Accusations dim future of AgFeed

Mateusz Perkowski

Analysis

By MATEUSZ PERKOWSKI

Capital Press

Two years ago, the future looked bright for AgFeed Industries.

The Chinese hog-and-feed producer -- incorporated as a publicly traded company in the U.S. -- reported record revenues and solid profits at the end of 2009.

The outlook seemed exciting, with AgFeed partnering with Western genetics and farming companies to bring Chinese hog production into the 21st century.

"Market forces, coupled with Chinese government's policy of industrialization and commercialization of the key industry, continues to signal positive change," Songyan Li, the company's former chairman said at the time.

Some investors now believe those glowing financial reports and forecasts were part of an illusion created by executives.

AgFeed's stock price, which once topped $20 per share, is now trading at about 50 cents as stockholders have barraged the company with lawsuits accusing it of misleading analysts and investors.

"The defendants made false and misleading statements and engaged in a scheme to deceive the market and a course of conduct that artificially inflated the price of AgFeed securities," according to the first of 11 legal complaints filed against the company in the past month.

These investors are seeking a class action lawsuit to recover damages from AgFeed's dramatic plunge in stock price.

The litigation threatens to become another burden for a company that is already struggling financially.

This summer, AgFeed reported losing more than $15 million during the first half of 2011. Since then, the company has filed a report with the U.S. Securities and Exchange Commission admitting its losses were probably even steeper.

AgFeed's downward slide was already becoming apparent in 2010, when it reported its first-ever annual loss. The company blamed underperforming "legacy" hog farms in China that were being restructured or eliminated.

According to disgruntled investors, there's more to the story.

The complaint contends that since at least early 2009 AgFeed consistently overstated its earnings by underestimating the amount of bad debt owed to the company.

Many financially strapped farmers weren't paying for the feed they'd obtained from the company, but AgFeed minimized the full effect of the debts on its accounts, the complaint said.

By this summer, however, changes to AgFeed's accounting system forced it to "finally admit the true health of the company" and acknowledge that its ability to collect payments would fall far short of previous projections, the complaint said.

As AgFeed filed reports revising its financial health, its share price plummeted -- eventually falling so low that the stock was delisted from the NASDAQ market in October.

The company announced that its board of directors would assemble a special committee to investigate accounting practices in China, but that failed to prevent lawsuits alleging violations of federal securities law.

AgFeed's misadventure has had other consequences for the company, which had planned to expand U.S. operations.

In 2010, the company bought M2P2, a major U.S. hog producer with operations in several states, in a deal valued at more than $20 million. This year, the company announced plans to take over a slaughterhouse and a sausage producer.

AgFeed's U.S. operations were projected to contribute to about 60 percent of its revenues this year and in 2012, but it recently terminated the acquisition plans and said next year's earnings projection "should no longer be relied upon."

Philip Vasey, director of the Marble Arch Research stock analysis firm, said he was bewildered by what has happened at the company.

Analysts from Vasey's firm have been unable to communicate with AgFeed representatives and the extent of the company's problems is unknown, he said.

Like other stock analysis firms, Marble Arch had a positive view of Agfeed's strategy of modernizing Chinese hog production and expanding U.S. operations, Vasey said.

"I figure if you can't rely on the SEC returns, what can you rely on?" he said.

The company had several experienced American executives who seemed genuine about AgFeed's prospects for growth, Vasey said. In his opinion, these executives were caught off guard by problems across the Pacific.

"My observation is they appear to have been let down by their Chinese people," he said.

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