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Short-Seller Cuts Through China Red Tape

Stocks in this article: CSKI SOLF

Initially, he focused on the numbers relating to inventory turns -- the ratio of sales to average inventory for a given period. Figures in the 10-K indicated that China Sky One's inventory turns for the year came in at about 50. Put another way, the company was saying that sales were so strong -- and manufacturing operations so efficient -- it could have exhausted its entire inventory of raw materials and finished products every seven or eight days.

Bird related those numbers to the popcorn stands in his theaters.

"The very nature of the game requires having a large inventory. How can they get by with nominal inventory?" Bird asks rhetorically, recalling his thoughts as he read the 10-K. "We used to get popcorn delivered to us every three days and we couldn't manage to run those kinds of numbers. If you believe in numbers, if you believe in the sanctity of addition, you end up coming to these inescapable conclusions."

China Sky One declined to comment for this story.

Bird says he then decided he needed to see a credit report on China Sky One Medical. Phone calls and emails to credit bureaus in London and India led him to a Beijing-based agency called Inter-Credit. The agency agreed to send him credit reports via email. When Bird figured out that Inter-Credit was getting much of its information from China's State Administration for Industry & Commerce, the SAIC, he started going directly to the source, he says.

The SAIC has no real equivalent in the U.S. It is a massive bureaucratic omnium gatherum, encompassing some of the duties performed in the U.S. by the Securities and Exchange Commission, the Federal Trade Commission, the Financial Industry Regulation Authority, the Internal Revenue Service, the Food and Drug Administration, a bunch of other agencies and, to top it off, the secretaries of each of the 50 states. It reaches down to the municipal and even village level. It requires an annual financial return from every registered business. In short, the SAIC has a lot of information.

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