Release Date: 9 October 2014

Tianhe Chemicals
Response to Tianhes
8 October Clarification Announcement
Ticker: 1619.HK
Market Cap: US$7.6 billion
Recent Price: HK$2.31
Target Price: HK$0
Expected Return: 100%

Conclusion: Strong Sell
You should have expected us

anon.analytics@neomailbox.net
Twitter: @anonanalytics
www.anonanalytics.com



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Dont be stupid and invest in the public markets unless you are prepared to do your own homework and due diligence.







Disclaimer

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Executive Summary:

Taxes: Tianhe still cannot overcome public records and information that calls into
question the purported tax certificates it claims to have obtained, and in what
appears to be evidence that it could only bribe one of the two relevant tax
agencies, it shifted all of its purportedly paid taxes to one of its subsidiaries,
leaving the other with almost no profit.

Fuxin Hengtong's profitability: in order to maintain the lie, Tianhe has had to
shift most of its purported revenue to one subsidiary, leaving the other with no
revenue not only is this inconsistent with Tianhes IPO prospectus and the
story it wants investors to believe, but Tianhes own auditor has published a
document showing an obvious flaw in logic.

CITIC International: Tianhe continues to fumble with its attempts to answer our
evidence regarding CITIC, and fails to present any detailed revenue and business
confirmation from CITIC international guys, it shouldnt be this difficult if what
you say is true!

The anti-mar market and Tianhe's still-unnamed customers: Tianhe still cant
justify its anti-mar sales especially compared to what the industry knows to be
true, and we present new evidence from an independent industry research firm
showing that Tianhes anti-mar claims continue to defy mathematical possibility.


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Introduction

After well over a month, on the evening of 8 October, Tianhe attempted out a longer rebuttal to our 2 &
15 September reports accusing it of fraud.

Given the amount of time it took for Management to concoct its defense, we expected something
grandiose in nature.

Instead, what we got were more lies and absurd statements by Management that have likely shocked
market participants.

We should note that we are not the only ones that believe Tianhe is a fraud. Since the release of our
initial report, multiple parties have reached out to us with evidence that reaches the same conclusion.
The evidence received include recorded conversations, documentary evidence, and internet source
material.

We are vetting all this evidence and will release a more detailed response shortly.

However, in the interim, we want to touch on some of the more obvious lies Management has made in
its October 8 response, namely as it relates to:

1. Taxes
2. Fuxin Hengtong's profitability
3. CITIC International
4. The anti-mar market and Tianhe's still-unnamed customers.




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1. Taxes

Management presents letters which it claims are from Liaoning Yi County State Tax Bureau and Fuxin
City Haizhou District State Tax Bureau. Presumably, Management would want the public to believe that
these letters exonerate and confirm that Tianhe paid all its taxes, based on the numbers presented in
the IPO prospectus.
1


However, what's interesting about these documents is that the letter from Fuxin City Haizhou District
State Tax Bureau shows negligible taxes paid (consistent with our findings), and the document from Yi
County State Tax Bureau purports to show that Tianhe paid massive taxes.

So what's going on here?

We believe Tianhe was able to bribe or forge documentation from Yi County, but was unable to bribe or
forge documents from Fuxin City. Heres why we think this:


2011

According to 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. However, Management claims
that Jinzhou DPF-TH paid RMB458 million in 2011:


1 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf pg. 8

5

Source: http://www.jz.gov.cn/lnjz/2011/12/16/152230.html

2012

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:


6

Source: http://www.ln.gov.cn/zfxx/qsgd/yks_1/yx/201207/t20120706_906940.html


In other words, 2012's entire planned tax collection was around RMB300 million. This is consistent with
the government article presented on page 19 of our 2 September 2014 report.

Yet, Tianhe's clarification announcement claims that Jinzhou DPF-TH paid RMB781 million in taxes in
2012.
2
That's about 2.6 times the total tax income of the entire County!

Notably, the title of the above article is Jinzhou Yi County 'Star' companies contributed to new record
of state tax revenue. Jiudaoling Coal mine and two subsidiaries of Huishan Dairy were mentioned in
the article, but Jinzhou DPF-TH is notably absent. We would imagine that a company contributing 260%
of the County's entire tax collection would be both noteworthy and a mathematical marvel apparently

2 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf pg. 8

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not, which is why we simply dont believe in the veracity of this new purported evidence that Tianhe has
put forward.

