by J. Brenner
September 18th, 2007
My recent interview with former China Expert Technology CFO Simon Fu may help to shed some light on the origins of the recent collapse of the company's stock price (CXTIE). Simon's answers, if accurate, help to build a timeline and help us to begin to comprehend the string of resignations and/or departures ranging from the COO, to the auditor, to the company's PR company, all in a matter of weeks. Simon mentions the process that existed within the company to generate business, discussing that a team worked on getting various contracts signed that were then sent to headquarters and posted to the SEC site for distribution. The stock price, as we know, was propelled higher with each new multi-million dollar project press release and the large early share acquisitions by large investors. China Expert Technology claims/claimed to be the sole entity operating in the e-government area with the "authority" of the Chinese government. But did these underfunded municipal governments actually have the funds to actually engage these large, ever-increasing number of projects or were these projects actually just nice plans and dreams? More importantly, did China Expert Technology have the finances, the manpower, the plan, or even the willpower to complete these projects? Could they "ramp up resources" to borrow a phrase commonly used by Simon? With the loss of the COO, described by Simon as the "key" player in the company, and departure of other members of the company, is anything left behind that could be deemed a viable, functional company? The conclusion may be different for every investor, but Simon's interview should give you at least some additional helpful information to reach your own conclusions.
China Expert Technology was the high-flying China e-government play that was recommended as an undervalued stock pick by a number of respectable publications and blogs and garnered up until very recently an "Outperform" rating by Reuters. Jeff Feinberg of the JLF Offshore Fund owned over 10% of outstanding shares up until recent weeks, lending further legitimacy to the stock as it rose to its high of $8.13 this year. Even as the stock began to plummet, many wrote about the incredible "buying opportunity," still unaware that the auditor had resigned and assuming that contracts and finances were legitimate and accurate. Today, the stock trades at approximately 30 cents a share, less than half of presumed "cash," although with the mass resignations and management incommunicado, there's nobody to confirm whether any such cash genuinely exists and where it actually sits. Remaining management have stopped answering calls or providing any form of contact with the investor community. Rumors and passionate arguments about the true value of the company -- or whether the management is taking it private illegally -- have been swirling around the blogs and message boards. With their former auditor ignoring questions on the subject and refusing to take my calls, solving the mystery of "what do we actually have here" was and is a huge challenge.
I snagged an interview with Simon Fu, former CFO of China Expert Technology, in the last half hour that he was serving in his new position as CFO for Chardan North Acquisition Corp. Yes, the announcement of his resignation from Chardan happened exactly one-half hour after my interview with him (interview began September 18th at 5:30 am ET, resignation announced on Business Wire, on September 18th at 6:00 am ET). If you want to access the audio portion of the interview (contact me), you'll hear him talk confidently and excitedly about Chardan's/HollySys' future, certainly with no indication whatsoever of any pending resignation plans. You'll also hear his voice become quiet when he discusses sensitive details, or laughing upon mention of Mr. Huang's behavior or when I raise the sensitive issue of legitimacy of the contracts. With each question answered, I had more I would have liked to ask him directly and more aggressively, but I had to balance my hunger for information with his willingness to share and his comfort in continuing the call. Better to get some information than none at all. He may have decided on his own to step down after contemplating the information he provided to me, or fearful that he may negatively impact Chardan North should the interview get published, or perhaps he was simply terminated after telling some of the investors that he had a too-candid discussion with me. In any case, all I know is that he is out before the story could break. Add another peculiar and sudden resignation to Simon Fu's employment history.
Getting in touch with anybody affiliated or formerly affiliated with China Expert Technology (CXTIE) has not been an easy task. Phone calls to the company's listed office in Shenzen are answered sporadically by a couple of women who have grown frustrated with the question, "Where is Michael Huang Tao." Michael appears to have disappeared with other company executives -- officially "on business in China" -- soon after his July 27th, 2007 conference call in which he promised that his company's 10Q would be forthcoming. That was the last time anyone in the investment community seems to have heard from him, and his PR firm Hayden resigned soon after that citing their inability to get in touch with any of the executives.
