China Redstone Group (PINK:CGPI)

There is a new article that was published on April 15 (last Fri.) regarding the cemetery business in Changshou District Chognqing, where CGPI is located. 

Source:  Workers Daily (a national newspaper based on Beijing).  

http://www.chinanews.com/gn/2011/04-15/2975360.shtml

This article referenced the business of CGPI, especially the cemetery license issue of CGPI.

In this article, one manager (the manager’s name is not disclosed) of CGPI (Chongqing Guiyuan) told the reporter that:

”we are attracted to Changshou District to start cemetery business since 2003.  Totally, we invested dozens of millions RMB.  However, we still do not have all required approvals” … "we want to be a legal operation, but it is really hard to be…"  "in the past several years, we processed more than 30 government approvals and finally have the quotas to nationalize the land.  Then, we asked Civil Affairs Bureau of Changshou District to seal the Application for Construction Land of Changshou District with the chop of the Funeral House of Changshou District.  However, Civil Affairs Bureau of Changshou District has not sealed the application for more than 400 days.  This means  the nationalization process of the land cannot continue..."

A GeoTeam investigator also called Civil Affairs Bureau of Changshou District in the morning of April 25, 2011.  The officer confirmed that CGPI did not have the required cemetery business license for the land issue.   The GeoTeam believes that CGPI has an obligation to address this issue, which we have brought up on several occasions, even if it is in the process of being resolved.

On March 15, 2011 CGPI published a letter to its shareholders. In this letter, CGPI summarized key issues raised by GeoInvesting and gave "facts" regarding those issues. In addition to its letter to shareholders, CGPI also sent GeoInvesting a "Cease & Desist Demand" letter via its attorney at the law firm of Richardson & Patel, LLP. In this letter, CGPI demanded through its attorney that GeoInvesting immediately and forever take down a grossly inaccurate and misleading report located on the GeoInvesting web site. What follows are (1) issues and "facts" (CGPI Response) summarized in CGPI's letter to shareholders, (2) our responses, (3) a written transcript (see supplement 1) of a conversation our assigned person had with the officers at the Funeral House and Cemetery Management Center of Chongqing Civil Affairs Bureau on March 3, 2011 and (4) an additional written transcript of a second conversation on March 25, 2011 (See Supplement 2) with the officers at the Funeral House and Cemetery Management Center of Civil Affairs Bureau including a recording of the conversation.

Please read full rebuttal here

See our original 19 page internal report 

Introduction:

In December 2010, we were contacted by a private investor who asked us to take a look at the CGPI story.  Specifically, he was seeking clarity on rumors circulating around whether or not CGPI possessed necessary land use rights to operate its cemetery business.  We asked our attorney, Bob, to delve into this story not knowing he would open Pandora’s Box.  Bob, along with our new on-the-ground due diligence team, have performed extensive due diligence on CGPI operations. What follows is a brief summary of our findings.  It is supported by a 19 page internal report and 52 pages of supplemental documents. We have maps, pictures, documents including land use rights and lease agreements and conversation notes with government contacts to back up our findings.  At first, the CGPI story appeared complicated, but after numerous conversations with Bob, we have been able to simplify our analysis. Our original goal was to summarize Bob’s conclusions on our focused China Due Diligence Board, “Ask Bob – GEO’s PRC Attorney”, at GeoInvesting.com, as we worked with CGPI and its IR firm to hopefully resolve open issues. They were cooperative.

History: Foguang was established in Fulin District of Chongqing City in 2002.  Foguang started to apply for the cemetery business and tourism business located in Changshou District.  Jan 2004, the office of Foguang moved to JiangnanTown, ChangshouDistrctChongqingCity.  Feb. 19 2004, Foguang received the land use rights for no consideration, from the Agricultural Machinery Bureau of Changshou District regarding the LongqiaoLake (339,444 m2).  Based on this agreement, Foguang can use the lake for its business. On Aug. 25, 2005, Foguang arranged an agreement to lease the land (570MU, 380,190 m2) surrounding the LongqiaoLake owned by Group 6, LongqiaoVillage with the government of Jiangnan town.  May 25, 2005, Foguang and two individuals establishes Chongqing Guiyuan Cemetery Industrial Co Ltd which obtains a Cemetery Service Business License to operate the cemetery on Aug. 22, 2006. Fonuang has a 51% ownership stake in Chongqing Guiyuan Cemetery Industrial Co until November 7, 2008 when it transfers stake to three individuals. 

In 2010, CGPI went public via a reverse merger, communicating that Foguang, a VIE, operates Guiyuan cemeteries. CGPI claims it has a right to cemetery revenues through contractual agreements between a PRC WFOE (Ran Ji) and Foguang PRC (VIE arrangement).

The underlying themes in our report include: 

• A loose ownership structure between the non-PRC and PRC entities jeopardizes investors’ claims to revenues.
• Misrepresentation of the entity that actually owns and operates cemeteries. We believe we have evidence that all the relevant parties of the cemetery business have not been disclosed in SEC documents.
• We have information leading us to believe hat CGPI license to operate cemetery has been revoked.
• Misrepresentation of land use rights; it appears that developed cemetery plots are situated on a much smaller area of land than CGPI claims. It appears that the only “land” that CGPI owns is a lake.
• Illegal lease of land where cemetery plots have been developed.
• A nominal fine had been levied against cemetery operation helps to suggest that CGPI is operating an illegal cemetery operation; the right to operate cemeteries appears to have been revoked.
• There is real potential for increased competition in the cemetery business.
• The Company’s tourism business plan may be less attractive than portrayed. (since we opened the investigation on CGPI, the company has made a decision to terminate and divest this project entirely)
• Revenues may be overstated, supported by plot counts and receipts from cemetery plots a member of our team purchased.
• Assets may be overstated.

Conclusion: 

The SEC documents of CGPI may not reflect its real business.  We feel there are several significant risks that can adversely influence its business.  We suggest that CGPI should revise its SEC documents and/or make substantial disclosures to clarify these issues.  We also suggest that the investors of CGPI pay attention to the issues summarized out in the attached report.

Please Read Full Report Here

***Disclosure: The GeoTeam is neither long nor short CGPI