SmartHeat Soars but Catalyst Unclear (Update 1)

Updated from 3:29 p.m. ET to add the company's statement and closing share price.

NEW YORK ( TheStreet) -- Shares of SmartHeat ( HEAT) was the top percentage gainer on the Nasdaq, rising more than 45% on exploding volume.

The reason behind the investor exuberance is a bit murky. The China-based company, which makes clean tech heating equipment, reported its fiscal 2011 results after Monday's close, swinging to a deep loss from last year as sales dropped nearly 50% and it recorded heavy charges from goodwill impairment.

The positives appear to be its report of a strong sequential rise in sales in the fourth quarter, and management commentary that it believes a demand slowdown in China will be "temporary." SmartHeat also said it's undertaken restructuring efforts, including staff reductions, and is tightly controlling costs.

Still, a move of such magnitude nearly always has a clear catalyst, and this kind of volatility is worthy of wariness. SmartHeat itself, in a statement release shortly before the closing bell, pleaded ignorance to what was behind the buying.

" W hile it ordinarily does not comment on market activity or market rumors, in view of the recent unusual market activity in its stock, SmartHeat confirms that it is not aware of any material corporate developments that could account for the unusual trading activity," the company said.

The stock finished at $7.68, up 46%, with nearly 12.4 million shares changing hands. The issue's average trailing three-month daily churn is a little more than 70,000, according to Yahoo! Finance. Earlier in the session, the shares ran as high as $9.64, and they are now up 180% from Monday's close at $2.74.

SmartHeat completed a reverse 1-for-10 stock split in February when its shares sank below 50 cents each.

For 12 months ended Dec. 31, SmartHeat said it lost $24 million, or $6.20 a share, down from a year-ago profit of $22.7 million, or $6.79 a share. Revenue totaled $65.2 million for the year, down from $125.4 million in 2010. The latest results include charges from goodwill and inventory impairment of $9 million. Operating expenses soared to $43.6 million in 2011 from $18 million in the prior year.

The company said its fourth-quarter operating loss totaled $8.8 million, and that, excluding charges, it would have reported operating income of $3.8 million for the three-month period. SmartHeat said sales came in at $33.7 million for the fourth quarter, more than half its total for the year, and up from $16.6 million in the third quarter. The higher sales resulted from previously canceled or delayed orders being reinstated, and expansion into other areas of China, SmartHeat said.

"Despite a very challenging sales environment caused by a continuation of China's restrictive fiscal policy in 2011, we are encouraged by our fourth quarter results due to our efforts to expand into regional areas of China, the development of our marketing force and our restructuring efforts," said James Jun Wang, the company's chairman and CEO, in a press release issued after Monday's closing bell.

China-based companies with U.S. listings have faced increased skepticism since the emergence of questions about accounting at a number of these companies in 2011.

Investors should be aware that Goldman Kurland & Mohidin LLP, SmartHeat's independent auditor, included an opinion in the company's Form 10-K filed on Monday that SmartHeat has a "material weakness" in the internal controls over its financial reporting.

The weakness in the Form 10-K is listed as a "Lack of technical accounting expertise among financial staff regarding (a) U.S. GAAP generally accepted accountign principles and (b) requirements of the PCAOB Public Company Accounting Oversight Board Auditing Standard No. 5 and COSO Committee of Sponsoring Organizations of the Treadway Commission in the assessment of internal control over financial reporting."

The company itself acknowledged the weakness in the filing, saying its management had "carried out an evaluation of the effectiveness of our internal control over financial reporting" and determined there was a weakness related to "a lack of sufficient internal accounting personnel with appropriate levels of knowledge, experience and training in generally accepted accounting principles in the U.S., or U.S. GAAP, for the preparation of financial statements in accordance with U.S. GAAP."

SmartHeat went on to say there was a "reasonable possibility that a material misstatement of our financial statements will not be prevented, or detected and corrected on a timely basis" in the filing, and that while its board was evaluating ways to address the issue, it's unlikely it will be able to "remediate" the weakness until it hires "qualified accounting staff or train our current accounting staff with the requisite U.S. GAAP experience."

-- Written by Michael Baron in New York.

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