To prevent Management from claiming they are not aware of the source of such information (as they
did throughout their entire rebuttal), the above-noted information can also be found on the website of
the Liaoning Province government:

Source: http://www.ln.gov.cn/zfxx/qsgd/yks_1/yx/201207/t20120720_916081.html



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From the above information, we can conclude one of two things:

1) that numerous official government reports are faulty and tax collection rates are understated by
an order of magnitude a crime that would be a death sentence for the officials involved given
the large amounts of money; or
2) Tianhe has faked tax documents.

We will let the market decide.

2. Fuxin Hengtong

As we noted on page 4, it seems obvious that Tianhe was able to forge/obtain fake tax documents for its
Jinzhou DPF-TH subsidiary but not for its Fuxin Hengtong subsidiary. As a result, we believe that
Management has therefore attempted to shift all the revenue and profitability generated by Tianhe to
its Jinzhou DPF-TH sub.

According to its prospectus, Fuxin Hengtong and Jinzhou DPF-TH are Tianhe's only two operating
subsidaries.
3
Tianhe had never broken out the revenue split between Fuxin Hengtong and Jinzhou DPF-
TH until they were forced to in their 8 October clarification announcement. And when they did, we
suspect all market participants were shocked to learn that according to Management, Fuxin Hengtong
only generated 6.8% to 2.6% of Tianhe's total revenue in the 2011-2013 track record period.

More comical, Management revealed that Fuxin Hengtong was loss-making in the periods prior to 2011.

This revelation is so ridiculous that it almost seems Management is shorting their own stock:

3 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0609/LTN20140609007.pdf pg. I-2

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Source: http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf pg. 8


According to Management, the purported reason Fuxin Hengtong's business operation is so laughably
small is due to two reasons:

1) During the Track Record Period, the Group mainly produced TI, HFE and PTFE at Fuxin Hengtong,
which have lower average selling prices than specialty fluorochemicals manufactured at Jinzhou DPF-TH,
such as TEI and other downstream specialty fluorochemicals products
4


2) In addition, the majority of the products from Fuxin Hengtong were used by the Group to produce TEI
and downstream specialty fluorochemicals at Jinzhou DPF-TH. During the Track Record Period, the
external sales of Fuxin Hengtong were mainly attributed to sales of HFE and PTFE.
5


4 Ibid pg. 10
5 Ibid pg. 10


10


Huh?? Both of these claims are false and easily refutable.

First, according to Fuxin Hengtong's own website, the subsidiary sells high-margin/high value products
including surface treatment agents and the Company's crown jewel chemical, anti-mar:

Source: http://www.htfluo.com/shop/dsfp/


Management was given over a month to prepare this statement but their clarification announcement
is not even consistent with their own website. This is a laughable.

Second, Management claims that the majority of products from Fuxin Hengtong were used by Jinzhou
DPF-TH to produce TEI and downstream specialty fluorochemicals. Obviously, this excuse is used in

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order to shift Tianhe's revenue and profits to Jinzhou DPF-TH. But in doing so, Management makes a
vital mistake concerning Chinese tax accounting. In China, related-party transactions or transfer pricing
have to be accounted for at arm's length transactions. Deloitte, Tianhes auditor, even published a
document on the subject.
6


What this means that is that it is impossible for Fuxin Hengtong to simply transfer costs to Jinzhou DPF-
TH. Accordingly Fuxin Hengtong would have recorded substantial profits from the internal sales, which
should be reflected in its VAT and income tax statement. But as Management clearly demonstrated, it's
not.

We are surprised that Management would use such a bad excuse when their own auditor has published
a document showing an obvious flaw in logic.



3. CITIC International

We imagine Tianhe's defense of its purported transactions with CITIC International was painful for
investors to read. On page 54 of our 2 September 2014 report, we used information disclosed by CITIC
Bank to show that CITIC International cannot possibly conduct business of the size claimed by Tianhe.

Instead of doing the sensible thing and getting detailed revenue and business confirmation from CITIC
international to present to investors, Tianhe used an online recruitment post as evidence that CITIC
International is large enough to account for 40.2% of its SFC revenue. It almost seems like Management
has given up trying to maintain any veneer of truth and professionalism.

Furthermore, on page 10 of our 15 September 2014 follow-up, we noted that Tianhe claimed that CITIC
International purchased RMB1.5 billion from Tianhe in 2013. Of this amount, RMB1.2 billion was SFC
products. Tianhe claims in its draft prospectus that CITIC International further re-sells a large portion of

6 http://www.deloitte.com/assets/Dcom-
China/Local%20Assets/Documents/cn_mfg_newtransferpricingrequirementsinchina_100609.pdf pg. 10

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our products to their clients overseas.
7
However, we showed that this statement was impossible,
because according to customs data, CITIC International only exported goods valued at US$37 million in
2013, and only US$0.7 million of this amount could possibly be considered SFC products.