"Call Michael...Michael will answer everything," was the constant promise I would be given from Phoebe and Angel at the number listed as China Expert Technology's "office." They would repeatedly provide a cell phone number...the same cell phone number provided by Hayden... that was simply never answered. When I tried to ask what these women were doing in the office, they weren't in marketing, accounting, management or administration. They weren't secretaries. The best one could describe herself as was "like office worker" only after I used as generic term as I could think of. On a couple of calls, there was the sound of a child in the background. Perhaps, "Bring your child to work day" in China, but it certainly made me wonder if the calls might be going to a private home (there have been alternating reports on message boards that China Expert's offices are either occupied or dark). In later calls, perhaps after word reached exiled management that the questions were pouring in, the woman answering the phones advised me that she cannot answer any more questions.
With Michael Huang unavailable, I did some research and planning and was eventually able to get in touch with the next best thing: Simon Fu, former CFO of China Expert Technology who was recently hired by -- only to quickly depart from -- HollySys (which recently merged into Chardan North China Acquisition Corp., another entity of which Jeff Feinberg has a large chunk -- in this case more than 20%). Simon was anxious to talk about his new role at Chardan, and as you will see this is how our interview begins. But of course, I quickly switched the topic to what everyone really wants to know: what the heck is going on with his former employer. The China Expert Technology questions clearly made him uncomfortable, but perhaps owing to politeness and his desire to move on to discussion about Chardan, he provided some insight and careful opinions about what may have caused the meltdown at CXTI. In the interview, Fu first reiterates the "planned relocation" explanation that Michael Huang mentioned in his July 27th conference call as the reason for his immediate departure. It becomes apparent later that Fu had more on his mind than simply relocation. The audio provides great context, because his laughter, varying speaking volume (very quiet at sensitive questions), hesitation, repetition of certain words, etc. sound like they reveal more than his words could alone. Regrettably, the information probably comes too late to make any difference for those who lost more than 90% of their investments in this company unless it spurs others to seek out yet more helpful information. But at very least the information can help us try to dissect what went on, and who may have known what. As I tried to end the call, Simon interrupted to embark on a long discussion about the prospects of Chardan, his new employer, undoubtedly worried that my writing piece may focus on China Expert Technology instead of Chardan North. Alas, 30 minutes later, Simon Fu was no longer CFO of Chardan North.
I was hoping a candid discussion would yield some insights as to the legitimacy of China Expert Technology's contracts, as well as to the timing of and persons and reasons behind his hiring at HollySys. The former questions would shed light on whether there still exists a viable business here, and the latter questions on addressing concerns about the potential of insider trading which has been the subject of numerous message board posts. 10% owner Feinberg managed to sell his shares at the respectable prices of $3.83 and $4.09 beginning as early as July 24th (beginning 4 days after Fu's resignation) and continued to sell off blocks of shares in small enough volumes to get a nice chunk of money back, albeit at a loss, until the volume grew to the point (combined with other sellers) that we witnessed the complete price meltdown over recent days. As Simon Fu mentions in his interview, he was wooed by investors to the nice CFO position at HollySys (to be Chardan) in "late July" which coincides with the start of insider selling, so questions on the message boards about the timing of sales are therefore certainly natural. They need to be asked if only to confirm the innocent and coincidental nature of Feinberg's trades at opportune times before the rest of us had any disclosure of anything too much worse than a CFO resignation explained away as a simple relocation issue. At some point if not already, an attorney with expertise on the appropriate insider trading laws will likely have a look and make a professional interpretation, and if and until that happens, Feinberg should get the full benefit of the doubt that he acted honorably.
Of course, we later heard, and BDO McCabe Lo confirmed for me, that the relationship with the firm's auditor, BDO McCabe Lo, ceased on August 17th, exactly 4 weeks to the day of Simon Fu's departure. Simon disconnects himself from the auditor issue in the interview, seemingly uncomfortable. But one would naturally wonder if Simon might have announced his abrupt and sudden departure upon getting some notice or warning from the auditor, especially given his noted good relationship with BDO. BDO's delays in answering multiple queries only heightens these concerns. Here's the email I received only after repeated queries to the three contacts at BDO McCabe Lo and a complaint to the main BDO offices. BDO McCabe Lo refused to answer other critical questions, especially concerning the reasons for their resignation, the date that notice was given of the termination, and my request for them to reaffirm legitimacy of past financial reports and contracts of this company.
