China Medical Technologies, Inc. CMED S
February 02, 2012 - 7:00am EST by
kerrcap
2012 2013
Price: 2.57 EPS na na
Shares Out. (in M): 27 P/E na na
Market Cap (in $M): 67 P/FCF na na
Net Debt (in $M): 207 EBIT 0 0
TEV ($): 274 TEV/EBIT na na
Borrow Cost: NA

Sign up for free guest access to view investment idea with a 45 days delay.

  • China
  • Fraud
 

Description

Recommendation: Short CMED to $0, with an attractive probability that the investment thesis plays out in the next 3 months. The current stock price is $2.57, implying a market cap of $70m, and we think there’s an attractive chance that both figures find their way to zero in the near future.

This investment idea is relatively simple. China Medical Technologies didn’t pay its last coupon payment due on December 15, 2011. Yet it had reported $206 million of cash on its balance sheet as of September 30, 2011. Why didn’t it make the payment? Our belief is that all or most of the cash isn’t there, and that CMED is misrepresenting itself in its SEC financial statements.

The attractiveness of the CMED short is that we have a good catalyst: a missed coupon payment and an impending debt restructuring. It’s a bit of an obvious point, but when a company misses its coupon payment, it typically signifies that a looming Chapter 11 or some other nasty development for equity holders is around the corner. Bonds are currently trading at 25 cents on the dollar. The company has two separate tranches of convertible notes, and we believe that it’s a somewhat widely dispersed investor base. There will probably be holdouts. Any restructuring transaction will certainly be difficult and time-consuming to negotiate.

In the case of U.S.-listed Chinese companies, a missed coupon payment may furthermore indicate that management is tired of dealing with foreign investors, has drained the company’s bank accounts, transferred assets to private entities owned by related parties, and the management team is planning on disappearing.

We have spoken with the Wilmington Trust (the indenture trustee), the counsel working with bondholders, and the Company’s Cayman counsel. All parties have indicated that the company has been relatively passive and not very communicative. Richard Thorp of Thorp Alpirga, who is the Company’s Cayman legal representative and is in charge of forwarding noteholder inquiries to the company via the email address cmednoteholders@thorpalberga.com, has not been privy to any bondholder restructuring plans nor has been informed of the company’s restructuring intentions, saying that he doesn’t “know what their intended line is at all.”

At this moment, we can only conjecture what is actually going on. The Company did not issue a press release when the nonpayment occurred on December 15th, nor when the 30-day grace period expired on January 14th. As an aside, this is an obvious violation of SEC disclosure rules, given that a coupon nonpayment is a material event, and a further sign that the company is going dark.

Most of CMED’s equity holders found out about the nonpayment on January 26th, when Fitch announced that it had reduced the company’s rating to Restricted Default due to the missed coupon. The stock declined 20% on the day, and we think it has further to go. S&P has also downgraded the company to “SD”, which stands for selective default.

The indenture trustee is Wilmington Trust, and the contact there is Suzanne MacDonald. She confirmed that the coupon was not paid and wrote that Wilmington Trust “will be sending a Notice of Default very shortly.” Bondholders have been working with Hogan Lovells, who represents the ad hoc bondholders committee. From our discussion with Hogan Lovells, they have had trouble getting in touch with the management team, ostensibly because it’s the Chinese new year. Naturally, that’s a silly notion, and given that the Chinese New Year is the best excuse for management’s lack of communication with bondholders, we think that there is plenty to be concerned about for equity holders. Chris Donoho, Cathy Yu and Neil McDonald are the contacts at Hogan Lovells. Donoho and McDonald are working on the Shengdatech bankruptcy, as well as bondholders of Sino Forest and Hong Kong-listed China Forestry.

In terms of the evidence for financial misrepresentation at China Medical, it’s best to read the 23-page Glaucus report issued last month and available at:

http://glaucusresearch.com/wp-content/uploads/downloads/2011/12/GlaucusResearch-China_Medical-CMED-Strong_Sell_December_6_2011.pdf

Glaucus summary points:

  • CMED paid $28 million for an acquisition from a seller who [Glaucus] believes was secretly related to CMED’s chairman. Evidence also shows that CMED radically overpaid for the acquisition: a few months before selling the company to CMED, a company controlled by parties related to CMED insiders bought out minority shareholders at prices suggesting that the business was worth $5-$8 million, not the $28 million paid by CMED for the acquisition.
  • Despite a purportedly profitable business, CMED is a serial capital raiser and has not generated free cash flow for most of its history. The company has spent twice as much on “investing activities” as it has purportedly generated from operations, so much like a typical Chinese fraud, it relies on debt or equity financing as its primary source of cash generation.
  • CMED’s balance sheet presents numerous highly suspicious red flags. CMED’s receivables account for a much higher percentage of net revenues than its Chinese competitors and its Day Sales Outstanding are on average 141.9 days longer than a leading Chinese competitor, despite the fact that both companies sell similar products to similarly situated customers.
  • In 2009, an anonymous letter to the audit committee accused senior management of committing fraud with respect to the company’s financials and its acquisitions. After an investigation by the audit committee, CMED’s auditor, KPMG, resigned.

