The challenges all started about 5 minutes before a conference call. The company announced that they needed to restate some earnings due to non cash warrants issues and more notably how they accounted for their asset value of their depleting land assets. Forward a month or so and the audit committee found some odd transactions between the CEO, his mom (who was also on the board) and some outside companies and it all snowballed from there.
The reason I am relaxed about the situation is the company stated in no uncertain terms that the money was not used for personal reasons, and they stated it again in a recent filing. There was no embezzlement, there was no fraud, no theft, just some seriously horrific bad luck, bad timing, bad accounting, etc… The non cash warrant issues are very typical in China and due not effect the cash position or revenue of the company. The net asset value, well, it’s tough to account for the weird 20%/40% contract that NEP has with Petro China so I imagine that was part of it. ..and as far as the transactions go with the ex-CEO and his mom, and outside companies — I can only imagine doing business with the government of China requires some creating business development.
In other words, if you think for a second that business is done “the American way” in China with no one getting paid off, no grey market, all clean and by the book then you’re totally wrong. In fact, the same thing happens in America but Americans do a better job of hiding it with their white collar pro American attitudes. You aren’t perfect, no company is. NEP has had it’s fair share of bad luck, and bad management — but at the end of the day the numbers will tell the story and we’ll see what happens.
I would go over the analysis of these two letters, but rather than writing out a detailed analysis on the blog I would welcome any Bulls Subscriber to a Q&A to go over these two letters and any other question on NEP next week in a webinar. If you’re interested please comment below and we’ll set it up! The one thing I would ask before you get in on the webinar is that you read both of these letters in detail!
Letter from Robert C. Bruce to NEP