Wednesday, November 15, 2006

How to Perform the Three-card Monte? Ask the Management of Bodisen Biotech, Inc.

Bodisen Biotech (BBC-$5.90) is spreading more than nontoxic soil conditioner around these days.

Last month, the China-based maker of organic fertilizers said that it expected ‘strong’ growth in revenue and profit for the third quarter ended September 30, 2006. Shares of Bodisen have tumbled about 45 percent in two days, reflecting investor disappointment in the Company’s
posted net income of $3.2 million, or 17 cents a share, for the three months ended Sept. 30, compared to a profit of $2.9 million, or 18 cents a share, in the year-ago equivalent period.

And today management disclosed that its prior financial filings “may have to be corrected or amended due to incomplete, misleading or inaccurate disclosures.”

Easy-lending credit policies, negative operating cash flow, and a questionable prior relationship with advisor Benjamin Wey and his
New York Global Group—the 10Q Detective saw red flags waving in the wind when we first posted on Bodisen Biotech. On October 2, 2006, we wrote: “albeit red flags do exist, in our view, we can shrug them off (for now) because the Company does have a strong balance sheet without any long-term debts.” Instead we chose to marvel at the Company’s strong (Chinese) agricultural product distribution network and upbeat comments by management.

Our favorite financier, statesman, and presidential adviser Bernard Baruch said: “Never pay the slightest attention to what a company president ever says about his stock.”

We wish we had listened—or at least paid heed--to the warning of
Dow Jones columnist Herb Greenberg when he rhetorically asked (of Bodisen’s management): “If the company can't answer that question (regarding their investment in China Natural Gas), or offer a good explanation, I would wonder what else might be exaggerated or not quite right?”

We are more than pissed off, for we feel like the mark in a game of
three-card Monte. That said, in our view, management is not finished with their sleight of hand card tricks. CEO Wang has already hinted at a sequential slowing of sales growth in the coming quarter, saying: ``While the fourth quarter, which represents the end of the harvest season, typically is our slowest period of the year, we expect to continue to achieve year-over-year revenue and earnings growth in the last quarter of the year.'' [Ed. note. Forget the hyperbole and read between the lines!]

In addition, we suspect that [more than one] class-action litigation is around the corner. [Ed. note. We can only hope, too, that the Company’s product ingredients really do not contain manure or other waste products.]

“If you get all the facts, your judgment can be right; if you don't get all the facts, it can't be right.” –Bernard Baruch.

Given the blatant discrepancies between management’s public comments and disclosures (in SEC filings), we have lost faith in this Company. Contrary to our concern(s)—and hoping to flip the “money card”—we are disclosing that we did do speculative buying in the Common Stock of Bodisen near the close of trading today—trusting that there is truth to the Wall Street saying that “even a dead cat will bounce if it is dropped from high enough.”

Editor David J Phillips is long shares of Bodisen Biotech and China Natural Gas. The 10Q Detective has a full disclosure policy.


Anonymous said...


I am a regular reader of the 10Q Detective and enjoy reading your analysis. However, I never really understood the investing thesis for BBC. Sure, it looks cheap on earnings, but there were so many red flags with this one. With so many higher quality companies available - and some relatively inexpensive in the large cap space for example - I am not sure why anyone would trade down for such a low quality name. In terms of red flags, there were many...
(1) company associated with a stock promoter
(2) foreign company whose executives don't speak english
(3) PIPE offerings
(4) Not well known auditors
(5) the use of "biotech" when it is a fertilizer company

Also, if the fertilizer business is so great in China, wouldn't this attract competitors?

Anonymous said...

I think the big thing that everyone missed in the earnings forecast for FY 06 was the issue of constraints in Bodisen's capacity. They had doubled their capacity last year, when they built a second plant, but that was completed in Q2 05. Thus, Q3 from last year had the same capacity as this year. Revenue growth dropped down to 21% y/y in the quarter, which was a steep drop from the prior quarter. There is no way they'll be able to meet their revenue guidance of 61MM for this year, based upon Q3 and ytd numbers. (Q4 is a seasonally weaker period for BBC.)

They should have some decent growth prospects in FY07, but they'll have to finish out those new facilities/acquisitions in order to increase their ability to handle the growth.

Other issues: the A/R. DSOs were way up in the quarter, and the company has increased its loss provision. That still might be too low, so margins may continue to be impacted going forward.

AMEX compliance issues. Yes, trust is a big problem here. Those Form 144 filers look smart right now , don't they? Makes you wonder if word had leaked that the second half of this year was not going to meet expectations.....

Chris Byron had an excellent article earlier this week about the strong liklihood that inproper trading has occurred here. Anyone remember CESV? I'd avoid the stock until all of these issues come to light and are resolved, one way or the other.