We refer to your email of 18 September 2007 and advise that the auditor-client relationship between BDO McCabe Lo Limited and China Expert Technology, Inc. ceased as of 17 August 2007. Our letter confirming this cessation was sent to the Company on 17 August 2007. A copy of the letter was also filed with the SEC. We have also advised the Company of its responsibility to file a Form 8-K with the SEC to report this change. Kind regards, S.K. Lo BDO McCabe Lo Limited 25th Floor Wing On Centre 111 Connaught Road Central Hong Kong
Tel : 2853 1417 Fax : 2815 2295 E-mail : email@example.com http://www.bdo.com.hk
Problem is, the auditor resignation or termination was never disclosed by China Expert Technology...not in any required 8-K filing nor in any press release (Update: an 8-K was finally filed for this event on September 27th). Neither properly or timely disclosed was the resignation (or so-called "contract termination") of the COO, described by Simon as "key" to the company, and which was casually mentioned in Michael Huang's conference call of July 27th (after which the required 8K suddenly and sneakily appeared on Edgar some 2 months late). The failure of the company to announce the auditor termination, whether intentional or not, only further enabled insiders and other sellers to sell -- and others to buy -- at artificially high prices -- prices that most certainly would not have been seen had the information been properly disclosed. I have been attempting to check with the SEC if the auditor did in fact alert them to the termination of the relationship with CXTI, and if so, how this information would be made available to the public in the absence of an 8-K filing.
Then came the PR firm's resignation, announced in the following email:
I know many of you, like us, have several questions and concerns about China Expert, such as when will they issue their auditor reviewed second quarter results. Since the last conference call and press release we have had no communications with the company. After repeated steps to receive information and assist the Company with its communication efforts we were in a situation where we had to resign the account.
All questions and comments on a go forward basis need to be directed to Michael Huang, Chairman of China Expert. His e-mail is firstname.lastname@example.org and his phone number is (86) 139-1183-5009.
Hayden Communications International, Inc.
The interview with the now-former HollySys/Chardan North Acquisition Corp, and former CFO of China Expert Technology Simon Fu was held September 18th, 2007 (5:09 AM ET). Key portions are transcribed below. While Simon speaks good English, please bear in mind it is not his first language and there's always a chance some words weren't transcribed with 100% accuracy given the pronunciation issues. I tried to transfer to the text some degree some of the emotions/discomfort/etc. inherent in his laughter, hesitation, etc. although please remember that there may also be some cultural and language/pronunciation issues that can affect interpretation.
JB: First let me just congratulate you on your new position at HollySys. I understand you ultimately serve as the CFO of the combined company, Chardan North China Acquisition, so I just want to congratulate you on that...
SF: Yes, thanks
JB: Just want to start with a very simple question, and that's when were you actually offered the job at HollySys?
SF: Basically, uhm, after I left China Expert, some investors just intervened and... prospected me...so it will be, I would say around late July, yes.
JB: I notice that HollySys also deals with some e-government and information systems, obviously that's what your expertise was in the former company. Does HollySys compete, would you say, with your former company in that arena...
SF: Not really, because the main business of HollySys frankly is on the integrated industrial automation control systems, which is customers including traditional power plants and also various industrial applications such as pharmaceutical companies and chemical plants, OK...
JB: So a much broader, industrial base.
SF: Yes, more on industrial base. And recently, although they just engaged the nuclear power plant system together with the railway and subway signal control systems, so more on these aspects.
JB: And customer base I guess would also be different.
SF: Yes, very very different. Because most of the customers are basically just like the power plants and numerous industrial manufacturers, and recently as they engage to nuclear power plants, just like the government bureaus and also the railroads, they also have several customers in the railroad business.
JB: And I have to ask these questions, because I'm getting them from readers: What led to your decision to actually resign from China Expert Technology?