One of our theories for the coupon non-payment is that the Glaucus report was enough to trigger the beginnings of a deeper audit by PriceWaterhouseCoopers, and that CMED management therefore thinks there is a high chance they fail their audit for fiscal year 2011. Last year’s audit was completed in July, so conceivably their next audit will be due mid-year. The company has a March 31st year-end. Based on experience with other U.S.-listed Chinese companies, the resignation of a top-4 auditor like PWC would trigger a large price decline as well as a potential trading halt. Given the potential for this, management may have decided to forego paying bondholders their interest, and instead drain the company’s bank accounts and begin transferring operating assets to private related parties.

We could also envision that the Glaucus report may have triggered inquiries from the company’s independent board members, particularly its non-Chinese directors Iain Bruce and Lawrence Crum. Mr. Bruce is a retired KPMG accountant and Dr. Crum is the director of the Center for Industrial and Medical Ultrasound and a research professor in electrical engineering and bioengineering at the University of Washington. These aren’t the types of guys with much to gain from a cover-up. It’s possible that they’ve urged for an independent investigation, and that the management team sees the writing on the wall and has decided to disengage foreign claimholders. Again, the thesis would be that management realizes the likelihood of a trading halt, and has begun looting the public company’s assets.

Finally, we’ll mention that a coupon non-payment at a time when a Chinese company is reporting plenty of cash is nothing new. We haven’t seen it much in the United States because there are not too many U.S.-listed Chinese convert issuers. But the Singapore Stock Exchange has seen this plenty before.

According to a 2010 article in South China Morning Post:

“Since late 2007, a spate of so-called S-chips – mainland companies listed on the Singapore exchange – have borrowed money then failed to repay the debts, with some becoming mired in fraud scandals. Of the 11 S-chips that issued convertible bonds between 2005 and 2008, six have declared themselves unable to repay […] Another five S-chips failed to repay bank loans during 2008-9. The effects on their share prices have been, predictably, crushing.”

Companies that defaulted despite having substantial cash on their balance sheets include China Milk Products, Celestial Nutrifoods, Neo-China Land Group (Holdings), etc. At this point, most VIC readers are pretty familiar with Chinese frauds that have made up their cash balances, like CCME, LFT and CHBT, so I probably need not continue.


Risks / Variant View:

The risk here is fairly straightforward. If the company decides to make a payment, the bondholders will likely withdraw their notice of default, and the stock will pop. It's conceivable, given that $5 million is not an overly onerous amount (the company has another $5 million payment due on February for its 4% converts). There’s one line of thinking among stockholders that the company is merely trying to swap its current 30 to 50 cent paper into lower principal value bonds. This sounds good in theory, but I’d assume that it would take a long time in practice, and that bondholders will demand that the equity be wiped out in order for them to take their haircut. So as they go down the path of a restructuring, maybe management realizes the difficulties involved with effecting a bond restructuring with fragmented investor bases of two tranches of converts, and decides to just make their coupon payments and forget this whole non-payment episode. With the company’s current $70 million market cap, it wouldn’t necessarily take a lot to double the stock price. As a result, it’s important to keep this position small.

The other risk is that the borrow rate creeps up above 50% and the stock price doesn’t collapse in the next six months.

Overall though, we like the trade.

 

Catalyst

Indendture trustee and bondholders issue notice of default. Restructuring negotiations drag on. Small bondholders hold out. Company goes dark. 
    sort by   Expand   New

    Description

    Recommendation: Short CMED to $0, with an attractive probability that the investment thesis plays out in the next 3 months. The current stock price is $2.57, implying a market cap of $70m, and we think there’s an attractive chance that both figures find their way to zero in the near future.

    This investment idea is relatively simple. China Medical Technologies didn’t pay its last coupon payment due on December 15, 2011. Yet it had reported $206 million of cash on its balance sheet as of September 30, 2011. Why didn’t it make the payment? Our belief is that all or most of the cash isn’t there, and that CMED is misrepresenting itself in its SEC financial statements.

    The attractiveness of the CMED short is that we have a good catalyst: a missed coupon payment and an impending debt restructuring. It’s a bit of an obvious point, but when a company misses its coupon payment, it typically signifies that a looming Chapter 11 or some other nasty development for equity holders is around the corner. Bonds are currently trading at 25 cents on the dollar. The company has two separate tranches of convertible notes, and we believe that it’s a somewhat widely dispersed investor base. There will probably be holdouts. Any restructuring transaction will certainly be difficult and time-consuming to negotiate.

    In the case of U.S.-listed Chinese companies, a missed coupon payment may furthermore indicate that management is tired of dealing with foreign investors, has drained the company’s bank accounts, transferred assets to private entities owned by related parties, and the management team is planning on disappearing.

