ZST DIGITAL NETWORKS

ZST Digital Networks (OTCPK:ZSTN) came public in October 2009 and raised $25 million by offering 3.1m shares at $8 per share. The offering was led by Rodman & Renshaw and Westpark Capital, two ubiquitous underwriters in the market for bringing Chinese companies public in the U.S. through reverse takeovers (RTOs).

There are plenty of recent examples of why investors should be highly skeptical of purchasing shares in these Chinese RTO companies. Many lack transparency, internal controls, exaggerate their financial performance and assets, have weak governance, and in some cases are outright frauds. Look no further than China-Biotics (OTCQB:CHBT), Orient Paper (ONP), Douyuan Printing (DYP), China New Borun (BORN), China Marine Food Group (OTCPK:CMFO), Fuqi Int’l (OTCPK:FUQI), and China Northeast Petroleum (NEP) as cautionary examples.

Upon a close examination of ZSTN’s business, financial model, and governance we are highly skeptical that their business exists in the manner it is being portrayed to U.S. investors, and believe ZSTN is a business of dubious practices and investment merits. Our main concern is their depiction to U.S. investors of a business generating superior sales and earnings growth without any cash flow generation. Furthermore, their financial model appears to favor customers, suppliers, and business partners at the expense of shareholders. We also provide hard evidence through a comparison of their SAIC financials to their SEC filings that indicate gross misrepresentation of their financial condition.

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