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China Minzhong: Share price plunged by more than 50%!

Monday, August 26, 2013

There are so many unexpected things which happen in life. The drastic plunge of more than 50% in China Minzhong's share price at one point this morning was definitely unexpected.

A quick search online found the probable reason behind the selling:

Glaucus Research Group which is based in California accused China Minzhong of irregularities in its sales figures, involving sales to top two customers, according to "corporate registry records".

Glaucus Research Group said they and their associates have a direct or indirect short position in the company. So, they stand to make money if its share price declines. They probably made a bundle today.


Definitely, I do not know whether the accusations are true and if they should be true, how bad are such irregularities? Since the alleged irregularities involve China Minzhong's top two customers, how significant are the contributions of the top two customers' to China Minzhong's revenue?

It is not hard to then imagine whether all other numbers reported by China Minzhong have irregularities. However, if we think logically, if there should be other irregularities, Glaucus Research Group would have tipped them all out. The more negative the news the better it is for their short position.

Since I do not know what is the total revenue contribution by the top two customers, I will make the extreme assumption that all of China Minzhong's trade receivables go to zero. This would wipe out shareholders' equity by 24%. NAV would then be RMB 5.34 per share or S$ 0.89 per share.

Looking at the year on year improvement in cash flow from operations and how the company is now in a net cash position as well as how it was able to pay down some of its bank loans, I came to the conclusion that the selling this morning was overdone and bought some shares at 52c a piece.

China Minzhong has requested for a trading halt and the company is due to release full year results on Thursday (29 August). Let us see what happens next.

See: 3Q FY2013 presentation.

57 comments:

Sage Bears said...

Ak ge, im in this with you. Follow you hoot dua dua!

Ray said...

S-chip, irregularities in book keeping. Not worrying? :)

AK71 said...

Hi Beary ge,

I wouldn't say I hooted dua dua though. ;p

Good luck to both of us. :)

AK71 said...

Hi Ray,

I am concerned, of course, but I cannot imagine Indofood buying such a huge stake without doing any due diligence.

So, there could be some irregularities but what is the extent of these irregularities? Is the massive sell off warranted? I don't know for sure and I can only make a calculated guess.

I will wait for China Minzhong's response to the allegations. :)

Ray said...

You are our beacon in such time of darkness. LOL ok, i know, you are going to say that you are anyhow rambling, we shouldn't follow at all... (LOL did I guess your reaction correctly?) but really people look to AK's reactions during times like this. I'm saying you should feel proud / good abt urself coz you have good track records that warrant their confidence :)

INVS 2.0 said...

Ah, another single-company stock. I will get into them once I have amassed enough wealth in REITs. But usually I would avoid Chinese stocks due to their notorious reputation of "you-know-how-things-are-done-in-China".

seefei said...

AK, i think i highlighted the 1 billion in receivable in CMZ book some times back. You said the year before was a record sale year so it was not surprising.

Maybe, the record sale was just a bumped up figure. but then i am talking to myself and hypothesizing wildly. Oopps... Missed the chance to buy at 52 cents this morning.

Divested sometime back and looking to go back in.

sillyinvestor said...

Hi AK

Glaucus research has already brought down CMR in HKex, do be careful everyone...

https://glaucusresearch.com/wp-content/u...6_2013.pdf

CAO has a strong SAO parent, Temaesk has a stake in it, but it also almost went belly up.

Hope vested investors survived this,AK hope you stake is not too big too. If things turn out well, then congrats for your courage to av. down even in such circumstances, I must say you really have the steel of courage (Not suaning, I say this in all respect)

Sorry, just a note of cautious, u know the type of investor I am, better kiasi then really si...

JCK said...

The glaucus full report is here

https://glaucusresearch.com/wp-content/uploads/downloads/2013/08/GlaucusResearch-China_Minzhong_Food_Corp_Ltd-SGX_K2N-BBerg_MINZ_SP-Strong_Sell_August_26_2013.pdf

AK71 said...

Hi Ray,

Yikes! I really should stop blogging. I could do as much harm as any purported good, you know? :(

Yes, please don't follow me. I am just an amateur investor talking to myself. I make mistakes too and if I am wrong this time, this would be one of my biggest losses ever.

AK71 said...

Hi seefei,

Indeed, if Glaucus Research is right, there could be more than meets the eye.

