New Article Alert!
PDFIn a press release issued late Friday, when many investors had already left work for the long holiday weekend, CSKI dropped a devastating bombshell. The Chinese pharmaceutical supplier, already a prime target of bears suspicious of its regulatory filings, suddenly slashed its full-year guidance as its own distributors attempt to distance themselves from the controversial company. Specifically, CSKI revealed that it will fall well short of revenue and profit targets for 2010 because “several major distributors” had severed ties with the company – the subject of a formal investigation by the U.S. Securities and Exchange Commission – due to unwanted government scrutiny of their own business practices.
“Management’s reduced guidance reflects the termination of relationships with certain private distributors, who after several rounds of discussions, chose to end their cooperation with the company after learning that their business information was disclosed in the company’s public SEC filings and would continue to be disclosed in such documents as required by SEC regulations,” CSKI stated after the market closed on Friday. “This disclosure, these distributors claim, has led to increased scrutiny of their financial performance by government authorities within China.
“While the company expects to replace these lost distribution arrangements over time, revenue and net income in the second half of 2010 are expected to be negatively impacted by the disruption in distribution channels,” CSKI continued. Moreover, “the company expects to incur higher selling and marketing costs during the second half of 2010 to develop new distributor relationships.”
CSKI is bracing for some serious side effects already. The company, which had previously been banking on 2010 sales of $160 million to $164 million, is now projecting full-year revenue of just $128 million to $136 million instead. The company slashed its full-year profit target, originally set at $40 million to $41 million, to a wider – and much lower – range of $26 million to $31 million as well.
According to TheStreet.com, Global Hunter Securities dropped coverage of CSKI the day before the company officially cut its guidance. The research house had scaled back its own projections for CSKI less than a week earlier, TheStreet.com noted, but even those lower numbers proved optimistic compared to the ones released by the company itself.
CSKI’s new forecast bloodied the company’s stock despite its holiday timing. The stock, which fetched more than $25 late last year, plummeted 28% to a new 52-week low of just $7 a share in after-hours trading on Friday.
Behind the Numbers
When warning about its looming shortfall, CSKI simultaneously announced the resignation of its top finance executive.
The company said that CFO Stanley Hao has stepped down from his post “due to health considerations.” Hao’s departure has raised some eyebrows, however, since it comes during the midst of an SEC investigation of the company’s financial reports.
Last fall, CSKI fielded a formal subpoena from the SEC that it apparently never disclosed to its investors. (TheFinancialInvestigator.com reported that news to the market last month instead.) The subpoena seeks comprehensive information about CSKI’s financial reports -- dating back to mid-2006 – as well as details about the tainted auditing firm that has been blessing the company’s books.
CSKI relies on MSPC (formerly Moore Stephens) to sign off on its financial statements. As previously noted in an outside report published by TheStreetSweeper, MSPC is a past target of securities regulators that has since come under fire for allegedly approving flawed financial reports issued by CSKI itself.
In an unusual lawsuit filed this March, short seller John Bird accused MSPC of blessing fraudulent CSKI financial reports that artificially inflated the company’s stock -- and hurt his own negative bet against the shares – in the process. That bearish call has played out over time, however, with CSKI losing roughly two-thirds of its value over the course of the current year.
In another unusual move, Bird has publicly laid out his case against CSKI on a website known as waldomushman.com. Notably, Bird highlighted discrepancies between sales figures presented by CSKI and those posted by others in its supply chain long before its distributors began complaining about government scrutiny of their reports.
For example, Bird observed, CSKI reported that Shaanxi Xintai generated $13.5 million worth of revenue – or 15% of the company’s total sales – in 2008. However, Bird noted, Shaanxi Xintai itself reported less than $5 million in company-wide sales for that entire year.
Similarly, Bird documented, CSKI reported that Heilongjang Kangda had purchased $7.5 million – or 33% -- of the company’s inventory in 2008. In contrast, he noted, Heilongjang Kangda pegged its total volume for the year at just one-third of that amount.
“There can be little disagreement on numbers found in government-mandated reports,” Bird stated when he first set out to expose CSKI after shorting the company’s stock. “In all cases, the numbers claimed by CSKI vastly exceed the revenue I am able to ascertain.
"Based on the massively inflated and inconsistent numbers, I have come to believe,” he bluntly concluded, “that China Sky One Medical is actively committing fraud.”
* Note: No member of TheStreetSweeper's staff or advisory board has ever taken a financial position in CSKI or received any compensation from others who have positions in the stock. As editor of the site, Melissa Davis will never take a position in any of the stocks that she covers. To contact Ms. Davis, the author of this story, please send an email to editor@thestreetsweeper.org.