We also provided a link where PRC government customs data can be obtained.

In its response, Tianhe claims that (I) they couldn't find the export data from the source we provided,
and that (II) we quoted the Company's draft prospectus instead of its final prospectus in regards to
CITIC's export volume.

Regarding I) we are surprised that the Management team of a US$8 billion company has trouble finding
export data or using links. But for those not computer literate, we will provide two additional links of
export data providers:

http://www.jkck.com

http://www.chinarequest.com

Regarding II) we note that the draft prospectus was circulated to potential investors. If Tianhe did not
want investors to rely on the draft prospectus, they should not have circulated it.

In any case, the final prospectus has similar language to the draft prospectus (except for explicitly
naming CITIC International as the customer):

7 Draft prospectus, pg. 133

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Therefore, even the final prospectus in conjunction with PRC export data show that Tianhe has lied in
their response about the extent of its relationship with CITIC International.



4. The Anti-Mar Market

We don't know who uses our most profitable product, but trust us... we really sell it

It's amazing that Management can release a 55 page report and not mention a single end-user of its
most profitable and lucrative chemical, and still expect to be taken seriously.

Tianhe continues to claim that it sold 8 tons of pure anti-mar in 2013 for approximately RMB1 billion. It
is primarily the sale of anti-mar that gives Tianhe operating margins that are twice that of its closest
competitors, yet no one in the industry that we have talked to seems to have heard of Tianhe or even
believe that the size of the anti-mar market is big enough to make Tianhe's 8 ton claims plausible.

In its response, Tianhe simply claims to not know who its end-users are.
8
This is insane and we doubt
many investors will take Tianhe's claims seriously. Even Daikin knows that its end users include Apple

8 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1008/LTN201410081263.pdf pg. 14

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and Samsung. Furthermore, Tianhe admits in its IPO prospectus that specialty chemical businesses
typically have close customer relationships, relatively high R&D intensity, often require stringent
customer/certification validation...
9
In this context, how can Tianhe claim it has no idea who the end
customers for its most lucrative product are?

Anti-mar market size

By Tianhe's own estimates, 1 gram of pure anti-mar can coat 200 smartphones. At 1 million grams per
ton, this implies that Tianhe sells enough anti-mar to coat 1.6 billion smartphones. According to IDC
(page 58 of our 2 September report), the global shipment of all smartphones was only 1 billion and the
global shipment of tablets was only 217 million. This effectively means that Tianhe supplies enough anti-
mar to the market to coat all of the smartphones sold in 2013 and half of all tablets sold in 2013. As
agreed by all experts we interviewed, smartphones and tablets accounted for the vast majority of global
anti-mar consumption.

In its response, Tianhe attempts to provide some plausibility to its claims of selling 8 tons of pure anti-
mar by claiming possible applications in solar panels. This is false and misleading information. According
to an expert from Daikin, anti-mar is not used on solar panels. The reason for this is obvious: solar
panels do not need anti-fingerprint agents on them. Furthermore, given that solar panels are used
outside, wind and dust particles can easily destroy the thin film which makes it impractical and
prohibitively expensive.

In fact, Daikin sells an entirely different product for solar panel applications, namely weather resistant
fluoropolymer film which is an intermediate and not a downstream SFC product:


9 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0609/LTN20140609007.pdf pg. 70

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Source: http://www.daikin.com/products/chm/index.html









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Anti-Mar Market Research

In our 2 September 2014 report, we estimated that the entire global market for anti-mar was 4 tons of
pure concentrate, or an estimated US$300 million. This is in contrast to Tianhe's purported sale of 8 tons
of pure anti-mar. It turns out that we were too generous.

Market Intelligence & Consulting Institute (MIC), headquartered in Taipei, is a division of the Taiwan
government's Institute for Information Industry and is an industry-recognized, independent, primary
research firm that conducts market research on the technology sector and industries. MICs research is
available for purchase via its website, and it has recently published a definitive industry report entitled
Anti-Mar Coating Materials Market and Supply Chain Development,
10
dated 1 October 2014, by
Senior Industry Analyst Pei-Fen Hsieh,
11
which outlines the development of anti-mar coating materials
used for cover lenses of smartphones, tablets and eyeglasses; examines market development and supply
chains of those materials and sets out the size of the anti-mar market. Anyone can purchase the report
online.
12


The MIC reports findings and conclusions further show that Tianhes claims to have sold eight (8) tons
of 100% concentrate anti-mar substance in 2013 worth RMB 1 billion are false because they cannot be
true based upon MICs estimation of the actual market size of anti-mar:

