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ChinaResearch 07-Sep-2011 05:04 AM
Post Type: Public Public
CMED (#11844) In Response to original message: #11542 posted by mbgizmo on 10-Aug-2011 11:03 AM

Investors should use extreme caution when investing in Chinese companies listed in North America. From the information gathered and I believe CMED is another Chinese fraud which raised foreign capital by selling a growth China story. The capital is used to grossly overpay for acquisitions from oblique, often directly related counter party.

1) The due diligence investigation started from the comparison of SAIC vs. SEC reporting. As can see from below table, there is 300mm difference between their local & SEC reporting. I can’t tell why this is such a difference, but the main issues are mainly in 2007 and 2008 while they launched their “high profitable” FISH business.

Company Level (RMB)

Revenue

12/31/2006

12/31/2007

12/31/2008

12/31/2009

12/31/2010

Total Difference

CMED reported

495,580,000

794,622,000

1,112,122,000

795,978,000

787,680,000

SAIC revenue

301,145,200

789,775,884

833,725,200

1,017,073,600

714,080,000

Difference

(194,434,800)

(4,846,116)

(278,396,800)

221,095,600

(73,600,000)

(330,182,116)

Breakdown

GP

-

21,841,300.00

123,323,200.00

394,060,000.00

404,550,000.00

YDME

301,145,200.00

740,444,084.04

690,089,900.00

605,720,000.00

309,530,000.00

BBE

-

27,490,500.00

20,312,100.00

17,293,600.00

NA

GP-Only

SAIC

12/31/2006

12/31/2007

12/31/2008

12/31/2009

12/31/2010

Total

Revenue

-

21,841,300

123,323,200

394,060,000

404,550,000

943,774,500

SEC

12/31/2006

12/31/2007

12/31/2008

12/31/2009

12/31/2010

FISH (GP)

0

98,074,000

284,482,000

393,505,000

462,424,000

1,238,485,000

Difference

0

(76,232,700)

(161,158,800)

555,000

(57,874,000)

(294,710,500)

YMDE & BBE

SAIC

12/31/2006

12/31/2007

12/31/2008

12/31/2009

12/31/2010

Total

Revenue

301,145,200

767,934,584

710,402,000

623,013,600

309,530,000

2,712,025,384

SEC

12/31/2006

12/31/2007

12/31/2008

12/31/2009

12/31/2010

HIFU/ECLIA

495,580,000

696,548,000

827,640,000

402,473,000

325,256,000

2,747,497,000

Difference

(194,434,800)

71,386,584

(117,238,000)

220,540,600

(15,726,000)

(35,471,616)

2) History of Related Party Transactions: like other Chinese fraud names, CMED engaged a bunch of unclear and questionable acquisitions. These activities raise significant concerns about Management motivations.

  1. Bought original ECLIA business (2004) from the chairman for $30.2mm
  2. Bought main building from chairman for $7.8mm
  3. Sold the headline business, HIFU, to chairman for $53.5mm, received over 2.5 years
  4. Bought BBE-Ekon indirectly from Yimin, owned by ex-assistant to chairman.
  5. Bought FISH (2/07) and SPR (12/08) business from CytoTrend
    1. Chen Zhong, chief scientist post FISH acquisition files many patent applications on behalf of Cytotrend/CMED some related to SPR, before SPR is bought but after he is CMED employee. When SPR deal announced his tie to them or even potential conflict not disclosed.

a) BBE Acquisition:- CMEDannounced on 11/08/2007 that it purchased entire equity interest in Beijing Bio-Ekon Biotechnology Co., Ltd, a local Chinese firm, for $28.8mm. When I checked the SAIC filling for BBE, the local government filing shows that the entire consideration was roughly $7.5mm. So question is where did $21mm go?

