Featured Posting: China Integrated Energy (CBEH): The Latest Alleged Chinese Fraud

On ZH: China Integrated Energy (CBEH): The Latest Alleged Chinese Fraud (With A True Value Of $0.76/Share) I will add in some comments in green bold.

• Another day, another alleged Chinese fraud emerges. Considering the track record of the Zero Hedge predicted cottage industry at exposing frauds such as RINO, CCME and CAGC, all of which are likely now halted in perpetuity, (much to the chagrin of their corrupt, idiot sellside analysts) here is the latest candidate for very careful diligence: China Integrated Energy (NASDAQ:CBEH), previously mentioned here when we discussed the clients of potentially compromised auditor Sherb. From the Sinclair Upton Research thesis: "In this report, we present irrefutable evidence that China Integrated Energy (NASDAQ: CBEH) is 1) transferring company funds to management insiders through fraudulent sham acquisitions and 2) fabricating its SEC financial statements. CBEH has transferred at least $35 million dollars of company cash by making acquisitions of shell companies owned by Gao Bo, who is the firstborn son of the CBEH’s CEO, Gao Xincheng. Given that the company has made over $134 million dollars in acquisitions and lease “prepayments”, our research has uncovered only a small fraction of the total amount being stolen from shareholders. There is also strong evidence that the financial results of all three segments of the company, refined products distribution, biodiesel, and gas stations, are overstated or even fictitious. The true value of CBEH is likely to be no more than $0.76/share, equal to the $37 million raised in recent secondary offerings, if the cash has not already been funneled out to related parties under the guise of even more acquisitions, gas station leases, and capital expenditures."

I found the report posted on ZH to be very interesting.

Page 6: How CBEH raised money.

Raising Capital

They key to discovering financial fraud is to follow the money – where it comes from, and where it goes. For CBEH, the money comes from U.S. investors. Since 2007, the company has raised a total of $85 million in private placements, or PIPE deals. This sum does not count the proceeds from exercise of 8.5 million in outstanding warrants, which would bring another $41 million into the company’s coffers.

Once the cash is successfully transferred from the U.S. into China, CBEH claims to use the money for acquisitions, prepayment of gas station leases, and construction of additional biodiesel facilities.

As of September 30, 2010, the company supposedly had $79.7 million of cash on its balance sheet.

Despite generating $38.5 million in net income and $35.6 million in operating cash flow in the first 9 months of 2010, the company decided to issue a total of $37.4 million worth of new shares in December 2010. If CBEH is as profitable as it claims, does not need to dilute shareholders at an irrationally low valuation of 6.1 times net income. ( Me: Interesting note eh? CBEH claimed to be profitable but yet it continued to raise more money in Dec 2010! )

With tens of millions of dollars flowing through the hands of management, we can only imagine how tempting it is for them to help themselves to some of it. In the following section we reveal the most egregious acquisitions, supposedly made with best intentions of shareholders, but in reality designed to transfer cash out of the company to family insiders directly related to CBEH management.

Me: The questionable acquisitions...!!

Chongqing Tianrun Energy Development Co., Ltd. (重庆天润能源开发有限公司), was 52.50% owned by Gao Bo (高博), the son of CBEH’s CEO, and Gao Jiankang (高健康), prior to being purchased by CBEH for $16.5 million

On October 18, 2010 CBEH purchased Chongqing Tianrun for $16.5 million in cash, by acquiring the holding company of Chongqing Tianrun, Chongqing Huaneng Recycling Chongqing Huaneng Recycling for Old and Waste Materials Co., Ltd. Chongqing Tianrun is supposedly owns 50,000 ton/year biodiesel facilities.

Our investigations into the true ownership of Chongqing Tianrun, as stated on AIC filings, show that Gao Jiankang has been chairman of the company since 2006, and as of 2009 October Gao Bo owned 52.50% of the company. Other named individual shareholders are Zhao Shenglu at 6.00%, Liao Xiadong at 4.95%, and 14 other people with 36.55%.

On the next page...

Why did CBEH deliberately misrepresent the true equity owners of Chongqing Huaneng and Chongqing Tianrun, unless they are hiding the truth that the transactions are not legitimate?

Shenmu County Erlingtu Hongtu Oil Material Co., Ltd. (神木县尔林兔宏图油料有限责任公司), was 80.00% owned by Gao Bo (高博) before being purchased by CBEH for $9.1 million

On October 19, 2010, CBEH purchased the Shenmu County gas station for 61 million RMB, or $9.1 million USD. According to the company’s supposed Equity Transfer Agreement, on exhibit 10.1 of the 8-K filed on 11/2/10, the selling shareholder and legal representative of Shenmu County was Lu Wenhua (卢 文华).

However, just as in the Chongqing Tianrun acquisition, we find that CBEH has misrepresented the true owners of Shenmu County, which was 80% owned by Gao Bo (高博) and 20% owned by Song Yongsheng (宋永生). In fact, just a single day before the acquisition, on October 18, 2010, the legal shareholders and representative of Shenmu County was changed to Gao Bo and Song Yongsheng.

The report continues.....

These CBEH transactions yielded a huge payday for Gao Bo, who “coincidentally” was the majority equity owner of two separate companies in two different regions of China, in two different industries (biodiesel and gas stations), that were bought out by CBEH in the very same week. Mr. Gao received personal sale proceeds of over $15 million in cash, courtesy of CBEH shareholders.

Even if CBEH argues that Gao Bo and Gao Jiankang became equity owners of the acquired companies after the acquisition, and not before, it still boggles the mind why the named shareholders of Chongqing Tianrun and Shenmu County is not listed as Xi’an Baorun Industrial Development Co., Ltd, but individual people. If Xi’an Baorun really owns the companies they acquired, why aren’t they listed as the legal shareholders in the AIC filings

Where's the profits as claimed?

CBEH management has claimed that the Chongqing Tianrun biodiesel facility with capacity of 50,000 tons/year will generate $32 million in revenue and $10 million in net income in 2011. We believe that their projection is highly exaggerated. In reality, the AIC financials for Chongqing Tianrun show 2009 revenue of $1.5 million, a net loss of -$420,000, and total assets of $4.36 million, of which only $790,000 is property, plant and equipment. Given that CBEH recorded over $8 million in PP&E on its supposed 100,000 tons/year facility in Tongchuan City (which we also believe has exaggerated results), we question why CBEH is spending $16.5 million on an unprofitable, tiny company with less than $1 million in real assets.

Where is the MOOLAH??? (page 19) Now this section is rather interesting. We have here a Chinese company who claims to be rich but does not seem to earn much interest from the tons of money it said to have!!!!



We doubt that the $79.6 million cash on the balance sheet actually exists

According to the company’s 2010 3Q 10-Q, ending 9/30/10, CBEH supposedly had $79.6 million in company bank accounts in China. During the first 9 months of 2010, the company claimed to have an average cash balance of $60 million. During 2009 and 2008, they claimed to have an average of $45 million and $29 million in spare cash in bank accounts.

If the cash truly is in company bank accounts, why hasn’t CBEH reported ANY interest income in ANY financial statements from 2008 onwards? There is not even a line for interest income on the 2008 through 2010 income statements, so the company cannot even say that interest income is being netted against interest expense. Either the company earns a 0.00% interest rate on tens of millions of dollars, which we think is highly unlikely, or that the cash does not exist in company bank accounts. We believe that there is over $2.5 million in missing interest income that should have been reported in the financials if the cash is really there.

Do read the rest of the report for it's certainly extremely interesting.