    We have spoken with the Wilmington Trust (the indenture trustee), the counsel working with bondholders, and the Company’s Cayman counsel. All parties have indicated that the company has been relatively passive and not very communicative. Richard Thorp of Thorp Alpirga, who is the Company’s Cayman legal representative and is in charge of forwarding noteholder inquiries to the company via the email address cmednoteholders@thorpalberga.com, has not been privy to any bondholder restructuring plans nor has been informed of the company’s restructuring intentions, saying that he doesn’t “know what their intended line is at all.”

    At this moment, we can only conjecture what is actually going on. The Company did not issue a press release when the nonpayment occurred on December 15th, nor when the 30-day grace period expired on January 14th. As an aside, this is an obvious violation of SEC disclosure rules, given that a coupon nonpayment is a material event, and a further sign that the company is going dark.

    Most of CMED’s equity holders found out about the nonpayment on January 26th, when Fitch announced that it had reduced the company’s rating to Restricted Default due to the missed coupon. The stock declined 20% on the day, and we think it has further to go. S&P has also downgraded the company to “SD”, which stands for selective default.

    The indenture trustee is Wilmington Trust, and the contact there is Suzanne MacDonald. She confirmed that the coupon was not paid and wrote that Wilmington Trust “will be sending a Notice of Default very shortly.” Bondholders have been working with Hogan Lovells, who represents the ad hoc bondholders committee. From our discussion with Hogan Lovells, they have had trouble getting in touch with the management team, ostensibly because it’s the Chinese new year. Naturally, that’s a silly notion, and given that the Chinese New Year is the best excuse for management’s lack of communication with bondholders, we think that there is plenty to be concerned about for equity holders. Chris Donoho, Cathy Yu and Neil McDonald are the contacts at Hogan Lovells. Donoho and McDonald are working on the Shengdatech bankruptcy, as well as bondholders of Sino Forest and Hong Kong-listed China Forestry.

    In terms of the evidence for financial misrepresentation at China Medical, it’s best to read the 23-page Glaucus report issued last month and available at:

    http://glaucusresearch.com/wp-content/uploads/downloads/2011/12/GlaucusResearch-China_Medical-CMED-Strong_Sell_December_6_2011.pdf

    Glaucus summary points:

    • CMED paid $28 million for an acquisition from a seller who [Glaucus] believes was secretly related to CMED’s chairman. Evidence also shows that CMED radically overpaid for the acquisition: a few months before selling the company to CMED, a company controlled by parties related to CMED insiders bought out minority shareholders at prices suggesting that the business was worth $5-$8 million, not the $28 million paid by CMED for the acquisition.
    • Despite a purportedly profitable business, CMED is a serial capital raiser and has not generated free cash flow for most of its history. The company has spent twice as much on “investing activities” as it has purportedly generated from operations, so much like a typical Chinese fraud, it relies on debt or equity financing as its primary source of cash generation.
    • CMED’s balance sheet presents numerous highly suspicious red flags. CMED’s receivables account for a much higher percentage of net revenues than its Chinese competitors and its Day Sales Outstanding are on average 141.9 days longer than a leading Chinese competitor, despite the fact that both companies sell similar products to similarly situated customers.
    • In 2009, an anonymous letter to the audit committee accused senior management of committing fraud with respect to the company’s financials and its acquisitions. After an investigation by the audit committee, CMED’s auditor, KPMG, resigned.

    One of our theories for the coupon non-payment is that the Glaucus report was enough to trigger the beginnings of a deeper audit by PriceWaterhouseCoopers, and that CMED management therefore thinks there is a high chance they fail their audit for fiscal year 2011. Last year’s audit was completed in July, so conceivably their next audit will be due mid-year. The company has a March 31st year-end. Based on experience with other U.S.-listed Chinese companies, the resignation of a top-4 auditor like PWC would trigger a large price decline as well as a potential trading halt. Given the potential for this, management may have decided to forego paying bondholders their interest, and instead drain the company’s bank accounts and begin transferring operating assets to private related parties.

    We could also envision that the Glaucus report may have triggered inquiries from the company’s independent board members, particularly its non-Chinese directors Iain Bruce and Lawrence Crum. Mr. Bruce is a retired KPMG accountant and Dr. Crum is the director of the Center for Industrial and Medical Ultrasound and a research professor in electrical engineering and bioengineering at the University of Washington. These aren’t the types of guys with much to gain from a cover-up. It’s possible that they’ve urged for an independent investigation, and that the management team sees the writing on the wall and has decided to disengage foreign claimholders. Again, the thesis would be that management realizes the likelihood of a trading halt, and has begun looting the public company’s assets.

    Finally, we’ll mention that a coupon non-payment at a time when a Chinese company is reporting plenty of cash is nothing new. We haven’t seen it much in the United States because there are not too many U.S.-listed Chinese convert issuers. But the Singapore Stock Exchange has seen this plenty before.

