Automotive compounder China XD Plastics Co. Ltd. today fought back against an earlier report which has questioned its financial reports.
On July 10, Bleecker Street Research posted an article on SeekingAlpha.com saying that China XD’s, “numbers don’t add up.” After that report was published, XD’s share price on Nasdaq fell more than 20 percent.
On July 14, XD issued a detailed statement refuting some of the allegations.
Regarding the most data-based allegation Bleecker made on the consistency, or lack of, between XD’s SEC filings and the income numbers that the company reported to China’s State Administration of Industry and Commerce (SAIC), XD claimed Bleecker failed to include all of its subsidiaries in the calculations. In addition, XD said Bleecker’s methodology is flawed as it does not, for example, take into account any eliminations of inter-group transactions.
As well, XD dismisses Bleecker’s questioning of its gross margins being substantially higher (184 percent higher in 2013) than China’s largest compounder Guangzhou Kingfa Science & Technology Co. Ltd. Instead, it compared its margins with another Chinese automotive compounder, publicly listed Shanghai Pret Composites Co. Ltd. and said the numbers are in line.
It added that Kingfa’s lower margins can be attributed to its low-profit trading business and the broad range of compound materials for various end markets.
XD claimed that its New York-based Chief Financial Officer Taylor Zhang, albeit having worked for two Chinese companies that were accused of fraud by SEC, was not employed by either of them when those companies were accused of wrongdoing. XD also said there has not been any suggestion that Zhang was involved in any alleged wrongdoing.
In response to questioning of its increased days sales outstanding (DSO) in 2013, XD said it was resulted from in the Chinese economy and its “proactive marketing strategy to penetrate the East China market.” DSO indicates the time it takes a company to collect revenue after a sale.
XD also said its R&D expenditures, in terms of percentage of sales, are “reasonable and effective,” although Bleecker called it “relatively miniscule” compared to Kingfa’s.
About its fairly frequent change of auditors (three changes in five years), XD said those decisions were based on the company’s growth and are justifiable.
It’s not the first time China XD was under scrutiny on some of these issues. An August 2011 article on SeekingAlpha.com called for attention to the same issues — mismatched numbers between SEC filings and the financials they reported to the Chinese government, much higher margins than competitors’, CFO’s former employer, among other things. Some of the comments suspected the anonymous author, who claimed to be an investor in China, was a short seller. Other comments found Morgan Stanley’s investment in XD to be reassuring.
XD is based in Harbin in Northeast China with three plants there and is building a fourth production base in Sichuan province in Southwest China.