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Saturday, August 20, 2005

China Evergreen (CEEC)

Yet another Chinese reverse merger. This one doesn't give me a warm fuzzy feeling. At first I thought maybe the earlier ones were like this and I just hadn't noticed it before, so I went back to looked again at YHGG's financial statements. No, YHGG is solid. It's just the last few that I've been looking at.

Walking through the CEEC 10-K/A:
Non-transitional, Nevada, Dec 31, 2004.
Guanzhou, Guangdong, PRC
market cap $4,352,240 at the time
100 million shares

Ammendment adds additional disclosure about the business and add certain contracts as exhibits.

They provide "turnkey" and build/operate/transfer "BOT" waste water engineering design and contracting.

Turnkey: Phase 1: survey and design, Phase 2: Construction and equipment installation, Phase 3: operation and management services. No investment by the Company. Handover after phase 3.

BOT: Company builds and operates the plant and invests in it. Contract term is usually 20-30 years. Municipal government contribute the land. Company provides the investment and daily management. After the contract period, the project is transferred to the government. Typical capital return period is 5-6 years for the Company.
------------------- -------------- ---------------- ----------- ------------

Tianjin Wuqing Wastewater RMB 9 million 10,000 tons 20 years November 2003
Treatment Plant (Phase 1)

Xinle Wastewater Treatment Plant RMB 34 million 40,000 tons 22 years October 2003

Haiyang Wastewater Treatment RMB 30 million 20,000 tons 22 years June 2005

Beijing Tianzhu Wastewater RMB 20 million 20,000 tons 25 years Operation expected to
Treatment Plant (Phase 1) commence in third
quarter of 2005

Handan Fengfeng Mining Area RMB 29.25 million 33,000 tons 22 years Operation expected to
Wastewater Treatment Plant commence in first
(Phase 1) quarter of 2006
90% ownership: Tian Jin Shi Sheng Water Treatment Company ("TJSH"). Commissioned Nov 2003, 10,000 tons daily.

35% ownership: Xin Le Sheng Mei Water Purifying Company ("XL"). Commissioned Nov 2003. Treatment 40,000 tons daily.

Manage both on contract, but revenue is immaterial.

Developed treatment facility in Hai Yang City ("HY"), 20,000 tons/day. Started operation June 05.

Developing another treatment facility in Beijing ("BJHTSY"), 20,000 tons/day. Completion expected Sept 05.

Oct 15, 2004 reverse merger.

April 2005, private placement of 20 units, received $25K each: 12% convertable debenture $25K, convertable into common at $0.20 per share or 10% discount to the share price of the next private placement prior to any conversion, also included was 125K detachable warrants at $0.20 per share, expires 10 years. All this for $500K.

Business established in 1999 by Pong Liang Pu, Chairman. Focused too much on innovative biochemical technologies and perhaps not enough on customer problems? The Chairman has patents (oh geez!), granted to Company.

They have successfully completed design and construction of 14 waste water facilities in China, 120,000 tons per day (3 accounted for 70,000).

Customers: municipal governments, food processing plants, beverage plants, industrial plants. Company was recognized as a "Key Enterprise in Environmental Industry in PRC" by General Bureau of Env. Protection of China. Also "High-Tech Enterprise" by Bureau of Science and Technology of Guangzhou.

Wastewater treatment is fairly new in PRC (gasp), started in the 1980s. Total waste in 2002 was 23 billion tons municipal, 26 billion tons industrial. Only 25% was treated. Government considers it "a policy priority" and wants 90% treatment by 2030. Government is offering some incentives to businesses.

Before 2003, facilities for fresh water supply were owned and operated by local governments. Rapid industrialization has put severe stress on the system. Fresh water supply is also opened up to private sector and international operators.

Company customers include municipal governments at the city, district, and town levels. Private customers include steel, car, electronics, chemical, food, beverage, paper, printing, breweries, hospitals, pharm. Each has it's own needs.

Main competitor is Beijing Capital Co.

True Global Limited accounted for 97% of sales in 2004 due to the sale of a BOT project in Q4 04 to that company. [That's not sales, that proceeds related to investments or proceeds from discontinued operations].

