From Alfred Little Research: Another Reason to Short Deer Consumer Products

After I pointed out here the likelihood that Deer Consumer Products (NASDAQ: DEER) management intentionally overpaid by 50% when they purchased land use rights to 435 Mu (289,416 square meters) in Wuhu, management quickly responded in the 10-K filed on March 10th that:

We have received a land certificate covering 289,415.79 square meters (435 Mu or 28.9416 hectares) in the first parcel of land, on which we anticipate building a new production facility.

Management, however, failed to respond to the key issue of why they paid a unit purchase price of RMB 330K per Mu vs. an average price of 240K per Mu from the very close comparable land use rights sales in the same month, at the same location, as I showed (here) in a list of 17 very comparable transactions.

After the urging of Global Hunter Securities analyst Joe Giamichael, DEER management followed up by filing an 8-K (here) including a picture of the purported land use right certificate to the 435 Mu parcel: (Click to enlarge)

The 8-K included a translation of the certificate (here) and includes the certificate number “019711318 S” (shown above). Management certainly hoped that this incredibly realistic looking land use right certificate would convince Joe Giamichael and other analysts that the 435 Mu land use rights purchase was legitimate.

Giamichael followed up stating, “We are comfortable that the company has paid what they had claimed to have paid to the Land Bureau”. Giamichael did not provide any assurances whether the high price DEER paid made sense. In fact, analysts and investors should demand an immediate explanation from DEER management of why they overpaid by at least $12 million, in total, for the two parcels (660 Mu).

To find the truth, my legal team and I returned to Wuhu this week to check the authenticity of DEER’s land use rights certificate with the Wuhu Municipal Bureau of Land & Resources (the “Municipal Bureau”), the only government authority allowed to issue this certificate. DEER’s certificate is clearly stamped with the “seal” of the Municipal Bureau. Here is a picture of the government complex housing the Municipal Bureau.

The Municipal Bureau has many departments, three of which Bureau staff recommended I visit to present the certificate for authentication. The three departments I visited were:

1. Wuhu Municipal Bureau of Land & Resources Enforcement and Inspection Department – which tracks and monitors the legality of all land transactions.

2. Wuhu Municipal Bureau of Land & Resources Land Registry Management Department – which administers land use rights certificate issuance and authentication, land survey, registration, land usage status and record changes

3. Wuhu Municipal Bureau of Land & Resources Land Administrative Department  – which coordinates the activities of all other departments within the Municipal Bureau.

The signs designating the offices of two of the above Municipal Bureau departments are shown below:

I recorded all conversations with the Municipal Bureau staff during both of my visits. The following is a summary of my findings:

1. Incredibly, none of the Municipal Bureau officials could verify the existence of DEER’s land use rights certificate. But neither would they prove it was a fake. Officials interviewed were either vague or uncertain in their responses or downright protective of DEER’s interests in this transaction.
2. The Record Office under the Wuhu Municipal Bureau of Land & Resources Enforcement and Inspection Department keeps a record of all land certificate and land transaction activities. Its attempt to verify the certificate # 019711318 S in the computerized database yielded no record. The staff at the Record Office clearly explained that any registered and issued land certificate has to be able to be located in their system, although they are hesitant to conclude this particular certificate is a forgery. After being questioned why the official seal of the Municipal Bureau is on Deer’s certificate, the Record Office staff pointed me to the Land & Resources Land Registry Management Department.

1. The staff at the Land Registry Management Department attempted to look up this certificate based on the number and likewise found no record of it. The staff stated the same story as the Record Office earlier, that any stamped and issued certificate must have a record saved in their system. The staff specifically stated that anything that was not in their system does not exist. They were, however, unwilling to speculate on how the official seal of the Municipal Bureau ended up on DEER’s certificate.

1. Not satisfied with our findings, I revisited Mr. Xu, the bureau official I mentioned in my previous report (here). Mr. Xu first thought the certificate was a legitimate copy after seeing it. However, once he was updated with our findings in the Record Office and Land Registry Management Department, he quickly pointed out a record of any genuine land use rights certificate must be found at the two departments I visited. Therefore, DEER’s certificate is very suspicious. Mr. Xu did mention the only other possible reason for a missing record at the Municipal Bureau was that DEER’s land transaction was originally registered at the District level Land & Resources Sub-Bureau of the Wuhu Economic Development Zone (the “District Sub-Bureau”). However, Mr. Xu clarified that for DEER to obtain the actual certificate, the District Sub-Bureau must have submitted all documentation to the Municipal Bureau for approval. In other words, if DEER’s certificate is authentic, there must be a record of the issuance of the certificate at the Municipal Bureau. Clearly there is not. Futhermore, Mr. Xu adamantly reiterated that DEER’s claimed purchase price of 330K RMB per Mu is far above the 150-200k per Mu prices he commonly sees in the Wuhu Economic Development Zone.

Despite the clearly disturbing signs DEER management likely concocted a fraudulent land purchase to misappropriate at least $12 million of company funds, I decided to have my team visit the local District Sub-Bureau in the Wuhu Economic Development Zone to verify its findings from the Municipal Bureau. Surprisingly, my effort to verify the certificate was immediately blocked by the staff at the District Sub-Bureau, who claimed DEER management had recently demanded, as a result of my investigations, that they disallow anyone from obtaining information about DEER’s land use rights purchases. The staff was completely unwilling to give me any comment on the certificate and only vaguely acknowledged DEER bought rights to two parcels of land. Unlike the somewhat helpful administrators at the Municipal Bureau, the local Sub-Bureau staff was completely uncooperative to my reasonable requests, with one exception. One junior staffer interviewed mentioned the average land price was 200,000 per Mu, again, quite similar to the price range I obtained from three other sources – Mr. Liu at industrial park’s investment service center, Mr. Xu at the Municipal Bureau and most importantly the recent comparable land sales in the same zone (here).

The following is a picture of the Investment Service Centers of the Wuhu Economic Development Zone, which houses the District Sub-Bureau:

Conclusion:

I question why DEER management would stop a legitimate attempt, even by a short-seller, to verify DEER’s land use rights certificate? Is it a fraud? Given the repeated failure to find any record at the three departments of the Municipal Bureau, whose seal appears seemingly without authorization on DEER’s land use right certificate, I remain convinced the certificate is a fraud. Management continues to refuse to discuss any of the issues raised in my previous report, nor bothered in any way to justify paying over $12 million higher than comparable sales. Where did the money really go?

Disclosure: I am short DEER.

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