    According to a 2010 article in South China Morning Post:

    “Since late 2007, a spate of so-called S-chips – mainland companies listed on the Singapore exchange – have borrowed money then failed to repay the debts, with some becoming mired in fraud scandals. Of the 11 S-chips that issued convertible bonds between 2005 and 2008, six have declared themselves unable to repay […] Another five S-chips failed to repay bank loans during 2008-9. The effects on their share prices have been, predictably, crushing.”

    Companies that defaulted despite having substantial cash on their balance sheets include China Milk Products, Celestial Nutrifoods, Neo-China Land Group (Holdings), etc. At this point, most VIC readers are pretty familiar with Chinese frauds that have made up their cash balances, like CCME, LFT and CHBT, so I probably need not continue.


    Risks / Variant View:

    The risk here is fairly straightforward. If the company decides to make a payment, the bondholders will likely withdraw their notice of default, and the stock will pop. It's conceivable, given that $5 million is not an overly onerous amount (the company has another $5 million payment due on February for its 4% converts). There’s one line of thinking among stockholders that the company is merely trying to swap its current 30 to 50 cent paper into lower principal value bonds. This sounds good in theory, but I’d assume that it would take a long time in practice, and that bondholders will demand that the equity be wiped out in order for them to take their haircut. So as they go down the path of a restructuring, maybe management realizes the difficulties involved with effecting a bond restructuring with fragmented investor bases of two tranches of converts, and decides to just make their coupon payments and forget this whole non-payment episode. With the company’s current $70 million market cap, it wouldn’t necessarily take a lot to double the stock price. As a result, it’s important to keep this position small.

    The other risk is that the borrow rate creeps up above 50% and the stock price doesn’t collapse in the next six months.

    Overall though, we like the trade.

     

    Catalyst

    Indendture trustee and bondholders issue notice of default. Restructuring negotiations drag on. Small bondholders hold out. Company goes dark. 

    Messages


    SubjectDisclaimer
    Entry02/02/2012 07:05 AM
    Memberkerrcap
    I forgot to add our standard disclaimer: I am short and own options on CMED and stand to realize gains in the event that the price of the stock declines. To the best of my knowledge, all information in this post is accurate and reliable, but I present the information "as is". I will not necessarily update or supplement this article in the future. Following publication, I may transact in securities of the company covered herein.

    Subjectrisk of getting screwed during a halt.
    Entry02/02/2012 11:28 AM
    Membertyler939
    Kerr, what is the maximum length of time you have seen a chinese fraud halted?  Here is my concern.  My recollection is that a few of these rto frauds were halted for many months.  Suppose the borrow becomes very tight.  Suppose everyone shorts and it goes to 100% negative rebate or more.  If the stock gets halted for a long period of time, you will have to pay this negative rebate for the entire time the stock is halted. 

    SubjectRE: risk of getting screwed during a halt.
    Entry02/02/2012 12:09 PM
    Memberkerrcap
    Thank you for your questions. 
     
    The key issue on halts is where your broker marks your security. Some brokers mark them at last sale price, which means that you’re paying the borrow rate on the last price while it’s halted, and your margin is tied up. If your broker marks down the securities to where the private market is trading it (usually 80% lower), then you’re paying a much lower rate on the halted security (ie. 20% rate on a 40 cent stock, versus a 20% rate on a $2 stock), and your capital is freed up to re-invest elsewhere. I’d inquire with your broker, and find one that marks the price down (Interactive Brokers typically does, though for one of our Hong Kong names they’ve been using last sale price).

    The halts are typically 2-4 months, though UTA has been halted for 10 months now.

    We’ve always made money on halts of U.S.-listed securities, and we’ve been in more than a dozen halted US-listed Chinese securities over the past year. They always open up dramatically lower, so they’re generally good trades. 


    SubjectRE: RE: risk of getting screwed during a halt.
    Entry02/02/2012 12:11 PM
    Membertyler939
    If the stock is halted, where do you find the private market price?

    SubjectRE: RE: RE: risk of getting screwed during a halt.
    Entry02/02/2012 12:13 PM
    Membertyler939
    Can you give an example of where ib used the "private market price" so I can discuss it with them in advance?  Thnaks for an intersting writeup.

    SubjectRE: risk of getting screwed during a halt.
    Entry02/02/2012 12:41 PM
    Memberkerrcap
    Thanks. I have an old email where IB explained their policy to me, but I can't find it. It might be best to just call them and ask them. On a lot of our names, they historically have marked down the stock price significantly. Examples include LFT, CHBT, WATG, etc. LFT was marked down to $3, whereas its last trade was $15+. Generally, once the stock is halted, I typically just celebrate and either make the money right away when they mark it down or make it in a couple months when the stock opens up on the pink sheets at some negligible value. Paying the borrow sucks, but in the U.S. stock halts don't last more than a year, and typically only last a couple of months, so you'll be fine. 