AK71 said...

Hi JCK,

Thanks. I read it earlier when I googled for Glaucus Research. :)

CS said...

Hi AK, greatly surprised to see CMZ plunged so much this morning. This could be another "Muddywater"story and I cannot fully believed what they said in the report. I tried to get some at S$0.60 this morning but my broker stopped me. I heard that GIC had fully divested its interest in Minzhong sometime in February this year. Do you have any idea about this? I am invested in this counter and hoped the company will clarify this matter soonest possible.
Regards,
CS

AK71 said...

Hi CS,

I honestly do not understand the entire report by Glaucus Research but that is only natural since I am just another retail investor without a finance, legal or accounting background.

I think we can only wait and see what the management has to say now.

Ray said...

AK,

I think you mean S-chips rather than S-REITs in 2 of your comments above. Might wanna correct them so as not to confuse your readers :)

AK71 said...

Hi INVS 2.0,

Many investors are giving S-chips a wide berth. If it gives us a peace of mind to do so, why not?

AK71 said...

Hi Mike,

I limited my exposure to China Minzhong and SoundGlobal, my two investments in S-chips to less than 10% the value of my portfolio. I no longer have a position in SoundGlobal and diverted the freed resources to China Minzhong. Could turn out badly if Glaucus is right on all counts.

If my investment here goes to zero, it would be a major set back for me but it would not be crippling. Still, it would be depressing and I might have to go into the mountains to meditate for a few months. ;p

AK71 said...

Hi Ray,

Yikes! You are right! Thanks for pointing it out.

Mondays are usually bad for me. Many things to do. Mind was overloaded. -.-"

Unknown said...

Dudez.. I think the allegations by Glaucus is quite clear
1. Fabricated sales, top 2 customer do not exists before 2009. One of its top customer is founded by Minzhong CEO
2. Top Supplier license is revoked prior to IPO
3. Inconsistent filing in SAIC and its reported subsidiary revenue, and its attempt to 'correct' its inconsistency
4. Suspicious capex; loan guarantee by CEO & supplier instead of 1.2 rmb plant
And the list go on..

AK71 said...

Hi Unknown,

Yup, I went through the document. This is very much beyond my ken. Don't know enough to actually tell if this holds water.

Will have to wait for China Minzhong's response.

Solace said...

Hi Ak,

my view on this issue: the auditors for china Minzhong must be really screwed up if the allegations is true!! it might not be totally impossible.

this episode reminded me to reread the book, 5 rules for successful stock investing, chapter 8: avoiding financial fakery.

AK71 said...

Hi Solace,

When I produced this blog post, I had only read the short report by REUTERS. It was rather rushed. Used my morning tea break to do it.

Anyway, since then, I have read the report by Glaucus at least twice during lunch and afternoon tea break. I pulled out my research on China Minzhong and reminded myself why I got myself vested in the first instance.

One of the allegations made by Glaucus is that China Minzhong committed IPO fraud but institutional investors of which one was a SWF of our country had oversight with nominees on the Board of Directors for 4 years prior to the IPO of China Minzhong. Does this mean that they were part of this alleged fraud too? It seems that Glaucus is implying this.

Quite a few questions raised by Glaucus could be answered by reading the FAQ section of China Minzhong's corporate website. Of course, we may well question how reliable are the replies.

http://www.chinaminzhong.com.sg/html/faq.htm

Phileas.Wind said...

Hi AK, I'm impressed that you still buy in during the sudden sell down. That's great confidence of a seasoned investor.

No matter how the things will unfold next, but I think this is just the common issue of S chips which may get involved in some financial numbers manipulation and cause bad experience to its investors.

sillyinvestor said...

Seriously,when I read from the edge singapore that Glaucus research has locked it sight on several s-chips in singapore, MinZhong is the last s-chip that came to my mind, although I have not dig into Minzhong's numbers, I have in mind many possible candidates with red flags aplenty.

So numbers only tell 1 part of the story, it reinforced the fact that we should read up on suppliers and customers too, (find it such a chore but nonetheless, forced myself to do it). Think it will make me more dilligent in my research.

But, many a times, when I google or even baidu some the chinese suppliers or customers, it drew a big blank, especially if they are not listed, so better stick to bigger companies with renowned customers (listed, easy to track sale and purchase), and suppliers. I swear off plenty of s-chips in the textile sector when I can't find info I need.

