Apparently the Construction Bank of China believes the balance sheet numbers, because it is really all that it is borrowing against at this point and they still give them around 7%.
The numbers are similar to 2009 and CHGI turned sales around fairly quickly. At this point the Construction Bank of China is in about the best position to value CHGI's assets and potential, and borrowing at 7% is a good sign.
$1/share is positive net value. If they sold as an ongoing operation, shareholders don't pay back creditors as the company stays in place. In an asset sale creditors get paid first, but CHGI has a positive book value of around $2 (after paying debts).
I'm assuming the actual price they would get in a distressed sale would be much lower for many assets, but also that graphite producers are looking for production facilities like CHGI in China, so the facilities themselves would go for close to book. That is why I cut book in half.
Who knows what an asset sale would really bring?
I expect that they will improve their business and improve sales. CHGI went through the same thing in 2009 when steel struggled, which required a PIPE to cover operations and expansion. They came through and increased sales until the current slowdown.
Unfortunately there is a lot of pain trying to expand their business model from commodity electrodes to higher end products.
The US tariff on Chinese solar panels and China's delay in developing nuclear reactors in response to the Japanese tsunami meltdown has also had an impact on higher end graphite applications.
There is always a chance the company could go bankrupt. Right now the stock is priced for a likelihood of bankruptcy, which I feel is overdoing it since the facilities and assets of the company still yield a positive book value, even at discounted prices.
I haven't sold any shares at these low prices. Clearly the horrible earnings last quarter demonstrate that it will be a long time until they start achieving sales and earnings based on their capacity. I expect earnings this quarter to be little improved.
I also agree with topsnot, if management wanted to they could probably sell the company for around $1/share based on the facilities and inventory alone. There are multiple graphite players who would like a Chinese "partner" with the production capabilities of CHGI.
You're forgetting $40 million in inventory among other things. The "book value" is still something around $2, even with the debt.
They don't seem to have trouble getting financing, now they only need to sell their products to justify expansion.
CHGI is an attractive purchase for a number of graphite producers, but they seem reluctant to sell unless they absolutely have to. With insiders owning most of the stock they don't need to sell until they want to and my instinct tells me that by the time things got bleak enough that they would sell there wouldn't be much value left. I think CHGI will live or die on its ability to produce, not in its ability to sell itself.
Fraud? Their loss last quarter equalled revenue. Fraud isn't the risk here, bankruptcy is.
Q4 was about the same as 2009, which was horrible and involved a PIPE. Shockingly horrible.
I don't know what is more surprising, how horrible Q4 was or the fact that they still got a bank loan in January at 6%.
Q4 is their quarter with lowest sales every year. Good thing we won't have long till Q1'13. Better be significantly better.
None of this means that CHGI is implicated any way in an SEC investigation or allegations of fraud. It only means that BDO and the other Big 4 Chinese accounting firms aren't going to be doing audits where Chinese regulatory law doesn't allow release of information the SEC may request.
and seeking prison sentences up to life
in prison for any partners and employees who participated in the violation. In July 2012 the
SEC sought a six month stay of the action to permit it to continue ongoing discussions with the
China Securities Regulatory Commission (“CSRC”) regarding cross-border enforcement
Last week, it became apparent that the SEC’s negotiations with the CSRC over document
sharing had broken down. In addition to instituting the administrative proceeding against the five Chinese accounting firms, the SEC also filed a motion to lift the stay in its federal court action against DTTC. In its brief, the SEC disclosed it had reached an impasse with the CSRC, accusing the Chinese regulator of being “unwilling or unable to provide the SEC with meaningful assistance in its enforcement investigations.” The SEC made plain that going forward it will seek production directly from Chinese audit firms in connection with its
investigations of Chinese issuers.
UNCHARTERED LEGAL TERRITORY
The law in this area is quite unsettled. The December 3 administrative proceeding was brought under Section 106(b) of the Sarbanes-Oxley Act of 2002, which directs a foreign public accounting firm that issues an audit report, performs audit work, or conducts interim reviews to produce its audit work papers and other documents related to its audit work to the Commission or Public Company Accounting Oversight Board (“PCAOB”) upon request. In the first decade after Sarbanes-Oxley was enacted, the Commission never brought an enforcement action under Section 106. Then, in May of this year, the SEC instituted a first-of-its kind administrative proceeding against DTTC under Section 106...
Global Accounting Firms Caught in the Crossfire as SEC
Fails to Reach Agreement with Chinese Regulators on
December 10, 2012
The China affiliates of the biggest accounting firms in the world have been placed in real
jeopardy due to the stalled negotiations between U.S. and Chinese regulators over document
sharing. On December 3, the U.S. Securities and Exchange Commission brought an
administrative proceeding against BDO China Dahua CPA Co., Ltd., Deloitte Touche Tohmatsu
Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special
General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited based on their
refusal to produce audit work papers and other documents relating to Chinese companies
under investigation by the SEC. The accounting firms claim that their hands are tied because
their Chinese regulators have refused to authorize the document production. A decision in
favor of the SEC could result in these Chinese affiliates being denied the ability to appear and
practice before the Commission, rendering it difficult for Chinese companies who rely on their
services to list on American exchanges, and ultimately hindering the competitiveness of U.S.