    SubjectRE: risk of getting screwed during a halt.
    Entry02/02/2012 12:42 PM
    Membercasper719

    Longtop was an example where for a while they were marking it at the last which I think was around 18. That’s the problem when sometimes they halt before the bad news starts to trickle in (ccme was that way too). I don’t believe the borrow cost was a problem with LFT it was just a matter of the cash. In fact Longtop was really annoying because they kept changing the mark so the value of accounts would fluctuate. After maybe 1.5 months I think they started permanently marking it ~2-4 dollars. I spoke to them a few times about it.


    SubjectRE: risk of getting screwed during a halt.
    Entry02/02/2012 02:34 PM
    Membertyler939
    My recollection was that on chbt, they charged a very high amount (I think 90+%), but fortunately it was not halted for very long.  I remember being very worried that it would be another LFT and that I would give up all my profits.  If anyone can provide some illumination as to why some companies are halted for so much more time than others, it would be greatly appreciated.

    SubjectHalted
    Entry02/07/2012 11:54 AM
    Memberkerrcap
    The stock was halted this morning by NASDAQ, due to NASDAQ asking for "more information" from the issuer. Congrats to everyone who shorted. If you've bought puts, make sure to exercise your puts before expiration. If you're short, we're paying 15% right now and from our experience, that should stay around the same while the stock remains halted.
     
    Anything could happen, but chances are that this stock opens up on the pink sheets at 20 cents and then steadily finds its way to zero. It's possible that the company announces 'oops, we're back from vacation for the Chinese New Year, here's our coupon payment and sorry for the misunderstanding', but it's much more probable that the cash is gone and assets have been transferred to related parties. 
     
    The typical time frame for a halt is 2-4 months. If your broker marks down your position, you're golden, and if your broker doesn't, you're probably going to pay 3% to 5% in borrow fees, after which you'll make 70% when stock opens up on the pink sheets. 
     
     
    Bloomberg wire from this morning:
     
    +------------------------------------------------------------------------------+

    *TRADING HALTED:(CMED) Trading Halted; For Information
    2012-02-07 14:18:57.100 GMT

    Requested by Listing Market

    (NASD)
    *TRADING HALTED:(CMED)
    Trading Halted; For Information Requested by Listing Market
    -0- Feb/07/2012 14:18 GMT
     

    SubjectUn-halted and de-listed
    Entry02/29/2012 09:51 PM
    Memberkerrcap
    CMED was un-halted and opened up in the pink sheets yesterday, beginning the morning at 62 cents, rallying to $1.70, and then dropping back down today to $1.35. 
     
    Now, at $35 million market cap, the stock will probably slowly find its way to zero. But some of these Chinese fraudcaps seem to bounce around between $10m and $40m market caps even after being de-listed, so I'll just close the position on VIC. But we're still short the name in our fund, and it's a nice stock to have in one's short basket, given that it's probably a donut. 

    SubjectRE: RE: Un-halted and de-listed
    Entry03/19/2012 11:57 AM
    Memberkerrcap
    Based on our calls this morning, we have yet to see any new developments. Additionally, the bonds continue to trade at roughly the same range they've been trading for the past few weeks. We're seeing:
     
    30-35 for the 4s of 2013 at Libertas
    26-35 at Imperial
     
    If anyone else has other news, please post. 

    SubjectRE: RE: RE: RE: Un-halted and de-listed
    Entry03/27/2012 05:55 PM
    Memberdr123

    In a related counter-intuitive development, CMED 4 08/15/13 converts have rallied to 43, so the move up in equity is not isolated.


    SubjectRE: RE: RE: RE: RE: Un-halted and de-listed
    Entry04/05/2012 04:19 PM
    Memberithan912
    Stock now 60% above writeup level even though disaster has occurred.  Shorts covering aggressively given not able to borrow shares is only plausible explanation?

    SubjectRE: RE: RE: RE: Un-halted and de-listed
    Entry04/05/2012 04:59 PM
    Memberzzz007
    The biography section of the AER website refers to the CIO as a "mastermind".  Are you sure you want to be on the opposite side of a trade with somebody that has qualifications like that?

    SubjectRE: RE: RE: RE: RE: Un-halted and de-listed
    Entry04/05/2012 07:42 PM
    Memberkerrcap
    For the record, we're still short CMED. I haven't come across anything to change our mind. We strongly disagree with the articles that came out on Seeking Alpha today. I'd address them, but I doubt that anyone on VIC would give much credence to them.

    SubjectRE: RE: Un-halted and de-listed
    Entry04/06/2012 11:20 AM
    Memberkerrcap
    I haven't - I stopped reaching out to bondholders and counsel shortly after the writeup. My reading was that holders didn't really want to do an involuntary at that time because of the difficulties associated with going after the assets in Chinese courts. As negotiations drag on, that might change because holders might not be left with any other options. It probably makes sense for me to reach out to some folks to get a better idea of the progress of negotiations, but right now, I'm not sure exactly what the restructuring talks have looked like. 

    SubjectRE: RE: RE: Un-halted and de-listed
    Entry04/09/2012 11:57 AM
    Memberdr123
    Meanwhile, the CMED 4% 8/15/13 convert is back to the 20s after a brief run into the 40s.


    SubjectNew Seeking Alpha article
    Entry04/10/2012 08:46 AM
    Memberkerrcap
    We've posted a Seeking Alpha article in response to the pieces last week that sent the stock up 15%-20%. It's possible there are some momo guys that are just riding this thing up, so maybe a dose of rationality will end the madness. 
     

    SubjectRE: New Seeking Alpha article
    Entry04/10/2012 09:40 AM
    Memberyellowhouse
    thanks for the update. i corresponded with adam after he wrote TSTY up as a short (which was a great idea, until you spoke with industry experts who correctly anticipated it was going to be bought out; pretty sure he lost his shirt on that one). he's an earnest guy, but not the sharpest tool in the shed.

    SubjectRE: RE: New Seeking Alpha article
    Entry04/10/2012 10:01 AM
    Memberkerrcap
    Yeah, I like Adam too, he's a great guy. I've met him a bunch of times and actually helped him fix a situation where he bought too many CMED puts and was going to blow through his margin when he was going to exercise them. But I'm also short CMED and so can't just sit on my hands while this highly implausible "takeout" rumor is circulating. I called him beforehand to give him a head's up that I was responding. 

    SubjectRE: RE: RE: RE: New Seeking Alpha article
    Entry05/24/2012 04:01 PM
    Memberbritt12
    Unfortunately the stock is unborrowable (at least at GS) and unoptionable as well according to CBOE unless you are closing out a position.  No reason to believe it's not worth $0 still

    SubjectConfusing situation
    Entry05/31/2012 08:09 AM
    Membernha855
    Why has the stock doubled to $4.50 per share? I don't understand what's happening here. Can someone fill me in? Thank you

    SubjectRE: RE: Confusing situation
    Entry05/31/2012 09:58 AM
    Memberkerrcap
    I agree that this situation is pretty weird. This stock strikes me as much a zero as any one I've seen. I published another seeking alpha article today: http://seekingalpha.com/article/628521-china-medical-likely-headed-for-bankruptcy. I'll copy and paste the article below, given that it's probably my best answer on what I think about CMEDY. 
     
    All of my diligence continues to indicate that this company will be pushed into an involuntary bankruptcy, and that it'll be done sooner than later. I have no idea who is buying at these levels, or what is going on with AER. For the time being, we've been able to get borrow. 
     
    --------------
     
    Article:

    We think the end is near for China Medical Technologies (CMEDY), and that the gears are in motion for bondholders to file the company for an involuntary bankruptcy, in order to pursue the company's assets in China and try to achieve some sort of limited recovery for creditors. Given the lack of communications from the company since the missed coupon payments beginning in December 2011, bondholders have likely seen that negotiations are unlikely to bear fruit, and are therefore probably preparing a filing. My discussions with bondholders and research analysts indicate a lack of progress as well.

    It has been nearly six months since the company first missed its coupon payment on December 15, 2011. It then missed another coupon payment on February 15, 2012. To date, the company has not filed an 6-K explaining why it missed its coupon payments. In fact, the company has not issued any 6-K filings or other relevant notices since its first missed payments. It did not inform investors when its independent director, Lawrence Crum, resigned. It did not inform investors when the stock was halted by NASDAQ, or de-listed to the pink sheets. It did not even appeal NASDAQ's decision to de-list the stock, unlike many other U.S.-listed Chinese companies that have seen their stocks halted.

    The company has not filed a quarterly report for the quarter ended March 31, and has not provided any explanation for why it has not done so. Naturally, we're highly skeptical that the company will file a 20-F by its July 31st deadline, or will be able to pass its audit.

    Standing ahead of the equity are $413 million face value of convertible notes (see here). When including accrued interest, the face value of notes is worth more than $420 million. If a theoretical restructuring were to occur, the bonds would have to be paid out at par plus accrued and default interest before equity holders would receive a dime. That said, we don't think an actual financial restructuring or debt-for-equity swap is in the works. Rather, bondholders will likely file the company for an involuntary bankruptcy in the Cayman Islands in order to begin attempting to pursue assets in China.

    As of yesterday, the company's 6.25% and 4.00% convertible notes traded at 17.2 and 37.2, compared with a face value of 100, according to Bloomberg. These levels imply severe impairment; to put it another way, bondholders expect to receive no more than 17 and 37 cents for every dollar. If bondholders are that significantly impaired, equity holders are unlikely to recover anything. Bond prices have not risen since January, indicating that communications between the company and bondholders have been uneventful and lacking progress. Below is a price chart of the company's bonds:

    As we can see, bonds have traded in the 20 to 40 price range since the company's missed coupon payments. At this point, the more time bondholders wait before filing an involuntary bankruptcy, the more difficult it may become to pursue their asset claims in China. We've previously seen Chinese management attempt to transfer assets to related parties to put them out of the reach of foreign claim holders, with companies such as ChinaCastPuda Coal or Sino-Environment.

