Many of the websites that were dedicated to examining, interpreting and uncovering the vagaries of investing and understanding Chinese companies have disappeared / ceased publishing – we’ve managed to find in archives many of these pieces and are re-posting them as possible to that the information is still available to those who might be interested. Over the next few pages this is the original from The Chinese Short Charade on SAIC VS SEC documents.
If there were a Letterman Top Ten List for short claims of fraud against Chinese companies, the number one would have to be that the SAIC filings (State Administration of Industry and Commerce) do not match the companies SEC filings. Your average investor, institutions included, see discrepancies between the two filings and instantly flee from the company convinced that it must be a fraud or something is fishy in Fuzhou. While differences between the SAIC and the SEC filings might be a flag to signaling further investigation, as the article below discusses it is FAR from being a smoking gun:
Re-Printed From Trading China Website
The comparison of Chinese filings and U.S. SEC filings from U.S.-listed Chinese companies has become a hotly discussed topic over the past several weeks. A large number of articles, most notably from authors with short positions in the stocks discussed, focus on severe discrepancies between SAIC reported numbers and SEC filings, and conclude there must be fraud involved. Such an automatic conclusion is just plain wrong as there are many legitimate reasons for those numbers not to match.
With this article I am going to clarify some of the major aspects in this rather complicated system of multiple filings for one and the same U.S.-listed company. The article is based on a July 12 report from Roth Capital Partners (many thanks for supplying it for this purpose), several other reliable sources, and my own research.
Every U.S. listed Chinese company with actual business operations in China has to file financial statements with three agencies (there are more but those don’t matter here): The U.S. Securities and Exchange Commission (SEC), China’s State Administration of Industry and Commerce (SAIC), and the Chinese State Administration of Taxation (SAT). Let’s have a more detailed look at those Chinese agencies:
China’s State Administration of Industry and Commerce (SAIC)
The SAIC (www.saic.gov.cn) is primarily responsible for business registration, business licenses and acts as the government supervisor of corporations. The SAIC is the Chinese government registrar for official documents like articles of incorporation, legal persons, registered capital and company ownership. In order to renew their annual business licenses, all Chinese companies must file a so-called ‘Company Annual Inspection Report’ with the SAIC between March and June every year. This report includes financial statements such as balance sheet and income statement, but those numbers are not verified or audited by the SAIC. The agency is primarily concerned with legal compliance issues and not with operating data or taxes.
State Administration of Taxation (SAT)
Chinese companies pay a variety of taxes as VAT, Enterprise Income Tax (EIT), business tax and payroll taxes. The tax filings made with the SAT (www.chinatax.gov.cn) are much more similar to SEC filings than what has to be submitted to the SAIC for business licenses. The SAT requires audited financial data including balance sheet, income statement and cash flow statement and the tax bureaus audit those reports quite frequently themselves and fine offenders who under-report to the SAT. Tax collectors in China are not any less serious than those in Europe or the United States. Financial statements to the SAT are much more reliable than SAIC filings, however those are not publicly accessible and unavailable to investors or research analysts.
Part Two Continues Here