Oh. We heard from some others that your company can move liquid.
B: No. we cannot. However, we can see what we can move for your company. Why don’t we make an appointment next Monday?
A: Yes. We can do that. Maybe you company can help us move solid, such as furnitures. We can ask another company to move liquid. You may know, it is very hard to find a company who can move liquid. This is the reason why I call you again.
B: This is a good arrangement. Yeah, we don’t have the equipment. We can make an appointment next Monday and see what we can do for you.
A: Good. I will call you Monday morning and see.
B: ok. Call me.
Disclosure: Short Via SCEI Puts.
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