Is China Green Agriculture (CGA) The Next Chinese Fraud?

After Muddy Waters came out with research two months ago that singlehandedly destroyed recent Chinese NYSE IPO, RINO, we predicted that there would soon develop a cottage industry of micro investment firms who do diligence on various Chinese frauds (and there are many of them), establish a short base, and subsequently release a research report in the name. Today we get the latest such possible casualty: meet China Green Agriculture, a Xian, China firm founded in 2000, which "engages in the research, development, manufacture, and distribution of humic acid based compound fertilizers in China... The company also engages in the development, production, and distribution of agricultural products, including fruits, vegetables, flowers, and colored seedlings." Sure enough the company IPOed on the NYSE in mid-2008, and if the just released research report by J Capital Research is correct, the firm is about to join such other disgraces as RINO in the NYSE IPO dunce corner. To wit: "In this report, we present compelling evidence that China Green Agriculture (NYSE:CGA) has significantly over-stated its true revenues and earnings. We estimate that CGA’s value is no more than $2.85 per share, as opposed to its current market price of $9."

From the report, the key concerns with CGA, which mirror almost verbatim those that Muddy Waters had with RINO, are the following:

  • Vastly Inflated Revenue
  • False Claims About Technology
  • Questionable Tax Reports
  • Possible Self-­Dealing
  • Excessive Purchase Price for Gufeng Subsidiary
  • Improbable Margins
  • Dubious Related-­Party Transactions
  • Huge Multiple Paid for Gufeng
  • Excessive Share-­Based Compensation

and most troublingily:

  • No Response from CGA: Over more than a year, we have made repeated requests in person, in writing, and by telephone to CGA executives, including the company chairman, to verify or disprove the information in this report or to provide even one telephone number for even one sales office. While affable and communicative, the company has in every case refused to provide any specific responses to our questions.

As always buyer beware, but a cursory glance reveals that there could be some very serious downside in the name. And unlike RINO, the short interest here is far more manageable: just 2.72 million shares short on a 14.34 million float.

Full report (pdf):



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