China-Biotics is ‘junk stock’, says China Economic Review

By Shane Starling

- Last updated on GMT

Related tags: Investment

China-Biotics: Fudged financials?
China-Biotics: Fudged financials?
Allegations of financial impropriety against China-Biotics are growing louder with respected investment publications coming down against the company for massaging its financial figures to overstate revenues.

The probiotics player that the investment website Seeking Alpha was slating as a potential buy-out target for the newly formed DuPont-Danisco conglomerate earlier in the year, is now the target of financial manipulation accusations.

In a March 2011 report on the Shanghai-based company founded in 1999, China Economic Review stated: “…we carried out due diligence work to examine the company’s distribution network, production capacity, customer base, revenue breakdown, and investor relations management.”

Overstated revenues

“The key findings are that China-Biotics has overstated its revenues and exaggerated the size of its customer base. On these grounds, we conclude that it is a junk stock.”

It concluded it was, "highly likely that China-Biotics is defrauding investors."

The report said the company’s production facilities were not capable of producing its stated output and that it was fabricating non-existent business relationships with companies such as Bright Dairy and Food. In March China-Biotics announced an expanded deal with Bright.

“Based on our enquiries, it is clear that China-Biotics is faking, or at least exaggerating its bulk additives customer base. There are therefore grounds to doubt the reported $21.8m bulk revenues in the domestic market.”

The company was also accused of claiming a retail distribution network of 111 stores, most of which turned out to be residential or office addresses with no retail activity, and of which China-Biotics suddenly closed 95, and removed website references to them.

China-Biotics reported revenues of $81m in 2010, a more than 50% rise on 2009’s $54.2m. It has failed to respond to the accusations, causing investment websites to damn the company.

Writing May 26 on the investment publication, The Street, Rick Pearson said the company’s silence on the accusations was damning, that its offences appeared “major”​ and that it was unlikely to pass an ongoing official audit.

In January, Seeking Alpha analyst Sean Wright said China Biotics a likely target if Danisco was to tap any investment fund made available to it by the $6.5bn DuPont takeover deal.

Related topics: Manufacturers, Emerging Markets

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