Critical Moment for China Expert Technology

When I first wrote about China Expert Technology (CXTIE) on Aug. 13 there appeared to be still hope (though not likely) that it would file its 10-Q report for Q2 on time. The second day, however, the company filed for the five-day extension, citing the following reason:

"The review of the financial statements has not yet been completed."

Then a new CFO (Mr. Qiyou Li, or Jeff Li) was nominated on Aug. 15. Today, three more weeks have gone by and the 10-Q is still up in the air. That, under a new CFO who was the company's former financial controller and has managed the company's financial matters from accounting to internal auditing for two whole years!

Is it really "the review of the financial statements" that is at issue? Did former CFO Mr. Simon Fu’s resignation cause the filing turmoil or was there a financial chaos that caused Mr. Fu to resign?

Honestly I do not have an answer. But some investors have begun to question the quality of the company's previous financial statements.

It is hard to blame them. I called five Chinese cities (including one district and one county) CXTIE claimed to have signed e-government contracts with in recent months. None of the cities confirmed the contract.

A few words of caution: I might not have spoken to the right official in all of the cases. But at least for the city of Xi'an, I was sure I have spoken with a key official responsible for the planning, assessment, and monitoring of the city's e-government projects. Moreover, for the district and county mentioned, I also had reason to believe I have spoken with reliable sources.

Still, it is possible that the company's contracts were signed with third-party management companies. But it really worries me when the local governments (particularly in Xi'an's case) had no knowledge at all of such management companies who were supposed to be doing e-government businesses with them. And the “management companies” were recognized neither by the local Departments of Commerce nor by the directory services.

Furthermore, all of the contracts were major ones mostly in excess of RMB 100M. It is very disturbing none of them was covered in the Chinese media.

All of a sudden, I felt I did not understand the company's business which I had once thought I did. And my natural reaction was to turn to the management for help.

With much persistence, I did finally get to talk with Mr. Michael Huang, Chairman of the company. Although he did mention management companies as a possible reason, he told me he was not involved in the company's day-to-day operation so he could not help me on questions regarding the contracts. He said he has forwarded my email inquiry to Mr. Xiao Xin Zhu, the company's CEO who should be answering my concerns. Mr. Zhu, as you might have guessed however, never responded to my inquiry and follow-up email I sent him.

Some of my readers were asking if the great buying opportunity has finally arrived. As you know, I do not make buy or sell recommendations. But this much I can say. If all of the e-government contracts prove to be real and solid, this stock can be picked up at $3 a share and still be a great value. On the other hand, this stock is worth little if the management cannot prove the contracts’ validity down to the RMB amount.

I have played enough hide and seek with this company. Before I quit this game, though, I would like to give this advice to the management: it is time to prove the company’s financial integrity and restore shareholder confidence. Face the shareholders and address their concerns. Concerns as basic as the validity and soundness of the e-government contracts! A no-nonsense approach to address their concern would be to publish contact information (in both English and Chinese) for them to verify the validity and progress of your outstanding e-government contracts.

Do that, before their patience runs out.

Disclaimer: the above represents only my personal view, which could be right or wrong. It is not a recommendation to buy or sell CXTIE. I do not have a position in CXTIE as of this writing.