Morgan Joseph's Share Comments on Fraud Allegation at Zhongpin

Zhongpin HOGS is the most recent Chinese reverse-merger to come under fire. The company, as its ticker may suggest, is a pork processor located in China. On Wednesday, The GeoTeam published a report on the company, alleging that it was defrauding investors. In its report, The GeoTeam cited financial filings it considered to be suspicious, noting perceived issues with both the company's CAPEX and revenue growth. In response, the company fired back, announcing a $30 million share repurchase program, and releasing a statement refuting The GeoTeam's report. Yet, the company's assurances may not have been enough, as a second fraud report was released on Thursday. This second report, released by Alfred Little, agreed with The GeoTeam's findings, then went further. Alfred Little writes, "We focus on the phony profits of one key HOGS subsidiary, Shanghai Zhongpin…HOGS never disclosed the existence of SZFC in any of its SEC filings, yet management took investors on a tour of this entity's stores on July 29…according to SAIC records, SZFC ceased operation since 2008 due to poor business management." "We believe HOGS deliberately hid the existence of SZFC so analysts and investors…could not find out how bad its retail business really is," Alfred Little adds. Benzinga reached out to Stephen Share, an analyst at Morgan Joseph Triartisan. Share maintains a Buy rating on the company, despite the fraud allegations. "GeoTeam's concerns on HOGS CAPEX is like comparing apples to oranges," Share stated. "The company has been investing heavily into its cold chain storage, which GeoTeam did not account for." Share was pleased with Zhongpin's response to the GeoTeam's report. "I'm glad they instituted the $30 million buyback. It shows that management is confident with the company," he added. Yet, Share would not completely rule out the company being a fraud. "We can't completely rule out the possibility of a fraud; however, we think it is unlikely management would be willing to buy back 10% of the shares outstanding if it was indeed a fraudulent company. In addition, the risk of fraud is now in the stock price, in our view, given it trades at just 4.4x our 2011 EPS estimate," Share explained. If the allegations prove to be true, Zhongpin would be yet another fraudulent Chinese reverse-merger in a long line including Sino Forest SNOFF and Rino International. Of course, these negative reports may simply be short-investors looking to take advantage of a trend. With the current level of skepticism surrounding Chinese reverse-mergers, any questionable report may have the capacity to move markets. Shares of Zhongpin closed near $8.44 on Thursday, down well over 1.50% on the session.