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September 16, 2014

Volume 7 Issue 4

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Tianhe Rebuts Fraud Claims

A week after being subjected to fraud allegations by research firm Anonymous Analytics, lube additive producer Tianhe denied the claims and accused AA of inaccurate statements.

In its Sept. 1 report, AA accused Tianhe of keeping two sets of books, inflating its earnings and of masking suspect customer relationships in its flourochemicals business.

Tianhe accused AA of making false statements of its own and of flawed logic caused by an insufficient grasp of the industry.

“The report includes a combination of falsified information, [a] forged signature of the [Tianhe’s] chairman and blatantly untrue statements, which the company believes have been used to undermine the company’s reputation and to manipulate the price of [its stock] shares,” Tianhe said in its statement. “The industry analysis set forth in the report also clearly demonstrates a lack of understanding of the specialty fluorochemicals industry, which has contributed to wildly inaccurate conclusions.”

Tianhe acknowledged that it contracted audits by two different firms the past two years, but said they were performed for different purposes – one by by Chinese firm Liaoning Zhongheng for local tax purposes, the other by international firm Deloitte in preparation for its initial public stock offering in Hong Kong in June. Tianhe claimed this is not an unusual practice in such situations.

AA claimed the two sets of books show huge differences regarding revenues and profits – that Liaoning Zhongheng’s book shows consecutive deficits, while Deloitte’s shows growing profits. To support its claim, AA attached photocopies that it claimed were taken from Liaoning Zhongheng’s report. However, Tianhe alleged in its clarification that AA’s documents are fake.

“We have compared these [AA] pages with the relevant pages of the financial statements audited by Liaoning Zhongheng,” the company stated. “This clearly shows that they are materially different.” Tianhe provided photocopies that it said were true copies from Liaoning Zhongheng’s audit that are consistent with Deloitte’s report. It also attached a statement from Liaoning Zhongheng confirming that AA’s photocopies are not from the auditing firm’s report.

AA accused Tianhe of wildly misstating its tax payments, but Tianhe confirmed that it paid income tax of RMB201 million (U.S. $32.2 million), RMB365.8 million and RMB438.3 million in 2011, 2012 and 2013 respectively, and the company claimed it has tax receipts as evidence.

AA has also alleged that Tianhe inflated its sales of pure anti-mar – an expensive, high-grade product of its flourochemicals business. AA cited various industry sources as proof that Tianhe’s claimed sales are twice the size of global demand, which AA said is mainly used in production of smart phones and similar devices. Therefore, it concluded that Tianhe lied to investors.

In its clarification, Tianhe countered that AA’s report understated the anti-mar market size by “at least five times,” and noted that anti-mar actually is applied in many areas other than smart devices, such as on automatic teller machines, industrial touch screen panels, solar panels and digital cameras.

In suggesting a motive for AA’s report, Tianhe alluded to the fact that some of the organization’s members took short sale positions that would yield profits if the price of Tianhe’s stock falls.

“Our directors are at a loss to understand why a firm such as Anonymous Analytics would publish such a wholly refutable report aside from wanting to directly or indirectly profit from such an action,” Tianhe concluded in the clarification, threatening it would take legal action against AA and “individuals responsible for the report.”

In the clarification, Tianhe also says its email system – used to communicate with the stock exchange – was recently hacked into, which prompted the company to issue the clarification immediately to avoid possible rumors in the future.

Trading of Tianhe’s shares on the Hong Kong Stock Exchange have been suspended since Sept 2.