    When bondholders push China Medical into bankruptcy, we think the stock price will decline dramatically. We believe there is no value left in the equity, and a bankruptcy filing will likely provide the catalyst that will help the market recognize that.

    The Company's Irrational Stock Price

    CMEDY has inexplicably risen to $4.40 over the past few weeks, which ascribes an absurd market capitalization of $115 million (and an even more absurd $530mm million total debt + market capitalization valuation) to China Medical Technologies. We strongly believe this share price increase is merely one of those odd, irrational occurrences that transpire occasionally in pink sheets-listed equities, and that the fundamentals will soon catch up with the company's stock price. Specifically, the company will be involuntarily forced into bankruptcy, in our opinion, and the stock price will decline dramatically from current levels.

    We're not sure whether the recent share price rise is from momentum buyers assigning undue credibility to the SC 13G disclosures of AER Advisers, short-covering, or some other fanciful reason. We don't care. CMEDY is likely to be pushed into involuntary bankruptcy by bondholders, and its stock price is likely to plummet when that happens. We can't fathom any realistic way equity holders will receive any fundamental value for their CMEDY shares in the future.


    SubjectRE: RE: RE: RE: Confusing situation
    Entry05/31/2012 12:17 PM
    Memberkerrcap
    Sure, Interactive Brokers. 

    SubjectRE: RE: RE: RE: RE: Confusing situation
    Entry06/12/2012 05:45 PM
    Membernha855
    We just hit a whole new level of weird. Do you have any evidence that the bond holders are planning to force a bankruptcy? Thanks. 

    SubjectRE: RE: RE: RE: RE: RE: Confusing situation
    Entry06/12/2012 07:17 PM
    Memberkerrcap
    We saw this exact same situation with CHBT and Richard Azar. A wealthy individual purchases shares of a U.S.-listed Chinese fraud with no sensitivity to price. In fact, the buyer seems to almost want to purchase shares at higher prices. So the prices go up while this newcomer amasses an unusually large equity stake in the company. Soon thereafter, the price collapses due to an event (auditor resignation in the case of CHBT and potential bankruptcy in the case of CMEDY). It's almost as if the buyer is racing to buy as many shares as he can prior to the fatal event. 
     
    What I'd wager is happening is that someone owns a lot of shares offshore; it could be management or it could be the lenders who lent management funds collateralized by management's shares. I'd think it's the latter, and some lender has had CMEDY shares put to them as a result of a loan default. Now this offshore holder wants to monetize the shares. So they have to find someone on the other side who'll purchase their shares from them, and it's convenient that the price being paid per share is higher.
     
    The question is where are Richard Azar and Peter Deutsch getting their money to buy CHBT / CMEDY shares. Is it coming through some circuitous means from the company's Cayman bank accounts? Maybe Cayman banks don't allow management teams to directly steal money, so somehow the company has been buying some worthless assets that are being sold by middlemen who are ultimately getting the money to Azar / Deutsch. 
     
    Who knows? It's interesting to think about, but I don't think it matters. In the end, fundamentals will determine the fate of CMEDY and we're just hoping that we don't suffer buy-ins in the meantime. I'm pretty confident that Deutsch isn't buying shares because he wants an equity claim to CMEDY's assets. 
     
     

    SubjectRE: RE: RE: RE: RE: RE: RE: Confusing situation
    Entry06/12/2012 07:37 PM
    Membernha855
    You have an extraordinary level of confidence that the noteholders will involuntarily file the company. Do you have any evidence that this will in fact happen? Or is it simply conjecture?

    SubjectRE: RE: RE: RE: RE: RE: RE: Confusing situation
    Entry06/12/2012 09:48 PM
    Memberkerrcap
    It's conjecture, given that we're not restricted (nor do we own bonds, and are therefore not on the unrestricted side of the committee either). 

    SubjectRE: RE: RE: RE: Confusing situation
    Entry06/13/2012 07:48 PM
    Memberdr123
    A few observations on this fascinating situation and answers to earlier questions:

    - There does not appear to be an arb opportunity since conversion requires cooperation of the company (which is MIA) even assuming it can be done while the issuer is in default.  The converts are on their own.
    - The borrow color we get indicates that shares are primarily sourced from small retail holders with no blocks/institutional inventory at the primes we talked to.  While the borrow has tightened somewhat, the overall picture has been similar since March with no material reduction in overall retail inventory and increased demand.
    - Since March, AER purchased ~22% of the shares outstanding, taking their position to ~37%.
    - The last reported insider holdings were ~46%.

    I am curious if anyone has received information conflicting with the above, particularly whether any of the borrow is sourced from institutional positions/large blocks?  Assuming the above borrow color is roughly accurate the following seem to follow:

    - AER has not been a significant net purchaser of retail positions.
    - AER has been primarily purchasing insiders’ or institutional positions.

    Does anyone see problems with the above conclusions or have access to different data?  Does anyone have a theory of the underlying motivations different than kerrcap’s?

