Muddy Waters initiating coverage on RINO – Strong Sell

Muddy Waters LLC has initiated coverage on RINO International Corp. (RINO) with a Strong Sell rating and a $2.45 price target.

RINO claims to be the leader in selling desulfurization (“FGD”) and other environmental equipment to Chinese steel mills. It reported 2009 revenue of $193 million. In reality its revenue is under $15 million, and its management has diverted tens of millions of dollars for its own use. We value RINO based on the cash we believe remains in the company after the most recent raise.

• RINO’s FGD sales (60% to 75% of revenue) are much lower than it claims. We found that many of its customer relationships do not exist.
• Chinese regulatory filings show that RINO’s consolidated 2009 revenue was only $11 million, or 94.2% lower than it reported in the US. We show that the Chinese numbers are credible.
• RINO’s accounting has serious flaws that are clear signs of cooked books.
• RINO’s management is draining cash from the company for its own business and personal uses. The management is in flagrant breach of its VIE agreements, which require it to pay income to RINO (as opposed to taking it).
• RINO’s balance sheet has an astonishingly small amount of tangible assets for a manufacturer. Rather, it is filled with low quality “paper” assets that balance out the inflated earnings, and likely hide leakage.
• RINO is not the industry leader it claims to be in the steel sinter FGD system market. Rather, it is an obscure company in a crowded field, and is best known for its failed projects. Its reported margins are two to three times what they really are. Its technology is sub-par.
• We are not sanguine about management “borrowing” $3.2 million to purchase a luxury home in Orange County, CA the day that RINO closed its $100.0 million financing.

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