SF: So basically I was told they have plans to move everything back to China, and they will have kind of localization of the staff. So I'm not the only ones that have had to leave,but in fact why I know the colleagues in the finance team and also in the legal team have had to move...because in the past they had the legal and finance center established in Hong Kong. OK. Although the company is listed as the states, the business is in China, so I'm also aware that this kind of organization will not be very long run, I would say that, frankly. Because either the corporate head office either they will have the offices in the states, because the company is listed in the states, or basically just like a lot of Chinese enterprises that are listed in the United States, they have their main operations or their corporate houses even still maintained in China, in the cities, and they will have representatives, which is maybe some kind of agent in the United States.
JB: OK, and I'm informed by S. K. Lo, the auditor of BDO McCabe that they actually resigned from China Expert Technology on the 17th of August, so I'd like to know if they gave you any customary 4-week notice period, and if so did you consider finding another auditor, and did that have anything to do with your decision to leave.
SF: Ehm... that is uhm...I think, the...I mean China Expert changed the auditors, which is after I have, uh, I have left the company. So, uhm... I also did not really, you know, engage in the changing of the auditors.
JB: So that was after your departure...
SF: Yes, after the uhm ... because I would say work quite well with BDO ... although when I joined the company which is back in November 05, in fact the company also changed auditors to BDO just several months before I joined the company, OK...The auditors is not I bring to the company, I don't think that because I left that they changed auditors, because of my leaving the company.
JB: How confident are you being that you were working for China Expert Technology, how confident are you that the contracts that they have announced are legitimate?
SF: So, uhm (laughter)...this question is a bit tough right now, because soon after I left I do understand that because the investors still called me, OK although I left for 2 months now...so you know it is a bit difficult for me to comment right now because I cannot really represent the company. But in the past, is uhm, you know there were the other colleagues in China the project team that got the contracts and they sent it to the head office, the corporate office in Hong Kong, and then they translate it, and then they put it on the SEC web, the Edgar site, so uhm...and we worked of course with the auditors, the auditors have a look at the contract. So [pause, audible sigh] I think this is uhm...what I can say, right now, you know...because the reasons, the behavior of the company really has caused quite a big concern frankly...so, uhm....I also don't have a clue what is really going on right now, because it seems after I left, they made some, you know, announcement and conference call...but it seems that they have made a lot of promise, that doesn't really, you know, that doesn't lead, that doesn't really work on that so...and also, I know that there is quite a lot of rumors and stories right now in the market. I would think that it is not really good for me to further comment on, you know, because so many stories and rumors right now already...
JB: Well that's why I think people wanted to get some information from you with regard to clearing up some of the rumors because obviously you have the trust of the company that you were hired by, you know Jeff Feinberg moved you and helped to recommend you to the new company, so there's obviously good trust in your workings and past dealings with the company...People are hoping that you might be able to shed a little more light as to what might have happened since your departure there at China Expert.
SF: Yes, but uhm, frankly, it is a bit difficult right now to really to comment on...especially, uhm I also don't have any idea just like giving out preannounce numbers and uhm, making so many promises saying that financial statements will be report on time... so I cannot really comment on these behaviors or these acts after I left really.
JB: Do you know why Mr. Huang would be so quiet or why he would not be speaking to investors...would he just be concerned he cannot answer these questions...
SF: (laughter) So (laughter), unfortunately (laughter), I cannot really (laughter) speak for him because...although I haven't contacted him since I left, so it is not really possible for me to speak for him and to comment on why he doesn't really talk to the investors right now.
JB: I guess the CEO was Mr. Song Feng...
SF: Mr. Zhu?
JB: The C-O-O, sorry...the C-O-O of China Expert. Song Feng?
SF: Yes, yes...
JB: My understanding is that he also had resigned...was that prior to your departure? Was that after your departure?
SF: What I know is even before my departure, because I also got information from the phone from the conference call that was held by Michael Huang, that he mentioned that the contract with Mr. Song has been expired at the end of May this year, and the contract was not renewed. And I also heard from the conference call that the responsibilities of the ... has to be also taken by the CEO Mr. Zhu.
JB: Do you believe that they're going to continue to file or do you believe that they're just going to take the company private...what do you believe they're going to do?