Sep 2006 to Mar 13 2007 - An entity called Yimin buys up lots of individual Ekon holders on private deals. It pays RMB 49mm. Yimin is controlled by Chen Shu Jun, a 30 year old former assistant to CMED’s CEO Wu Xiaodong. Its pre-acquisition assets are comprised of a small cash balance and 2 HIFU machines. (Mr. Wu even issued a letter to confirm Yimin’s purchase of HIFU machines from YDME which used to help the SAIC registration process)

Apr 18 2007 - Clear Castle Investments Limited (BVI) buys East Crest Enterprises Limited (Hong Kong) from READY-MADE INCORPORATIONS LTD (BVI) i.e., East Crest is a clean empty shell.

May 30 2007 – Yimin sells Ekon to East Crest for RMB 53.6mm and records investment income of RMB4.85mm for FY2007.

Nov 26 2007 - CMED announced it will pay $28.8mm for BBE. It does not disclose the seller nor mention East Crest, Clear Castle, nor Yimin. The only asset it says it acquired is BBE.

Jan 08 2008 – CMED completed acquisition. In 20-F for FY ‘07 (Mar 2008) it lists only BBE as a subsidiary and announces that the seller is Finnea International Limited, with no other details. In 20-F for FY ’08 (Mar 2009) it finally also lists Clear Castle and East Crest as subsidiaries above BBE.

Conclusion – CMED “overpaid” $21mm for an asset that traded twice for $7.5mm only six months prior with one of those trades done by a potentially related party.

b) FISH & SPR acquisitions – CMED claimed it bought FISH assets from Supreme Well -> Molecular Diagnostics -> CytoTrend in Feb 2007. Paid $136.8mm plus $40mm earn out. Chen Zhong, a former Utah professor and former co-director of University of Utah cytogenetic lab, small owner and director in CytoTrend in the past and filer of many patents on its behalf, becomes CMED chief scientist. He signs a 5 year employment and non-compete agreement with CMED as a condition of acquisition. From the merger agreement (filed Sep 2007) it is clear CMED is contemplating purchasing the SPR business from CytoTrend as well (does so in Oct 2008, almost two years later). Both FISH and SPR are research businesses with no revenues prior to the acquisition.

There is possible connection between Chen Zhong and Molecular Diagnostics (MD). He used to be the chairman of CytoTrend and owned 1 share, while MD owned the balance. It is hard to believe that he was the face of the company, led the research effort but had no equity at time of sale. In the official bio, or discussion of the acquisitions, there is no mention of his relationship with CytoTrend though he used to own it, was its chairman, and filed patents on its behalf.

July 20 2007 – CMED pays $22mm as good faith money to Supreme Well for SPR.

Aug/Sep 2007 – Chen Zhong files 20 patent applications with either CMED or CytoTrend as assignee (hard to tell original since it may have been changed later). If it is CytoTrend then he is actively working for them even though they are in negotiations on SPR. If it is CMED then CMED already gets many SPR patents, even though they have not yet acquired SPR. What exactly did they acquire if they already have the IP?

Nov 19 2007 – Chen Zhong becomes CTO of CMED.

Oct 07 2008 – CMED announces SPR acquisition for $345mm, paid over one year. There is no mention of Chen Zhong’s connection to CytoTrend. They are asked on the call about the seller and all they say is that they’ve bought FISH from them before. In the press release they estimate SPR potential market size at $700mm and expect $23 to $26mm revenue in FY09. In FY10 they sold $4mm worth. In their latest presentation they estimate the market will be $250mm in five years.

3) Audit committee received a letter in 2009 alleging improper conduct of senior management in connection with asset acquisitions and sales. Contents were not disclosed. Announced after “independent investigation” completed and found no evidence.

4) The funding environment was getting worse this year after the massive Chinese frauds. CMED might find the capital markets closed to them on corporate governance concerns according to Fitch. On their recent analyst call, CMED claimed that they have access to other sources of funds such as commercial banks in China to provide liquidity. Based on my conversion with some analysts spoke to company earlier, the company told them it’s very hard to get the funding in current tighten credit environment locally. I am surprised that they changed their tone so easily only after two months. Also note CMED doesn’t have any valuable fixed assets as collateral.

Recommendations: Strong Sell.

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