Aug. 17, 2011 8:57 AM ET | 11 comments | About: China XD Plastics Company Limited (CXDC), Includes: ABAT, CCME, CHBT
Disclosure: I am short CXDC.
China XD Plastics (NASDAQ:CXDC) is another Chinese company that became listed in the US through a reverse merger. Its main business is the manufacture of plastics used for making auto parts. It has just been announced that Morgan Stanley has signed an agreement to invest $100 million in CXDC, apparently as play on the growing Chinese automobile industry.
Going public via reverse merger (also known as backdoor listing) is not bad in of itself. But many companies go through the backdoor to do so because they cannot get listed through the usual way, which is why backdoor listing carries the stigma it does. The stigma has been shown to be justified this past six months as one Chinese reverse merger company after another has been delisted after being accused of fraud.
One of the surest sign of trouble with these companies has been when the financial numbers they report to the SEC are vastly different from the numbers they report to the Chinese government. Based on a review of Chinese regulatory filings, it turns out that China XD Plastics has this problem as well.
While CXDC’s SEC filings suggest that it is highly profitable, with a much higher margin than some of the leading companies in the plastics industry, the financials it has reported to the Chinese government show quite the opposite, with profit numbers that are only about one-tenth of that reported in its SEC filings.
These findings appear to put the Morgan Stanley investment in question.
CXDC’s main operating company in China is Harbin Xinda, which is 100% owned by a Hong Kong holding company (more about this in the tax discussion below). Below is a corporate structure chart for CXDC (click to enlarge images):
CXDC Structure Chart
(Source: SEC 10-K Filing)
1. Income Reported to Chinese SAIC Much Smaller than Income Reported to SEC