CATCH-22 FOR ACCOUNTING FIRMS
Last week’s administrative proceeding brings to a head a simmering dispute between public
accounting firms operating in China and the SEC. The conflict first surfaced in September 2011,
when the SEC brought a federal court action to compel Deloitte Touche Tohmatsu CPA Ltd.
(“DTTC”) to comply with a subpoena calling for the production of documents relating to one of
its clients, Longtop Financial Technologies Limited, a Chinese company that the SEC later
charged with failing to provide current and accurate financial reports. In court papers, DTTC
argued that producing the requested documents would run afoul of Chinese law and could
result in Chinese regulators dissolving the firm entirely...
My guess is that BDO simply isn't going to take a chance auditing without being able to release documents that Chinese law won't allow to be released to the US. You can google "BDO China Dahua CPA Co., Ltd. AND Simpson" and read the Simpson article that best summarizes the situation (links to the .PDF on the third hit by my search). BDO has been the target of the SEC for refusing to disclose documents that they simply can not disclose under Chinese law.
My guess is that CHGI is relying on a smaller accounting firm audit the way all firms have done prior to this little #$%$ match between the SEC and Chinese regulators.
If BDO now thought CHGI had committed accounting fraud on any audits BDO have completed in the past they would be required under law to disclose what these findings (related to their completed audits). There isn't a chance a big firm like BDO would risk keeping quiet for a $10 million market cap company.
Pending some release from BDO to the contrary you can rest assured they stand by their prior audits and that it is most likely that they are simply staying out of the fight between the SEC and Chinese regulators for the time being.
Are people really concerned that a company that last reported steep unexpected reduction in sale and forecast the same dismal report to be cooking the books?
Again, google "BDO China Dahua CPA Co., Ltd. AND Simpson" and look for the link citing and linking to the article written by Simpson Thatcher on the subject.
Like I said in another post; this likely a side effect of the battle currently brewing between the SEC and the Chinese government than anything specific to CHGI.
Google "Simpson Thatcher" & "BDO China Dahua CPA Co., Ltd." & "December" and read the article Simpson put out about the recent developments between the SEC and Chinese regulators and BDO's unfortunate place in that fight.
Essentially auditors like BDO have been put in a situation where the SEC now requires disclosures that are prohibited into the US by Chinese law. They face the choice between life in prison, SEC sanctions, or simply stepping out of the fight. It doesn't look like BDO is willing to take that risk for CHGI.
I chinese scam wouldn't say they were dismissing their auditor because the auditor would certify sufficient auditory evidence.
If you are familiar with what is going on between the Chinese government and the SEC, BDO's actions here aren't terribly surprising.
Starting in December of 2012 the SEC began requiring BDO and the other big auditor's to supply information that they are not allowed to disclose to the US under Chinese laws. So the catch 22 they face is to disclose to the US what the SEC wants and face life in prison over in China or to face SEC sanctions.
China Carbons precise inventory of graphite, a protected resource under Chinese and American law, is likely one of those areas. It appears that BDO simply isn't going to do either.
Simpson Thatcher has a great article on it if you good "BDO China Dahua CPA Co., Ltd." and "December".
The fact that CHGI is upfront about why they dismissed BDO goes along way toward their credibility since they could have just dismissed them without comment.
Hopefully they clear this up in an upcoming Conference Call, but I'm not terribly surprised by BDO backing out of China Carbon considering how small CHGI is and the problems BDO already faces being caught up between the SEC and the Chinese government.
On the last CC the CEO commented that Q4 will be bad, but that Q1 on should see improvements.
My feeling was that he had already seen the orders coming in to bump up Q1, so I would not assume that they would not be relatively good.
We're up over 100% from about a month ago. Being down 10% one day doesn't mean anything here. I'll take a 100%+ month run and a 10% down day anytime.
CHGI has no advances to customers. Advances from customers (which CHGI does have) is actually a good thing because it shows pre-payment. Advances to suppliers is also a good thing to see in a highly leveraged company because it shows that input supplies have been paid for.
Fangda doesn't produce any Nuclear graphite to my knowledge. Fangda's 180,000 tn total capacity is almost exclusively commodity electrodes.
CHGI has 60,000 tn total capacity, so to compare total productive capacity Fangda is only 3x larger.
However, CHGI has a larger high purity capacity than Fangda, which is why CHGI believes they are the largest producer of high purity graphite in China.
The competitor's in high purity graphite products come from Japan, not China.
I'm starting to agree with you that focusing on Nuclear is the way to go.
I'm sure it will still be a long haul.
Time to ride the beginning of the year wave.