That is why YZJ is the only s-chip in my portfilio, most of its customers are listed, so I can checked the financial strength of the customers and also if the deals are truly there. (Not a buy call, a cheap advertisement if you like)

NV said...

Hi,

I went through the supporting documents provided by Glaucus. On the face of it, it appears that the documents (P&L BS submissions to SAIC, company registry records, etc) gels with the allegations by Glaucus. Assuming the documents obtained by Glaucus were real, were the inconsistencies highighted a genuine administrative error or something more sinister?

It is obviously now up to CMZ management to present their case with GREAT clarity.

I also read the FAQ in CMZ website. Yeah, not sure how reliable the replies are....as it is always possible to have a cleverly crafted answer but not mentioning the negative points and also not highlighting the probability of the positives happening.

Eg. #17 in CMZ website's FAQ in response to "are your high margins sustainable?"... to what extent is this true?

I am not vested in CMZ.

Kyith said...

a local value hedge fund put out their case to sell their china minzhong holdings 1 year ago (only published 1 year later due to embargo)

current and potential investors can use this as another independant analysis of china minzhong

China Minzhong and Straco Fundamentals

AK71 said...

Hi Phileas,

Well, I acted based on what I felt was right and, of course, it could turn out to be wrong.

Was I brave or was I foolish? Perhaps, both. ;p

AK71 said...

Hi Mike,

Well, I am sure you are not the only one who was shocked. I know I was.

I am generally not very sanguine about shipyards with the exception of those involved in O&M. Well, your example of YZJ is one of how there could be good investments amongst S-chips. ;)

AK71 said...

Hi NV,

There are points made by Glaucus which are based on facts, assuming that the evidence are bona fide. However, there are also points which are matter of opinion.

We will just have to wait for China Minzhong's presentation.

AK71 said...

Hi Kyith,

Thanks for sharing this. I recall reading this recently and I even thought why would they sell at a 50% discount to their entry price? They got in at IPO.

When they sold, I bought. -.-

AK71 said...

This might now come across as a whimper:

China Minzhong will publish its 4QFY6/13 results this Thursday before market.

We are looking at revenue of RMB685m, down 15% YoY and 29% QoQ while expecting net profit to be RMB164m, down 4% YoY and 36% QoQ.

QoQ earnings dip is nothing to worry as 2Q and 3Q are usually the peak quarters and Minzhong has locked in about 78% of our full year forecasts in the first three quarters.

YoY drop can also be expected because 4Q last year was an exceptionally strong quarter due to late arrival of winter season in China.

In our view, there are two short term catalysts for Minzhong:

1) supply contracts from Indofood and
2) first dividends payout since IPO.

Although we do not think the first dividends payout could be anything significant, it is a good start in our view. Such practice could also help to argue for a re-rating case for the stock.

Reiterate BUY and TP SGD1.36, pegged to 5x FY6/14 PER.


Maybank Kim Eng


Source:
http://research.maybank-ib.com/pdf/document/China_Minzhong_260813_4908.pdf

AK71 said...

Travis Seet, China Minzhong’s financial controller, told Reuters the company was taking legal advice on how to respond to the report. He declined to make any further comment and trading was halted pending an announcement from the company.

China Minzhong listed in Singapore in 2010 and has attracted several big-name investors, including Singapore sovereign wealth fund GIC which sold its 14.4 per cent stake in February to Indofood Sukses Makmur Tbk PT. Indofood had no immediate response to the queries on China Minzhong.

Other large investors include Franklin Templeton Investments Corp, which holds just under 11 per cent of the food producer, according to Thomson Reuters data.

“Given the huge damage done already, we believe it will be an up-hill task (especially without GIC’s backing now) for the company to re-build confidence,” Lim & Tan Securities wrote in a note.

A number of Chinese companies listed in Singapore ran into accounting problems in 2008 and 2010, denting investor confidence in the stocks, known as S-chips.

The Singapore Exchange has since then taken steps to improve corporate governance of listed companies and after the trading halt, the regulator said it had asked China Minzhong to confirm the company was in compliance with the rules.


South China Morning Post

Source:
http://www.scmp.com/business/companies/article/1299471/short-seller-hits-china-food-firm-rare-singapore-attack

Tien Song Chuan said...

