Short-seller's report

1. 13 October 2014
BY EMAIL
Deloitte Touche Tohmatsu
35/F One Pacific Place
88 Queensway
Hong Kong
Fax: 852 2541 1911
Joseph Lo
Deloitte China Chairman
Jolo@deloitte.com.hk
Chris Lu
Deloitte China CEO
chrislu@deloitte.com.hk
Kester Yuen
Managing Partner of Southern Region
kesyuen@deloitte.com.hk
RE: OPEN LETTER TO DELOITTE TOUCHE TOHMATSU REGARDING TIANHE CHEMICALS GROUP LTD.
Dear Deloitte Touche Tohmatsu,
As you are aware, we have published several reports on our website detailing extensive evidence that supports
our view that Tianhe Chemicals Group Ltd (1619.HK) has engaged in fraud in connection with its IPO by grossly
misrepresenting the size and scope of its business and making other misrepresentations and false statements to
the market.1
We are writing this open letter to you, Deloitte Touche Tohmatsu, the reporting accountants for Tianhe’s IPO, or
its affiliate, Deloitte Touche Tohmatsu Certified Public Accountants LLP, in order to underscore what we believe
is evidence that Tianhe continues to make false representations to the market regarding its business including
regarding its taxes. We believe Tianhe is making false representations and providing falsified documents to you,
its auditors, as part of its efforts to obtain your sign off on its accounts, a sign off that we believe should be
properly withheld, based upon all of the evidence.
In this letter, we underscore some of the previous evidence, as well as some new evidence that shows
conclusively that Tianhe has lied about the taxes it has paid, and that the tax confirmations that it has
presented to you are either the result of bribes or have been fabricated.
1 http://www.anonanalytics.com/2014/09/tianhe-chemicals.html
1

2. In response to our analysis and conclusions contained in our reports, Tianhe's Management team has released
several clarification announcements via the Hong Kong Stock Exchange. We believe that in making these
clarification announcements, Tianhe has made statements that are contradictory to previous representations,
as well as to the Deloitte-audited SAIC filings and financial statements, and that Tianhe has now backed itself
into a corner and cannot keep up with all the lies it is telling.
Let us explain:
In its 8 October clarification announcement, Tianhe claimed to have obtained tax confirmations from Liaoning
Yi County State Tax Bureau and Fuxin City Haizhou District State Tax Bureau confirming that Tianhe paid all its
taxes (VAT + Income taxes paid) consistent with its IPO prospectus.
In making its claim, Tianhe presented the following tax breakdown by its only two operating subsidiaries:
Source: http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf pg. 8.
Based on this tax breakdown, it would appear that on the one hand Fuxin Hengtong is barely profitable
(consistent with our findings and prior assertions) while on the other hand Jinzhou DPF-TH is incredibly
profitable (inconsistent with our findings).
Accordingly, it appears to us that Tianhe was only able to fabricate/bribe tax confirmations for Yi County (where
Jinzhou DPF-TH is based) and not from Fuxin City (where Fuxin Hengtong is based).
However, there are three primary reasons to believe that the tax confirmation from Jinzhou DPF-TH is fake:
2

3. First, and most important, we have conclusive evidence that the tax confirmation obtained for Jinzhou DPF-TH
is false because the numbers do not match the Deloitte-audited SAIC filings.
According to the tax confirmation presented by Tianhe, Jinzhou DPF-TH paid total taxes of RMB458 million in
2011 and RMB781 million in 2012:
Source: http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf Attachment 5
3

4. However, according to the Deloitte-audited consolidated and standalone cash flow statement, the amount of
total taxes paid was far less:
There is no ambiguity that the line item '支付的各项税费' which means 'all taxes paid' includes VAT, income
taxes, and all local taxes.2
Therefore, according to Deloitte, Jinzhou DPF-TH paid total taxes of RMB212 million in 2011 and RMB390
million in 2012. Yet Tianhe’s newly obtained “tax confirmation” claims that Jinzhou DPF-TH paid RMB458
million in 2011 and RMB781 million in 2012.
This inconsistency is all the proof you need to see that Tianhe is lying again. The Deloitte-audited financial
statements including the above cash flow statement prove it conclusively.
(We suspect we already know how Tianhe will respond to this damning discrepancy, and we have preempted
our response in Appendix A.)
To be clear, by referring to the Deloitte-audited SAIC documents we are not conceding that they are accurate.
In fact, we believe Deloitte has been duped into signing off on fake financial information as we explained in our
2 September 2014 report.3
But rather, what we are saying is that Tianhe's management team is so incompetent
at committing fraud, that their fake tax confirmation is not even consistent with their fake Deloitte-audited SAIC
filings.
2 http://www.chinaacc.com/new/635_649_/2009_8_12_le0075121890020.shtml
3 http://www.anonanalytics.com/2014/09/tianhe-chemicals.html
4

5. Second, we note that the 'income tax' numbers for Jinzhou DPF-TH are all rounded numbers, but for Fuxin
Hengtong they are all exact numbers (refer back to page 2). We find it highly unlikely that a professional tax
authority would issue an official tax confirmation using rounded numbers. This is a glaring red flag.
Third, the tax confirmations presented by Tianhe for its Jinzhou DPF-TH subsidiary do not match the tax reports
previously presented and published by the Yi County government (where Jinzhou DPF-TH is based and pays
taxes). These discrepancies are another glaring red flag.
For example, according to an official announcement by the Jinzhou government, the total tax budget of Yi
County in 2011 was RMB190 million, and by 12 December, 2011, the County had collected RMB170 million. Yet
Tianhe claims that Jinzhou DPF-TH paid RMB458 million in 2011:
Source: http://www.jz.gov.cn/lnjz/2011/12/16/152230.html
5

6. By 30 June 2012, Yi County State Tax Bureau had collected all tax income of RMB147 million, which was 52.72%
of the whole year's planned tax collection:
Source: http://www.ln.gov.cn/zfxx/qsgd/yks_1/yx/201207/t20120720_916081.html
In other words, 2012's entire planned tax collection was around RMB300 million. Yet, Tianhe's clarification
announcement claims that Jinzhou DPF-TH paid RMB781 million in taxes in 2012.4
That's about 2.6 times the
total tax income of the entire County!
In Tianhe's clarification announcement, they claim they have addressed this discrepancy,5
but a careful read of
their actual announcement shows that the Company completely ignores it.6
4 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf pg. 8
5 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1010/LTN20141010007.pdf pg. 1
6 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf
6

7. As the auditor that signed off on these filings, we respectfully suggest that you consider your position in light of
these obvious discrepancies. We request that you and your audit teams carefully study the issues we have
raised in this letter and in our previous reports and be prepared to make the hard decisions we believe you
must make on behalf of investors and the integrity of the global capital markets. If we are correct that Tianhe
is a fraud and Deloitte fails to inform investors and regulators of this risk, Deloitte may also be held liable in
courts of law and in the court of global public opinion in the event of Deloitte’s failure.
You may contact us for additional information at this email: anon.analytics@neomailbox.net
Sincerely,
Anonymous Analytics
7

8. Appendix: Tianhe's Response to our First Point
We suspect that Tianhe will respond by claiming that VAT taxes are not shown on the income statement. This is
true, but they are clearly shown on the cash flow statement, and this is a basic accounting principle every entry-
level accountant should know, including the auditors at Deloitte.
However, to drive home the point, we cite pages 44 and 45 of the textbook titled “Chief Tax Officer” published
by Tsinghua University Press in 2005 and authored by He Zhidong (ISBN 7302098700, 9787302098706):
This text clearly explains that “all taxes” includes VAT taxes. A second source of information is here:
http://www.chinaacc.com/new/635_649_/2009_8_12_le0075121890020.shtml
Furthermore, there are any number of listed Chinese companies that provide examples of this principle:
New Material (600636:SS) reports income statement taxes of RMB48 million in 2012 and RMB33 million in
2013. However, its cash flow statement reports total taxes paid of RMB213 million in 2012 and RMB118 million
in 2013.
8

9. Kweichow Moutai (600519:SS) reports income statement taxes of RMB4.7 billion in 2012 and RMB5.5 billion in
2013. However, its cash flow statement reports total taxes paid of RMB10.2 billion in 2012 and RMB12.5 billion
in 2013.
Lubei Chemical (600727:SS) reports income statement taxes of RMB21 million in 2012 and RMB9 million in
2013. However, its cash flow statement reports total taxes paid of RMB76 million in 2012 and RMB53 million in
2013.
As is plainly obvious from the above examples and textbook excerpts, all taxes, including income taxes, VAT
taxes, and local taxes are represented in the cash flow statements.
9