July 28th, 2011

Fools Gold?
(Part 1 )
It appears Kingold Jewelry Inc. is inflating its #s.

Kingold Jewelry Inc. (NASDAQ: KGJI) Recommendation: Strong Sell Target Price: $0.40-$0.50
Please Review Important Legal Information and Disclaimers on Page 2 of this Document Pete Long, Equity Analyst Sneaky Jewel ry,Capital, Email: sneaky.p.research@gmail.com Pete Inc. (NASDAQ: KGJI) Page 1 Kingold

sneaky.p.research@gmail.com

Disclaimer:

Use of Sneaky Petes Research is at your own risk. You should do your own research and due diligence before making

any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report, Sneaky Petes Research (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our clients and/or investors has a short position in the stock (and/or options of the stock) covered herein, and therefore stands t o realize significant gains in the event that the price of stock declines. Following publicat ion of any report, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regard less of our initial reco mmendation. Th is is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any ju risdiction in which such offer would be unlawful under the securities laws of such jurisdiction. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who ar e not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. However, such information is presented "as is," without warranty of any kind whether express or imp lied. Sneaky Petes Res earch makes no representation, exp ress or implied, as to the accuracy, timeliness, or comp leteness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and Sneaky Petes Research doe s not undertake to update or supplement this report or any of the in formation contained herein.

Executive Summary:
Company: Kingold Jewelry Inc., (NASDAQ:KGJI) Industry: Jewelry Fabrication Recommendation: Strong Sell Estimated Value: $0.40-$0.50 Report Date: July 28th Price: $1.75 Market Cap: 90M Chinese subsidiary shareholder offering shares on Beijing Equity Exchange at substantial discount Smoking gun evidence: Net Income reported on Beijing Equity Exchange is less than half of what KGJI filed with SEC Financials are domestically audited and officially filed with the Beijing Equity Exchange KGJI could now face substantial litigation risk for not actually achieving 2010 make good targets & again raising capital from investors who may have been materially mislead Serious risk of trading suspension by SEC. Rare case of contradicting filings challenging the legitimacy of both exchanges Chairman & the Company have a troubled history in China including a suspicious founding and a denied domestic listing attempt Domestic SAT tax filings align with domestic shareholders lower net income
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Kingold Jewel ry, Inc. (NASDAQ: KGJI)

It Would Seem KGJI Is Inflating Its Profits

It does not bring me pleasure to expose frauds in China since I have invested too much of my personal time working in this space to simply leave it. But Ive been sitting on this information for far too long, and no one has put this info out into the open yet.. In mid-May something fishy appeared on my KGJI news feed, so I poked around the Chinese web until I found this webpage pictured below. This is a posting from the minority shareholder of KGJIs mainland subsidiary offering to sell their 4.1667% stake in the company.
(Picture of the web posting. Full posting shown in appendix )

The posting ran from May 1to June 15th at http://www.cbex.com.cn/G3/2011010285.shtml and was taken down after June 15th . A full copy of the webpage can be found in the appendix of this report. As well, here is a Chinese news report from mid-May, clearly stating that Kingolds subsidiary has posted its shares for sale on the Beijing Equity Exchange: http://stock.hexun.com/2011-05-22/129846318.html

(Clarification of Translation: This minority shareholder is listed in SEC filings as Beijing Shouchuang Investment Co. Ltd, ). According to Beijing Shouchuangs website
Kingold Jewel ry, Inc. (NASDAQ: KGJI)

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(http://capitalvc.com/company_en.html) they use the English name Beijing Capital Investment Co., Ltd. They are held by the Beijing Capital Group, () a state owned company with 68 billion in assets under management. This posting is listed by the Beijing Capital Group, which is whom will be referred to from hereon. Beijing Capital Group website can be found here: http://www.bjcapital.com/) And here are chinese articles from 2008 citing Beijing Shouchuangs investment in KGJIs mainland operating subsidiary here & here.

