Unpleasant odour hangs over fertiliser company

PUBLISHED : Wednesday, 16 February, 2011, 12:00am
UPDATED : Wednesday, 16 February, 2011, 12:00am

It is a common, if mistaken, belief among journalists that they could do any job better than the professionals.

But one area where journalists know they could do better is in advising businesses how to respond to negative accusations. And top of the list of advice they would offer would be 'never complain, never explain and, above all, never deny anything unless you want people to believe it'.

It's advice that Nasdaq-listed company China Agritech would have done well to heed. Last Thursday Agritech sent an eight-page letter to its shareholders rebutting point by point a series of allegations made by a portfolio manager with short positions in its stock.

Of course, by doing so it only attracted attention to the original allegations. Big mistake.

On paper, Agritech sounds like a great business. According to its annual report, the company is a fast growing manufacturer of environmentally friendly organic fertilisers. It boasts production plants in Anhui, Harbin and Xinjiang, with the capacity to manufacture 13,000 tonnes of liquid fertiliser and an impressive 200,000 tonnes of granular fertiliser.

Last year its revenues shot up 57 per cent to US$119 million, capping growth of 68 per cent in 2009. In April last year the company raised US$20 million in a public offering to fund the construction of 21 distribution centres across China's central and eastern provinces. US private equity company Carlyle owns a 22 per cent stake, and as of yesterday Agritech boasts a market capitalisation on Nasdaq of US$196 million.

Organic fertiliser, in case you were wondering, is manure. And a number of investors have noticed a funny smell about Agritech.

In a report published at the beginning of February, one short-seller, Hong Kong-based Lucas McGee, alleged that Agritech's business operations are nothing more than a figment of the founders' imaginations.

McGee claims to have visited Agritech's factories only to find empty warehouses. One, he says, had a 'for sale' notice hanging on its gate, while another had only 'a few people on site washing clothes'.

What's more, the short-seller failed to trace any of Agritech's named suppliers, and says that the only customer he could track down - Sinochem - denied all knowledge of the company.

Nor could McGee find any evidence of distribution centres. Worse, when he tried to buy some of the company's fertiliser, he couldn't find any, failing even to procure a sample from the company's head office. What's more, McGee claims the 2009 figures Agritech reported to China's State Administration for Industry and Commerce differed wildly from the numbers it filed to the US Securities and Exchange Commission (see the first chart).

Agritech, he concludes, is worth no more than the cash it holds, implying the stock is some five times overvalued.

Outraged by the accusations, Agritech's chairman and chief executive, Yu Chang, shot back with a letter to shareholders attacking McGee. The company's SEC filings are accurate, its customers genuine and its factories humming with activity (the for-sale notice, he explains, was hanging outside the factory next door). To back up his assertions, Chang provided detailed information about the company's operations, complete with photographs of its factories and distribution facilities.

That was a mistake. In the photos, the gates of Agritech's largest factory, which supposedly produces 100,000 tonnes of solid fertiliser a year, or enough to fill a dozen trucks a day, are firmly shut. In its loading area, a few sacks of fertiliser lie piled haphazardly on the floor of an otherwise empty building. Business does not look brisk.

What's more, Chang's letter has caught the attention of other short-sellers. One US-based portfolio manager also set out to track down Agritech's factories and also found deserted premises with no plant and equipment and nothing to suggest any large-scale fertiliser production. From the details provided by the company, he concluded the contract with Sinochem might be genuine, but if so the quantities of fertiliser involved were more suitable for growing house plants than for large-scale agricultural application.

Of course, short-sellers have an interest in spreading doubts about the company. But from the recent fall in Agritech's share price, it looks as if Chang's rebuttal has only furthered their cause. He should have heeded the old advice: never issue a denial. They do far more harm than good.