The Company creates an on-site company for each BOT project.

They talk a bit about the technology which seems fine. Also quality control which seems ok, but could be more defined. They outsource the design and construction to various contractors: East-North Design Institution of China Civil Engineering, 20th Group of China Railway Co.

3 types of equipment: electrical, automated control systems, test/analysis/detection/monitoring.

52 employees: 8 sales/marketing/service, 12 R&D, 25 finance and admin, 7 operations.

There are new regulations related to this business.
Environmental Impact Assessment: created 1989, revised 2002, effective Sept 2003. EIA must be prepared during the project feasability stage. Approval is required.
Three Synchronies Policy: installation of pollution prevention and control facilities during construction phase. Must be inspected and approved by EPB.
Permitting requirements: Discharges must be registered.
Reporting requirements: Anyone who might pollute must take appropriate measures, etc. etc.
WASTEWATER DISCHARGE. Two types of wastewater discharge systems are defined in China: (1) polluted wastewater discharges (typically industrial and domestic wastewater) and (2) non-polluted wastewater discharges (for example, storm water). Separate drainage systems for polluted and non-polluted discharges are required for a facility in which a municipal sewer system is available.
Principal offices are 400 sq mtrs in Guangdong. Leased for 240K rmb/year.
No legal proceedings.
Voting to authorize 200 million shares and 50 million blank check pfd stock.
In July there were 45 recorded holders of stock.
No allowances in AR.
For turnkey operations, customers are biled on a percentage completion basis.
For BOT operations, customers get billed when operations begin.

The income and cash flows statements are fairly meaningless given the nature of 2004 business.

PKF accountants in HK.
The gigantic increase in AR is from the sale of the BOT business mentioned above.
Depreciation rates are ok, except 10 years for cars ($122K assets) (like the other Chinese company I recently looked at). I drive my own cars for 10 years. Plants are correctly depreciated over 20 years because at the end, they don't own them.
Revenue recognition seems standard.
They're evaluating the effect of share-based compensation accounting standards on the business.
Obsoleted inventory of $13K.
$3.16 million due from related company run by the Chairman. Guang Dong Xin Shen Environmental Protection Company. Interest free, unsecured, repayable on demand.
$27K due from directors. Interest free, unsecured, replayable on demand.
$1.7 million due from an associate. same terms, sheesh!

Infrastructure assets are split between HY ($2m) new last year, TJSH (which they incorrectly called TJ) ($1m), BJHTSY ($0.4m) new last year.

equipment (before depreciation)
office equipment: zero?? ($6K for 2003)
furniture and fixtures: $6K
tools and equip: $25K
motor vehicles: $122K
plant: $235K
only $57K depreciation.

Limited view into 35% owned entity, as expected. Revenue=$1.15 m, profit=$0.45m, results for 2003 all loss startup. Balance sheet most assets are infrastructure, lots of prepayment and deposits, $3.6 million due XXM. Equity=$1.1 million.

Accrued liabilities are mostly "other payable", with PRC tax also, plus small amounts of everything else.

I'm not sure I exactly follow the income tax statement.

Prepayment, deposits, and other receivables are almost entirely "other receivables" with no explanation.

Committed cap ex: $3.1 million for constructing 2 BOT wastewater plants, all within 2 years.

There are some items that portray the company favorably.

         NAME             AGE                      POSITION
---------------------- ------- -----------------------------------------------
Chong Liang Pu 46 Chief Executive Officer, President and Director
Ren Cai Ding 46 Chief Financial Officer
Jia He Li 62 Chief Operating Officer
Shi Rong Jiang 30 Director
Lin Hong Ye 62 Director
Mr. Pu was CEO and GM of a similar company from 1999 to 2004.
Mr. Ding was CFO at Pu's previous company, and other stuff before that.
Mr. Li was also at Pu's previous company.
CEO salary is $24K, no other compensation.
Pu owns 57.5% of the company.
Jiang owns 5.1%
Gao Yongping owns 10.1%, no mention anywhere else.

No audit committee.
Audit fees: $56K, no other fees.

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