So I Dug Deeper:
1st Red flag: The shares are being offered at a much lowe r price than the NASDAQ shares. The selling price was much less than what the stock of the parent company was trading for on the NASDAQ. On May 18th , Beijing Capital listed their 5M shares, representing 4.1667% of the operating company, for sale for 29.45M RMB. At a USD:RMB exchange of 1:6.53 that works out to 4.5M USD, or roughly $0.90 USD per share. Compared to the recent average price of around $1.80, this begs the question, Why? Why does the domestic partner want to get out? Why sell at a reduced price when the company is claiming that its growing yearly? 2nd Red flag: The reported Revenues and Profits are much lower than what KGJI has filed with the SEC : The annual revenue and income figures for KGJI reported by this minority shareholder are much less than what KGJI reported to the SEC. For instance, in KGJIs SEC- filed 10-K, they reported 523M USD in Net sales, but the numbers posted by Beijing Capital have KGJIs 2010 revenue at 389M USD. For 2010 Net income, the SEC 10K lists 19M USD, but Beijing Equity Exchange lists a net income of 9M USD for KGJIs operating subsidiary. Different fiscal accounting periods cannot explain the massive difference in net income Reported by Beijing Capital Millions of RMB 2,539.8 78.8 58.7 353.3 319.2 Millions of USD 389.5 12.0 9.0 54.2 48.9 KGJI filed with SEC Millions of USD 523 31 19 84.3 73.8 % Overstatement of SEC Discrepancy 34% 158% 111% 56% 51%

Revenue Operating Profit Net Profit Total Assets Total Equity

The screen shot of the posting below shows the #s origins:

This can be seen in its entirety in the appendix.

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How Reliable Is This Information

This is not some posting on a Chinese Craigslist. This information is listed on the China Beijing Equity Exchange, a government sanctioned exchange. The numbers reported here were audited by a local firm in Wuhan (). This subsidiary is the only source of revenue and profits for KGJI. BJ Capital Group Ltd., is a large scale State-Owned-Enterprise affiliated to the State Owned Assets Supervision and Administration Commission of the Beijing Municipal Government. One would think, agencies affiliated with the government wouldnt report numbers on a government sanctioned exchange unless they were correct. Furthermore, what reason could they possibly have for reporting lower numbers when theyre trying to sell their stake? The information was exposed in broad daylight, with contact numbers which you can find on the posting. I reached out to the following parties hoping for some clarity and closure as to why these #s are so different from the #s reported to the SEC. Below is a summary of the run-around I was given: Beijing Capital Case Representative, Cheng Ma . (ph: +86 010-58385566) o Contact Summary: Q: These #s are far below SEC #s. A:Wow, really, that big of difference? Good luck with that.. o A month later I called to ask if they had found a buyer, Mr. Ma said they have, but he still cannot disclose the name yet as the transfer is not complete. The auditor, Wuhan Tianli Partners Accounts (ph: +86 027-87257009). o Contact Summary: They confirmed they have audited the said company, but would not speak any further without permission from Kingold. Needless to say, we could not get that permission. Beijing Capital Case Manager, (refused-to-give-a-name) (+86 010 68964806) o Contact Summary: Stonewalled. Kept assuring me the discrepancies dont concern them. Beijing Equity Exchange case representative Zhao Xuan (ph:+86 010-66295566) o Contact Summary: Wouldnt vouch for authenticity of the #s, told me to contact Mr. Ma of Beijing Capital What dumbfounds me was that was I trying to ask why they were seemingly low-balling themselves, by selling at lower revenue and profit levels. In other words, I wasnt accusing anyone above of any wrong doing, just asking for confirmation. I get the impression that they do not want to add fuel to the fire which Mr. Jia Zhihong may soon be in. For Mr. Jias sake, I hope this hunch is wrong, but in my experiences, if it looks like a fish, smells like a fish, and tastes like a fish, its probably a fish. And in this case, that fish appears to be cooking the books.

