A small research firm, Muddy Waters Research, has initiated coverage of China’s RINO International (NASDAQ: RINO) with a ‘Strong Sell’ recommendation and released a report challenging the U.S. regulatory filings of the company. Among other things, the research firm alleges that Chinese regulatory filings indicate that RINO’s revenue in 2009 was a mere $11 million, not the $193 million it reported in U.S. regulatory filings. RINO’s managment is also accused of diverting “millions of dollars for its own use.”
RINO, involved in green technology, makes flue-gas desulfurization equipment that is used by hydrocarbon-fired power plants to scrub sulfur out of smokestack emissions. Its competitors include Donaldson Co. (NYSE: DCI), Calgon Carbon (NYSE: CCC) and Westport Innovations (NASDAQ: WPRT).
The report claims that a management-owned variable interest entity, a VIE, has failed to make required cash transfers to RINO, instead sending the cash to the management-owned VIE. The report also accuses management of using $3.2 million of its cash to purchase a luxury home in Orange County, Calif., on the same day that RINO closed a $100 million round of financing.
Muddy Waters also disputed RINO’s reports of customer relationships. Muddy Waters said it contacted nine customers listed in RINO’s annual 10-K filings with the SEC, and report that five of the nine deny having done business with RINO, another one is almost certain to have had no dealings RINO, and three confirmed that they did purchase FGD systems from RINO. Of those three, one firm said it was “not satisfied” with RINO’s system and was “unlikely to engage RINO in the future;” another said the RINO system performed so poorly that it was taken offline; and the third said the system is still under construction.
The 30-page report from Muddy Waters alleges everything from misstated assets to accounting irregularities. RINO issued a press release this morning saying the company “takes its responsibilities to investors very seriously and has launched an internal review of Muddy Waters’ allegations. RINO looks forward to providing investors with a timely and detailed response to the allegations upon completion of its internal review.”
RINO is scheduled to report third-quarter earnings on Nov. 15, and says it plans to hold an earnings conference call on Nov. 16. RINO said during the conference call “management will comment on the allegations to the extent possible based on the progress of internal review but will not hold a question-and-answer session.” That should be interesting.
RINO’s shares have plunged, from about $14.75 mid-afternoon yesterday to below $11 at this morning’s open, a new 52-week low. The shares are trading at around $11.70 at about noon today. The 52-week range is $10.86-$35.15. Volume is about five times the daily average. Muddy Waters says the share price should be no more than $2.45. Yikes.
