October 28, 2011

China Gerui Adv. Material, Ltd. | CHOP

In this report, we present a number of reasons why investors in China Gerui Advanced Materials Group, Ltd. should be especially cautious.

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In this report, we present a number of reasons why investors in China Gerui Advanced Materials Group, Ltd. (“CHOP”), as well as its auditor and the SEC, should be especially cautious. We believe that the company’s revenue and profit may be overstated in its filings with the Securities and Exchange Commission.

Our analysis has many parallels and has led us to the same conclusions as that pertaining to A-Power Energy Generation Systems (APWR). (APWR’s auditor subsequently resigned trading was halted by the NASDAQ; APWR is currently under investigation by the SEC.)

A summary of our key concerns include:

  • Impossible economics — CHOP claims to be an extraordinarily profitable company with industry leading margins. But there is nothing extraordinary about what it does: much like an oil refinery, it converts one commodity good into another. An analysis of directly comparable companies and liquid commodity markets pricing for both CHOP’s raw materials and finished goods reveals evidence indicative of a business likely inflating its profit margins.
  • Past SAIC filings indicate the company is likely generating the rather ordinary profits one would expect from a business of this type, and one in line with similar manufacturers of cold-rolled steel.
  • Common ties — From July 2007 to October 2008, CHOP’s current CFO Edward Meng served as the part-time and then full-time CFO of A-Power Energy Generation Systems, prior to an abrupt dismissal.

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