Market Overview

ChinaBak Soars 65% on False Rumor

On Wednesday, ChinaBak Battery (NASDAQ: CBAK) jumped by as much as 65 percent to $1.63 on tremendous volume following widely circulated rumors that the company will be supplying lithium ion batteries to Kandi Technologies (NASDAQ: KNDI).

On the previous day, ChinaBak had been trading at around 90 cents, with a market cap of just $10 million. As explained below, ChinaBak will in all likelihood be delisted and go to zero this year as it is currently facing an outright delisting by the NASDAQ. Surprisingly, the stock is still easy to short.

On the same day that ChinaBak soared, Kandi was also up by around 70 percent on news that its electric vehicles had been approved by China's Ministry of Industry and Information Technology. This would qualify its electric vehicles for government subsidies.

The only problem is that the rumor regarding ChinaBAK was entirely false. But obviously the association with booming Kandi was very beneficial to anyone owning shares of ChinaBak.

How do we know that the rumor was false?

Simple. We just called ChinaBak in Shenzhen and asked them.

What ChinaBak will say to those who call is that first, they are not doing any business with Kandi. Second, they have no idea where this rumor originated.

The original rumor read, “China Bak (CBAK) confirms deal with Kandi (KNDI) to make batteries."

The error has already been pointed out to the editors of all of other sites to suggest they post a correction. Hopefully, by the time this article is published, the rumors will have already been retracted.

Those who are already familiar with ChinaBAK should know that there is simply no possibility of the company being selected for any ongoing business venture. Nothing short of an explosive rumor could have possibly resurrected the stock.

ChinaBak is already deeply insolvent. It has only $7 million in cash, but the cash is restricted by its banks. Against that tiny balance, it has $330 million in current liabilities coming due in the next few weeks and months. The interest alone on these debts is running at $1.5 million per month.

The company's remaining assets have been pledged against credit facilities and the banks are even holding the Chairman's shares of ChinaBak as collateral. Its inventories are dwindling and it is now selling its remaining products at below cost, as reflected by its negative gross margin.

When I last wrote about ChinaBak, the stock was at $2.70. The company had already received five delisting notices from the NASDAQ. It had just spiked dramatically for no reason other than that it had avoided that delisting. As I clarified the situation for readers, the stock traded down considerably, and recently hit a low of $0.59.

The way that ChinaBak avoided delisting was by conducting a 10:1 reverse split when the stock previously hit $0.30. This transformed it overnight into a $3.00 stock again. The NASDAQ requires a $1.00 minimum stock price in order to remain listed. So basically the reverse split achieved no lasting effect.

Were it not for the last reverse split, the share price would now be quoted as just 14 cents. The low from a few weeks ago would therefore be quoted as being just 5.9 cents. In reality, given that the company is deeply insolvent with its banks and selling its products below cost, ChinaBak is a true zero.

In addition to the share price problem, the company also needed to fill a vacant board seat (due to a board resignation) in order to avoid delisting. The head of the audit committee, Charlene Budd from Texas, first installed her son Jonathon Paugh as the head of two vacant board committees at ChinaBak. But, when the NASDAQ found out, they objected and had him removed. Once again, the company was subject to prompt delisting.

So Ms. Budd's next solution was to install one of her coworkers, Martha Agee, a teacher at a small Christian college in Texas. According to her resume, Ms. Agee has no experience in China and no corporate board experience in any country at all. It appears that Ms. Agee was therefore just a convenient placeholder on the board to prevent a delisting. I contacted her to see if she had ever even been to China, but received no response.

Since that time, and after getting Ms. Agee in the door, audit chair Ms. Budd has recently resigned. This caused a sixth delisting notice from the NASDAQ to be received recently. It seems reasonable to suspect that her colleague in Texas, Ms. Agee, will also resign without the company of the woman who introduced her to Chinese small cap board rooms all the way from her school in Texas.

Several weeks ago, the CFO also resigned. It was the second CFO resignation in the past year. The role of CFO was then assumed by the CEO, XiangQian Li. The Treasurer and Secretary had already resigned, and Mr. Li had already assumed those roles. So on paper, Mr. Li now fills all five separate management roles of Chairman, CEO, CFO, Treasurer and Secretary. Clearly there are not a lot of management figures left at ChinaBak to turn the lights on and off, much less to gear up for a full scale operation supplying Kandi's electric cars.

But then again, not even ChinaBak actually claims that they will be manufacturing for Kandi. This was just a 65 percent move on nothing more than an unfounded rumor.

Conclusion

Prior to the false rumor, ChinaBak was trading well below $1.00 and now, once again, has a deficient board in the eyes of the NASDAQ. For these reasons, the company once again received a delisting notice prior to the rumor driven spike in the shares. With the rumor now fully debunked, this stock will quickly find its way back towards zero. Even a cursory read of its business and financials demonstrates that there is no way for ChinaBak to recover.

It is selling its remaining products and below cost and liquidating its remaining receivables. The proceeds then go straight to the banks. With almost no cash and a market cap of only $15 million (after the large rumor spike), and with $330 million in short term liabilities coming due, there is virtually no chance that this company will remain listed by the end of 2013.

The fact that ChinaBak will be delisted hardly seems worth questioning. The only real questions now are: who planted this well placed rumor and how much of a profit did they reap?

Posted-In: News Short Ideas Rumors Stock Split M&A Hot Markets Movers Best of Benzinga

 

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