{ "docId": "019dd923-622c-750b-8b95-d44d4f82ec42", "docSlug": "637d86f8f55c", "documentTitle": "Duoyuan Global Water Inc. (DGW)", "authorId": "51_Muddy_Waters", "authorName": "Carson C. Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2011-04-04 00:00:00", "orientation": "portrait", "aspectRatio": 0.7070758, "pageNumber": 9, "pageCount": 21, "prevPage": 8, "nextPage": 10, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 4, "notes": "This is a page from a Muddy Waters research report alleging fraud. It uses investigative journalism techniques to expose operational and financial inconsistencies.", "elementsJson": [ "paragraph", "footnote" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b95-d44d4f82ec42/9", "deckHref": "/decks/019dd923-622c-750b-8b95-d44d4f82ec42", "deckJsonHref": "/decks/019dd923-622c-750b-8b95-d44d4f82ec42.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b95-d44d4f82ec42#slide-9", "components": [ { "bbox": null, "kind": "callout", "text": "There are Major Errors in DGW's Audit, Showing Inattentiveness and Providing Management the Opportunity to Perpetuate the Fraud.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-0934-771a-b7a8-59f21cdcdcbe", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.11, "w": 0.78, "x": 0.11, "y": 0.52 }, "kind": "paragraph", "text": "We visited DGW’s Beijing headquarters on two occasions – once to call on DGW as a potential client, and once to inquire about renting office space. DGW occupies a small portion of the building, and had only four employees (and many empty desks) in the office when we visited. Contrary to disclosures in DGW’s SEC filings, companies with no affiliation to the Duoyuan Group rent the majority of the space in the building. Despite DGW’s claim that its founder / chairman / CEO, Wenhua Guo, devotes most of his time to running DGW,6 two Beijing office employees stated that Chairman Guo is rarely in the office.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "611a680e-b542-4539-aba5-c86068540fb2", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.13, "w": 0.78, "x": 0.11, "y": 0.21 }, "kind": "paragraph", "text": "During our three tours of the factory, we witnessed minimal production activity. There was much work in progress laid out on display, but few workers and tools around it, and little noise or material movement. The production equipment we saw was not particularly sophisticated; rather, it was typical of Chinese manufacturers, involving lower-end Chinese made equipment and relying on labor-intensive (versus machine intensive) production practices. More importantly, results of the multi-million dollar capital investment projects and upgrades DGW claims to have undertaken were conspicuously absent (see DGW Shows Little Evidence of Using Investor Funds for Capital Expenditures).", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "8f84b62e-a6c6-4f6f-a00f-8d6239999c3d", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.78, "x": 0.11, "y": 0.7 }, "kind": "paragraph", "text": "There are four clear indications that DGW’s auditor, Grant Thornton Hong Kong,7 was inattentive during its audits of DGW.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a51be376-72fa-4028-a716-8702539b3688", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.04, "w": 0.78, "x": 0.11, "y": 0.09 }, "kind": "paragraph", "text": "shift, and the factory and its grounds were completely dark from 6 pm onward. Unless the 170 workers wear night vision goggles, it would be very difficult for them to work.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "c974d022-c14f-480f-8a19-222bf85e9df8", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.11, "w": 0.78, "x": 0.11, "y": 0.39 }, "kind": "paragraph", "text": "We obtained the 2009 Annual Inspection report for Beijing, which shows that it generated revenue of RMB 3.3 million in 2009. The Annual Inspection report is derived from the SAIC financials. This number likely consolidates some – if not all – of DGW Langfang’s revenue. We think it likely consolidates all of DGW Langfang’s revenue because if we assumed that Beijing generates 25% of actual revenue (the same as its proportion of reported revenue), then its 2009 revenue would have been RMB 0.8 million (US$0.1 million), giving the Company a total 2009 revenue base of RMB 3.1 million (US$0.4 million).", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d7dab82d-88f1-4583-ab79-1c3e2b97dafa", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.78, "x": 0.11, "y": 0.14 }, "kind": "paragraph", "text": "In conversations with DGW employees, we learned that most of the office workers are recent college graduates. They are apparently paid average wages for the area, but accepted the offer from DGW because they had no alternatives. It seems that many of the employees are searching for jobs elsewhere.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "e9142341-6817-4254-bb65-604049e67fd0", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.78, "x": 0.11, "y": 0.75 }, "kind": "source-note", "text": "6 DGW 2009 20-F, p. 15.\n7 Grant Thornton’s Hong Kong office merged with the Hong Kong office of BDO International in November 2010. This follows the October 2009 disappearance of GT Hong Kong’s managing partner amid allegations that he stole over $12 million from friends and clients. (http://www.cfoinnovation.com/content/commentary-when-accountant-disappears) These events raise serious questions about the culture of GT’s Hong Kong office, and may partly", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "5fea5639-a658-4617-8684-f47a387e9648", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.04, "w": 0.78, "x": 0.11, "y": 0.65 }, "kind": "title", "text": "There are Major Errors in DGW's Audit, Showing Inattentiveness and Providing Management the Opportunity to Perpetuate the Fraud.", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "139795ae-00b7-4ba0-8125-0b7c6356d312", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.25, "x": 0.11, "y": 0.36 }, "kind": "title", "text": "Beijing – Little to Nothing Doing", "attrs": null, "subkind": "subtitle", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "7cf98b44-bef2-44c8-bb56-c2457edbd4f1", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 9, "from": 3, "beatId": "d8f81630-5fdd-4a37-9454-daeb4fd2b7fe", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "The Monster", "beatSlug": "overcoming-monster-the-monster", "evidence": "The document presents various contradictions and irregularities in DGW's audit reports and financial dealings.", "position": 1, "confidence": 0.8, "parentBeatName": "Hook", "parentBeatSlug": "hook" } ], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }