• Winsway tried to rebut our accounting analysis by saying that its numbers work because it turns inventory every 2.5 months. In this report, we’ll show that this defense makes no sense. In other words, Winsway has no explanation for how its inventory numbers are unable to be reconciled. The only explanation left is that Winsway is cooking its books.
• Winsway’s continuing denial that its key supplier, Moveday, isn’t a related party is once again not true. Mongolian documents show that named subsidiaries of Moveday in the press release share management and addresses with Winsway, reinforcing that Moveday is an undisclosed related party.
• We expect Winsway’s auditor, KPMG, to be looking into these problems as KPMG’s global head is now based in Hong Kong.

Download the full report here.

Download the full report here.

Jonestown Research has also posted a video that accompanies this report on YouTube:
http://www.youtube.com/watch?v=FmOZX-2jzBw

Jonestown writes the following about Winsway:

For the following reasons, we assert that Winsway has material misstatements in its reported numbers that amount to securities fraud:

• Winsway’s balance sheet inventory values cannot be reconciled with the tons of coal inventories that should be on the balance sheet. This is a clear sign Winsway is cooking its books – in other words, committing fraud. We estimate that Winsway’s inventory is overstated by about HK$1 billion as of H1 2011.
• Official China import data shows volumes far lower than those Winsway reports.
• Winsway’s key transportation provider (and beneficiary of a $40 million loan from Winsway), Moveday, is actually an undisclosed related party. Jonestown Research will soon release video evidence showing this.
• Even worse, Moveday appears to be a shell company. It has no evidence of due establishment in Mongolia, it has no registration card (record), and has never filed to pay taxes. The industry sources we spoke to have never heard Moveday’s name, which would be extremely unusual if Moveday really were operating at the scale Winsway claims. Therefore we think that the described operations of this vendor is largely – if not completely – fictitious.
• Winsway’s investor presentations contradict its prospectus with respect to its import process. We believe that Winsway presents this different picture because a) it believes that most investors don’t read the prospectus (unfortunately this assumption would likely be correct) and b) the presentation version makes a strange business model seem direct and easy to understand.
• Winsway’s fraud should not be a surprise. The “Moody Waters” report gave Winsway 11 red flags. The highest number of red flags Moody’s gave was 12. Sino-Forest only had 7 red flags.
• Through this fraud, Winsway has raised approximately one billion USD. Winsway is planning to use $600 million of this capital to finance the planned acquisition of 60% of Toronto-listed Grande Cache Coal (GCE-TO). Both the Hong Kong Stock Exchange and the Ontario Securities Commission must approve this acquisition.
• We urge the Hong Kong Exchange and Canadian regulators to look closely at Winsway to insure this acquisition doesn’t close using proceeds obtained through fraud. Rather, we believe Winsway’s funds should be returned to its bond (US$500 million) and equity investors. Further, we believe denying this acquisition is likely to protect Canadian jobs and interests. Both of these interests greatly outweigh the interests of the risk arbitrage funds that have piled into GCE in recent weeks.

Download the full report here.

InvestDOOR is distributing Jonestown Research’s content, and we express no opinion as to its accuracy, completeness, or veracity. See the disclaimer in Jonestown Research’s report for information specific to its research.