The market size of anti-mar as to smartphone and tablets is set out at Figure 2, on page 3 Worldwide
Anti-mar Coating Material Cost & ASP for Smartphone and Tablet, 2011-2013.
13
Figure 2 (copied
below) drills down and isolates the data that is directly relevant to the issues: the actual cost of

10
Report is available at: http://mic.iii.org.tw/english/Store/en_3_mic_store_1_2_1.asp?doc_sqno=10144

11 Ms. Hsiehs bio is available at
http://mic.iii.org.tw/english/aboutmic/en_1_about_mic_4_1.asp?pno=t921010 it is noted that she has
extensive experience in the panel industry.

12 The report price is US$2,000.

13
Figure 1 Worldwide Anti-mar Coating Market Value (Materials and Processing included) for Smartphone
and Tablet, 2011-2013 shows the total end user cost of Anti-Mar, which is inclusive of materials,
production and employment costs, capex, markups and margin, and does not isolate the cost of anti -mar
material. Figure 1 is only relevant to show total market value of all of the components including the value
added by production, which is not exactly relevant for our analysis.

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purchasing Anti-Mar by end users, or, in other words, the amount of money paid by end-users to
purchase anti-mar from suppliers (which is another way of saying the amount of total global anti-mar
sales numbers related to those products):


Figure 2 shows that total global market size for Anti-mar for Smartphone and Tablets for years 2011,
2012, and 2013. Focusing on 2012 and 2013, the data is as follows:

For 2012, the total anti-mar market size for Smartphone and Tablets was US$ 105.2 million (US$
70.5 million for SmartPhone Material Cost + US$34.7 million for Table Material Cost);

For 2013, the total anti-mar market size for Smartphone and Tablets was US$116.3 million (US$
75.7 million for SmartPhone Material Cost + US$ 40.6 million for Table Material Cost).

Of course Smartphone and Tablets do not represent the entire range of uses for anti-mar, but we do
know how much they represent:


18

According to a Display Bank/IHS Report, for 2012 smartphones and tablets together accounted for
around 63.5% (see chart below) of the touch panel product market.
14




The table above shows the following:

2011 - 56% of the anti-mar market was for Mobile Phones and Tablet products.

2012 the market size increased to 63.6% Mobile Phones and Tablet products.

We can safely assume that mobile and tablet percentages as a percentage of the total anti-mar market
products did not go down significantly in 2013 (if anything, they increased), but lets assume that they
remained the same 2012 market percentage for 2013 and use the 2013 number of total anti-mar sales
for SmartPhones and Tablets of US$116.3 million.

Lets also assume that all touch panels were coated with anti-mar coatings (which is not the case, but
lets assume it for these purposes).

Therefore, if we know the percentage of the market that Smartphones and Tablets products make
(Display Bank/IHS Report), and if we know the dollar value of anti-mar for smartphones and tablets (MIC
Report Figure 2), then we can extrapolate and calculate the dollar amount of the entire anti-mar market
for all products.

14
Display Bank/IHS Report Touch Panel Market Forecast and Cost/Issue/Industry Analysis 2013, available at:
http://www.displaybank.com/research_file/574881.pdf, at page 20.


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The math is straightforward:

US$ 116.3 million [2013 smartphones and tablets market value]

0.636 [63.6%]
=
US$ 183 million for the global anti-mar market for all products.

That is, the entire market size for anti-mar for the year 2013 is no greater than US$183 million (RMB 1.1
billion). Every industry expert and including the MIC report confirms that Daikin is the anti-mar market
leader (with approximately 60% of the market), with the remaining approximate 40% market share
shared by Shin-etsu, Dow Corning, and DuPont.

We further note that Tianhes clarification announcement dated September says that anti-mar can be
used on solar panels is without merit, as industry experts say that anti-mar is in fact not a viable
substance for use on solar panels because the nanometer thin coating is prone to dust and dirt which
outdoor solar panels are exposed to. We therefore believe this potential application is without merit in
Tianhes explanation and further false statements to the market.

We reiterate, once put into the context of the factual reality of the anti-mar global market and the
estimates, production, and sales figures of recognized industry leaders, Tianhes claims are quite
obviously false, and confirms that Tianhe has perpetuated fraud on investors in the HK stock market.







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Conclusion

As we clearly demonstrate above with fresh evidence, Tianhe continues to lie to the market. This is the
result of only a couple of hours of review of Managements pitiful response that took a month to create.

We will return with a more detailed review of the entire response in due course.