SF: I heard a message that there were some stories about privatization, which is illegal I would say that...but unfortunately, I cannot really comment because ...because I don't have a clue...as far as I know these types of privatizations are strictly illegal (laughter) rather than just the company just like close the door and try to be a private company. I don't think this is the proper way.
JB: Let me ask it a better way: Do you believe Mr. Huang has the intention to continue the business China Expert Technology, or do you believe that this is not a sustainable business.
SF: Uhm...it is also a difficult answer, because, um...you know, I don't have a clue whether they will ramp up their resources, because as in the past, always with investors we mentioned that yes, there are so many projects to deploy and as I always mentioned, getting the contract is one thing, but more important is to deploy the solutions, deploy the systems...because if you get a contract that you cannot deliver, it doesn't really, you know, doesn't count at all...so I also don't have a clue whether they are ramping up resources - of course the leaving of Mr. Song, the COO, although raised some concerns of course to the to the investors publicity... because it seems the company should ramp up more resources with more people, but in fact they also left...the COO who is the key person in the past to manage all those projects, so I think this also creates concerns to investors because he left.
JB: OK, I'm going to wrap up by going back to Chardan, which I guess really still is HollySys, yes at this time? Are you now active in HollySys, or is there a date you're actually going to start? Because when I first tried to reach you there, I may have mispronounced your name, but they told me you didn't work there.
SU: (laughter) I think there is some complications, becuase my name is Fu, but in Chinese they pronounce speak in "Fyhu" so if you pronounce it not exactly though maybe people will get it wrong.
JB: I figured it was probably my mispronunciation...
SF: Maybe if you said Simon Fu...but it shouldn't be a big problem recognizing my first name.
JB: And this is a good number to reach you? Because maybe once, let's say three months or four months, you get settled in, I'd like to ask some more detailed questions about that business and your role there. So is this the best number to reach you at the company?
SF: Yes, yes...so yes I think that the company [Chardan/HollySys] has very good prospects, mainly because the business that they are engaged, right now energy, and also on the transportation infrastructure assignment...and these two areas are one of the core focus of the central government...and they put more resources because they also understand that China as a developing country, they really have to improve on both the energy, because there always is a lack of power supplies in some of the regions in China, and also to improve the infrastructure on the transportation...because especially when they want to improve the overall logistic infrastructure and especially they want to explore the western region of China, they definitely need to ramp up their railroad system and also the air transporation, all these transportation and logistics assignments...
(I continue to discuss the operations and plans of Chardan/HollySys over the next 7 or so minutes. Simon Fu's "resignation" from Chardan was announced 30 minutes after the conclusion of this call.)
Some of the theories posited on the message boards may seem more or less likely to each reader in light of the interview and/or Fu's response to certain questions: Did Simon Fu indeed know of the pending auditor resignation? Why did Feinberg want this guy as the CFO of another company he's investing millions of dollars in given the history of China Expert Technology? Was Fu offered a "deal" by the investors to spill the beans in exchange for a new cushy CFO position in a "real," or at least far more solid company?
Perhaps in the end, we have still more questions than answers, but Simon Fu has certainly helped shine some light into that vast black vacuum of information left by China Expert Technology.
For those interested in hearing the full, unedited telephone interview, please email me at email@example.com.
Disclosure: I own residual and small value (under $1,000) of both China Expert Technology and Chardan North Acquisition Corp. I am holding the former simply because it's not worth the bother to sell it, and have not added to the latter while the jury is out on these highly unusual circumstances surrounding two of insider Feinberg's major recent investments. I make no recommendation whether to buy or sell...but I do encourage helping to uncover information and sharing with the community in a way that can make us all better informed investors.
Disclaimer: This piece is my opinion based on the facts, opinions and comments provided to me by Simon Fu in this interview and incorporating the concerns widely expressed by small investors on the popular investment message boards. This is not a recommendation to buy or sell any security. Simon Fu's conversation was described as accurately as his accent would permit but is in no way presented as a flawless transcript. The information is provided to give smaller investors a more level playing field when it's far easier for bigger players and insiders to learn what is going on. As always, you should do your own research before making any investment decision, whether in the companies mentioned herein, or elsewhere.