    SubjectRE: : RE: RE: Confusing situation
    Entry06/18/2012 05:13 PM
    Membernha855
    This hit bloomberg at 3:30pm and seems to have made no impact. This is so very odd.

    SubjectRE: RE: RE: : RE: RE: Confusing situation
    Entry06/20/2012 03:40 PM
    Memberdr123

    Float is being shrunk assuming AER and Deutsches are making material purchases in the open market.  While this is certainly possible, it seems almost certain that much of their position has been accumulated in private transactions, most likely from the insiders:  Per the 6/12 filing AER & Pals acquired ~5.1mil shares while ~4.6mil shares traded in May.  From a different angle:  Assuming Mr. Wu has not sold any shares, the float is now ~12% or ~3.8mil shares, while (from admittedly qualitative color) retail book currently appears to be multiples of that.  It would be interesting to hear what intelligence others have on this topic.


    SubjectRE: RE: RE: RE: RE: : RE: RE: Confusing situation
    Entry06/22/2012 10:26 AM
    Membernha855
    There's a game being played here that I don't understand. What brings this to an end? How can we be confident that the Deusch's don't own 60% of the shares now? Why does this stock not have a Q at the end of it? Why has the SEC not gotten involved?

    SubjectRE: Fidelity Borrow
    Entry06/22/2012 10:32 AM
    Membernha855
    So to be clear you think that AER was lending their stock out through Fidelity and that they have decided to stop lending their stock?

    SubjectAncient Chinese proverb
    Entry06/22/2012 10:36 AM
    Memberzzz007
    "When shooting fish in barrel, first make sure barrel not full of gasoline."

    SubjectRE: RE: RE: Confusing situation
    Entry06/22/2012 11:55 AM
    Memberkerrcap
    I haven't responded for a while to the past few comments, but unfortunately I don't have a tremendous amount to add. Bondholders went forward with the filing, but no one seems to care. It's either a classic short squeeze, or the Deutsches are doing something that's opaque and/or inexplicable to the rest of us. If I see something that makes more sense, I'll pass it on. 

    SubjectRE: RE: RE: RE: Confusing situation
    Entry06/23/2012 08:40 PM
    Memberdr123

    Some weekend reading courtesy of the Yahoo MBs: http://www.scribd.com/doc/97748510/Winding-Up-Petition-Sealed.

    No surprises but helpful to see confirmation that:  The company has not responded to any bondholder communication since 2/1/2012 and there has been no negotiation.  The company, CEO, and CFO have failed to file an appearance in any of the securities lawsuits filed over misstatements and failures to disclose material adverse facts.
     


    Subjectre: The "mastermind" behind AER
    Entry06/27/2012 11:03 AM
    Memberzzz007
    Am I mistaken, or has the AER website recently been upgraded?  I can no longer find reference to the "mastermind".
     
    I think that the whole honey bee theme is brand new.  Perhaps a subtle statement that when betting against the "mastermind", you are certain to feel the sting of the bumblebee.
     
     

    SubjectAER
    Entry06/27/2012 02:22 PM
    Membernha855
    Does anyone have confidence that AER has not simply continued to buy here? Based on the 13Ds on file, it appears that they don't really seem to care much about making accurate filings with the SEC.

    SubjectRE: RE: AER
    Entry06/27/2012 04:47 PM
    Membernha855
    ithan - are you saying that AER continues to buy stock?

    SubjectRE: RE: The "mastermind" behind AER
    Entry06/28/2012 10:28 AM
    Memberdr123

    While you are likely right about the origins of AER’s investment, the numbers strongly suggest that they have (at least partially) been buying management’s stake in recent months.  Hard to imagine that AER is so misinformed that they are doing so unknowingly, though these tweets make a strong case for it.


    SubjectRE: RE: RE: RE: RE: AER
    Entry06/28/2012 03:34 PM
    Memberoliver1216
    is zstn the next squeeze candidate.  i think AER just changed to a 13d, as they had with cmedy.

    SubjectFSIN deal closed...
    Entry06/29/2012 08:57 AM
    Memberzzz007
    Deal closed @ $9.50/shr.  Add that one to the HRBN list...unless, of course, it actually is a real business.
     
    Things not looking so good over at Muddy Waters these days.

    SubjectCMEDY opens in grey market
    Entry07/16/2012 10:02 AM
    Memberkerrcap
    A few updates on CMEDY:
     
    First, Roddy Boyd has an excellent update, providing details on the auditor resignation and the resignation of another board member:
     
     
    Second, the stock opened up today on the grey market. The bid-ask spread is not being shown, but my understanding is that you can call your broker to execute trades. Jefferies is showing $5.30 as of 9:55am this morning. 
     
    We haven't been involved in a grey market stock like this before, but thus far this morning it looks like the lack of liquidity and the SEC's cautionary halt may have been enough to end the short squeeze. At the least, with no quotation system, it appears unlikely that retail buyers will be much involved in this stock going forward. 
     
      Back to top