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Did KGJI Not Actually Reach Their Make-Good Target

Reported by Beijing Capital Net Profit
(USD Millions)

KGJIs 2010 Make-Good Target

KGJI filed with SEC 19

Discrepancy 111%

10.7

The net income figure for 2010 posted by Beijing Capital is below KGJIs make- good target promised to private placement investors, and yet the SEC filed # is above the target. (Make-Good target for 2010 was 70% of 100M RMB, or roughly 10.7M USD, see pg. 12 of 10-K)

What are the implications for KGJIs Stock Price

Estimated Price Target for KGJI: $0.40-$0.50
On July 20th , KGJI had a price of $1.82 per share with a P/E of 4.26 for 19M in reported net income. If you were to apply that 4.26 P/E to 9M net income, the market price would be roughly $0.86. However, given the potential loss of confidence, and the fear in the sector, I believe the P/E will also take a hit and sink to the lower ranks of the tarred and feather China RTO stocks. With that in mind, I believe a market price between $0.40 to $0.50 is a reasonable estimate. Given the supporting information I have presented and more supporting evidence to be released shortly in the second half of this report, I believe this chart lays out some probable scenarios for KGJIs stock price. Investor Reaction
Unifo rmed or In Denial Cautiously Optimistic Reasonable Middle Ground Doomsday Scenario

Net Income USD

(SEC Filed #s)

M arket Sentiment

Resulting P/E
Current 4.26
(M aintained)

Resulting Stock Price

Rationale
Dismissive of new information presented. Still believe company can overcome tarnished reputation. Price seems to reflect new relevant info & new perceived risks. The sky is falling.

19
(Mainland Subsidiaries Reported)

Disregards all new info in this report KGJI may be deceptive, but this should blow over Confidence Compromised & Concern of Litigation Fear of Stock Halting and/or Delisting

$1.75 $0.86 $0.43

Illi qui d, possibly move to pi nk sheets

9
(Mainland Subsidiaries Reported)

4.26

(Halved)

9
(Mainland Subsidiaries Reported)

2.13
(Destroyed)

<1.0

I dont doubt that Kingold does have an underlying functioning business operating in China. What I doubt is the validity of their reported numbers. On May 2nd the Chairman of Kingold wrote an open letter to shareholders trumpeting improved transparency asking anyone whom had interest in seeing Kingolds domestic filings to access them through the CFO Bin Liu. While the letters intent was comforting, in actuality the local Wuhan
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Kingold Jewel ry, Inc. (NASDAQ: KGJI)

govt had put in place unusual measures to block standard 3rd party access to KGJIs SAIC filings. Whether or not KGJI is responsible for these roadblocks, having Bin Liu present the tax filings seems a little like the fox guarding the hen house. As youll see in the next report, it seems the call for increased transparency was a bluff as there was and is reason to restrict access to domestic filings.

Conclusion
KGJI was able to complete a $23 million financing in January of 2011 based on what appears to be, incorrect financial statements filed with the SEC. (Comment: The financing was done at such a seemingly low valuation that an independent director resigned in protest.) It would also appear that the make good targets outlined in the December 2009 financing were not achieved. It would now seem that significant litigation risk exists as prior investors did not receive what they were legally due, and that the investors who participated in the $23 million financing in January of this year, were materially mislead about the financial performance of the company. While the company should be able to withstand these legal headaches it will be interesting to see how sternly the SEC handles this given the recent negative media attention to RTOs. Most importantly, if KGJI is ever going to restore confidence with investors, KGJI must go to great lengths to explain Beijing Capitals actions this past May. As I said earlier, Ive been sitting on this for a fair chunk of time now, and I have not seen any mention of it on the western internet. This posting by Beijing Capital went up on the Beijing Equity Exchange on May 18th and hit the Chinese news feeds a few days later. I suggest you check out KGJIs trading volume for the following week, because it seems that some of the larger holders may have got wind around May 24 as indicated by a few days of abnormally large volume and selling pressure. In conclusion, I strongly suggest you get someone you trust who reads Chinese to go over this posting on your behalf so that you may judge for yourself. I have included the posting in its entirety in the appendix. (Note: the #s on the Chinese site are in 10,000s of RMB). I will be releasing the second half of this report in the near future which will include more supporting evidence. The fund manager Im employed by is short the stock. Im sorry to be the bearer of bad news. Pete
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Kingold Jewel ry, Inc. (NASDAQ: KGJI)

