The BCSC / Jon Carnes drama and its implications

A British Columbia Securities Commission (BCSC) panel dismissed fraud allegations against Jon Richard Carnes.

• The Globe and Mail (a Canadian newspaper) has an excellent in-depth article that gives “The full story of Jon Carnes, Silvercorp, and the BCSC“.
• You can read the actual decision at http://www.bcsc.bc.ca/Enforcement/Decisions/PDF/2015_BCSECCOM_187/ .  It’s interesting if you’re into short selling.
• I have tweeted about some of my thoughts on the decision over at @glennchanWordpr.

While Carnes theoretically won, the panel’s written decision was very biased against short sellers.  Firstly, the BCSC failed to realize that they went after the wrong people (this is a pattern that repeats through history with many regulators… it’s nothing new).  However, the panel did not see value in creating an environment where people can expose fraud without fear of repercussions and nasty legal bills from regulators.

More importantly, one of Carnes’ researchers (Huang Kun) was wrongfully imprisoned in a Chinese jail and suffered abuse while detained.  Money is one thing.  Having your human rights violated is another.  I believe that Carnes’ lawyer(s) presented newspaper articles that describe Kun’s story.  Exhibit EX00344 (a BCSC webpage lists the hundreds of exhibits filed) seems to be a Globe and Mail article that describes what happened to Huang Kun in China.  The panel’s written decision does not seem to mention Huang Kun at all.  His name does not appear in the decision anywhere.  I am very disturbed at what appears to be the panel white washing the abuses that have occurred.

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CBPO – What their joint venture partner is saying

CBPO’s Shandong Taibang subsidiary is 82.76% owned by CBPO (image).  I believe that the rest is partially or wholly owned by the “Shandong Institute of biological products” (山东省生物制品研究所).  The Institute’s website seems to say that their joint venture with CBPO has projected revenues of $900M annually (Renminbi) and projected income of $17.24M annually.  This works out to an income margin of 1.91%.  Gurufocus.com shows that CBPO’s net income margin for YE2013 was 26.85%.  The discrepancy seems large.

(*EDIT 5/8/2015: Changed the net income margin number from 2014 to 2013.)

CBPO’s strange web presence

CBPO is a Chinese reverse merger with a market cap of $2.45B.

The WHOIS record for Ctbb.com.cn shows “山东泰邦生物制品有限公司” under the registrant name.  This translates to “Shandong Taibang Biological Products Co., Ltd.” according to Google Translate.  According to CBPO’s SEC filings, “Shandong Taibang Biological Products Co., Ltd.” is a 83.76% owned subsidiary of CBPO.  That is weird because the SEC filings suggest that CBPO is the owner of Ctbb.com.cn.  Many of the 10-Ks such as the YE2014 10-K say something to the effect of:

In addition, we had registered three domain names as of December 31, 2014, namely, http://www.chinabiologic.com, http://www.ctbb.com.cn and http://www.taibanggz.com.

So if CBPO registered ctbb.com.cn, why does the domain registration show “山东泰邦生物制品有限公司” under the registrant name?  Why is the site registered to a partially-owned subsidiary?  Is this another case of multiple personality disorder?

Figuring out the skill of mining CEOs

In my opinion, the best method for a CEO to make shareholders richer is to be good at wheeling and dealing.  CEOs like Brian Dalton and Kevin Mcarthur (Tahoe and ex-Goldcorp CEO) are very good at valuing assets and structuring deals.  These CEOs are good at shuffling paper around and making deals in a way that more wealth accrues to their shareholders.  They look for undervalued assets and sell shares/assets when they are overpriced.

AAMC revisited – A royalty on yield chasing

(AAMC has a market cap of $490M and the shares are fairly illiquid.)

AAMC (original writeup) is the asset manager of RESI.  Asset managers can be extremely attractive investments because they have the potential to grow earnings dramatically.  The underlying business model revolves around buying up non-performing loans (NPLs) and resolving them (e.g. loan mods, selling REO properties, and converting NPLs into rental units).  Over time, RESI will accumulate rental housing units.

I think of AAMC as a play on investors chasing yield in the current low-interest rate environment and doing silly things such as overpaying for dividend yield.

Misadventures in reading a financial statement / absorption costing

When reading financial statements, I pay particular attention to costs that have been capitalized.  Capitalizing costs boosts income in the short-term and is often a sign of aggressive accounting.  I often use the shortcut “Crtl + F” to search for instances of capitalized costs in an annual report.  However, it turns out that I don’t understand accounting rules such as absorption costing for inventory.  Under US GAAP, Canadian GAAP, and IFRS… absorption costing is the only method allowed for valuing inventory.  Companies must capitalize fixed manufacturing overhead (e.g. rent) into inventory.  I wrongly assumed that footnotes describing this practice was a sign of unusually aggressive accounting (it isn’t).

On Tuesday, I attended a stock picking competition where 3 teams of MBA students (the finalists) analyzed an obscure and illiquid Canadian company called Buhler Industries (BUI.TO).  It is from skimming through Buhler’s annual report (page 16 of the annual financial statements on SEDAR) that I erroneously thought that Buhler may have been inappropriately capitalizing overhead costs into inventory.  From talking to others, it turns out that I’m not the only person who didn’t understand that Buhler management was simply following the rules.  I suppose the lesson here is that there are so many unintuitive and/or complex accounting rules that most investors are not aware of all of them.

Closed my RGR call option position

Given today’s surge in stock price, I closed my RGR call position (my calls are deep-in-the-money and expire two days from now).  I think the stock is fairly valued at these levels (or arguably a little undervalued if you really, really like the CEO).  What I missed originally is that the gun market has mini-cycles because consumer demand has random surges related to panic buying.  I wish I had waited for the shares to trade at depressed prices (e.g. the company is buying back shares and the CEO isn’t selling) before putting on a position.

Over the long term, I think Ruger will do extremely well as long as Michael Fifer is the CEO.  If the stock falls below $40, there is a strong chance that I will have a long position again.

*Disclosure:  No position.
EDIT (4/15/2015): When I first wrote about the stock in Nov 2013, the shares were around $74.   The overall trade worked out ok because I was buying the dip as RGR stock fell below $40.  The current price is around $54.  Because I owned calls, the huge drop in share price was not a big deal.