Appendix
For your convenience: Kingolds 10-K filing can be accessed here:
http://www.sec.gov/Archives/edgar/data/1089531/000114420411018554/v216529_10k.htm

Chart of Chinese and English Business names translations:

Entity English Name Chinese Characters

Chinese Phonetics (ping-ying)

Beijing Shouchuang Chuangye Touzi Youxian Gongsi

Web Links

4.17% owner of equity interest in Wuhan Kingold (as listed in 10-K)

Beijing Shouchuang Investment Co. Ltd, / Beijing Capital Investment Co. Ltd. Beijing Capital Group

http://capitalvc.com/

4.17% owner of equity interest in Wuhan Kingold as listed on Beijing Equity Exchange (technically the holding company of the fund listed in KGJIs 10-K) Domestic Auditing firm

Beijing Shoudu Chuangye Jituan Youxian Gongsi

Official: http://www.bjcapital.com/ Overview: http://baike.baidu.com/view/108134.htm

Wuhan T ianli Partners Accounting Firm

Wuhan T ianli Hehuo Kuaijishi Shiwusuo

Kingold Jewelry Incs mainland subsidiary. The subject of the VIE Contracts. Exchange where this 4.17% stake in the subsidiary is listed for sale Kingold Founder Kingold GM

Wuhan Kingod Co., Ltd. China Beijing Equity Exchange Zhihong Jia Bin Zhao

Wuhan Jinhuang Zhubao Gufen Youxian Gongsi Beijing Chanquan Jiaoyisuo Jia Zhihong Zhao Bin

Listing: http://4692400.71ab.com/ 2 nd : Listing http://www.71ab.com/view_4692400.htm l Chinese Site: http://kingold.com.cn/ (Western Site for KGJI: http://www.kingoldjewelry.com/s/History .asp) Official: http://www.cbex.com.cn 2 nd link

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Clarification that this posting is for KGJIs subsidiary:

Both Beijing Capitals posting and KGJIs 10-K list Wuhan Kingolds date of incorporation as: August 2 2002. Both Beijing Capitals posting and KGJIs S-1 list the original registered capital of of Wuhan Kingold as 120M RMB. Both Beijing Capitals posting and KGJIs 10-K both list the same shareholder %s for Jia Zhihong, Zhao Bin & Beijing Capital all match up with KGJIs 10-K filing: o From the 10-K: Wuhan Kingold is 55.31% owned by Zhihong Jia, our founder, chairman and chief executive officer, 1.67% owned by Bin
Zhao, our general manager and director, 4.17% owned by Beijing Shouchuang Investment Co. Ltd., a PRC state owned enterprise, with the balance of 38.85% owned by a total of 44 other shareholders, who are all PRC citizens. All of Wuhan Kingolds shareholders, o ther than Beijing Shouchuang Investment Co. Ltd., have entered into the VIE agreements. (source: 10-K page 13,)

o From Beijing Capitals post on the Beijing Equity Exchange :

No. 1 2 3 4 5 6 7 8 9 10 Wuahn Kingold Top Ten Shareholders Jia Zhihong Tianjin Fortune w ealth equity investment fund center (limited partnership) Beijing Capital Group Ltd. / Beijing Shouchuang Investment Co., Ltd.) Dai Garden TANG Po Shenzhen, Dong Fang Anying invested enterprises (limited partnership) Yellow River Shenzhen Venture Capital Management Co., Ltd. Huayang St. Zhao Zhao Bin Stake 55.3054% 10.7292% 4.1667% 3.3333% 3.3333% 2.6042% 2.5% 2.3438% 2.0833% 1.6667%

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The Beijing Capital Offering Its 4.1667% Holding on the China Beijing Equity Exchange
The Original Beijing Capital Posting was here (http://www.cbex.com.cn/G3/2011010285.shtml) and was taken down after its June 15th expiry. Here is a link to picture of the full webpage: http://i.imgur.com/Ps8AV.png And below it is pasted in sections.

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