China's economy is a disaster waiting to happen...
http://www.cbsnews.com/video/watch/?id=50152767n

Sun said...

I think you do have to wonder why the hedge fund release the report now, 3 days prior to the release of the result?

Since they have a vested interest in that they have shorted the stock, could it be that they would release this news/report such that they use it as an opportunity to earn their shorts and maybe close their position before the release of result on thursday?

just a contrarian view. i have a vested interest in china minzhong and have yet to average down. just waiting to see how things develop over the next few days. I just find the timing a bit suspicious.

AK71 said...

Hi Sun,

I suppose we should be suspicious of everybody including China Minzhong's management. ;)

If China Minzhong is really an elaborate financial hoax, then, we would just to have take it as another lesson from Mr. Market.

The report by Glaucus Research has information which we as retail investors can never have access to in our private capacities.

This is why people like Peter Lynch and Warren Buffett suggest investing only in simple businesses which we can understand. Good to be reminded of this.

No matter how this turns out, it is one very humbling experience.

AK71 said...

Can you confirm your compliance with the listing rules and, in particular, listing rule 703?

The Company confirms that it is in compliance with the listing rules and, in particular, listing rule 703 of the Listing Manual.

Source:
http://infopub.sgx.com/FileOpen/CMZ_ReplytoSGXQuery_26Aug13.ashx?App=Announcement&FileID=253897

AK71 said...

It has been brought to the attention of China Minzhong Food
Corporation Limited ("the Company") that Glaucus Research Group (“Glaucus”) has released a
report (“Report”) regarding certain affairs of the Company.

The Report has caused a substantial
decrease in the share price of the Company this morning and Glaucus has openly stated that Glaucus and those acting in concert with it are short sellers who will profit from the decline of the Company’s stock price.

The Company is in the process of reviewing the Report and will provide its response shortly. The Company will take all necessary steps to defend its reputation and will not hesitate to take legal
action against those who put up and disseminate false or misleading statements without due
regard to their truth and for the purpose of inducing others to deal in securities.

In the meantime, the Company has halted the trading of its stock and reserves all rights against
the aforesaid parties.

http://infopub.sgx.com/FileOpen/CMZ_PressRelease_26Aug13.ashx?App=Announcement&FileID=253898

AhJohn said...

Just like a nightmare. But I don't think they would make such a mistake if they want to cheat.

AK71 said...

Hi Ah John,

There are so many opinions out there about the whole matter but we still have to wait and see how China Minzhong would respond to this.

It could actually be a great opportunity for Indofood to make a general offer for the whole company now. ;p

Cory said...

Hi AK, dice may not be in your favor. Down side can be 100% loss, upside maybe back to 70-80 cts range.

Sometimes it maybe easier to admit defeat and take the loss. Having won so many battles it is hard not to on next.

I wish you luck sincerely.

Tien Song Chuan said...

If China can fake their entire GDP data, what is one company stock?
http://www.cnbc.com/id/100967912

Mr ICICI said...

i don't think you have to wait for response from management. obviously they are going to deny it and slam glaucus for saying bad things about them. i mean, what else do you expect them to say? they are not going to say 'glaucus is right, i DID fake some numbers. oops...'

there's also no use looking at the numbers again and again if it is faked. as good as toilet paper.

i'll probably look at price action. it is pretty shocking. for a stock to plunge 50% in a day is quite something. probably take years to recover back to the previous day share price.

if it's me, i would just cut loss. shit happens...just got to move on. i definitely wouldn't sink anymore money in, unless you are playing for a rebound. but i leave that to the TA experts.
even if it does recover, i don't think i can go through the whole episode. probably affect my mood and my work. but that's just me. =)

Serendib said...

AK, if even the most experienced MNCs like Caterpillar can miss things in Chinese firms, who are we to be experts?!
http://www.forbes.com/sites/simonmontlake/2013/05/16/caterpillar-settles-with-principals-of-troubled-chinese-acquisition/

AK71 said...

Hi Cory,

Thank you for the well wishes. Definitely need all the good luck I can get. ;)

AK71 said...

Hi Mr. ICICI,

Actually, it is not the first time China Minzhong's share price plunged so much. The last time it happened, it rose and doubled within months.

The probable response from the company which you have conjectured is actually the best case scenario. If they are willing to vigorously defend themselves and prove that the allegations are false, it will restore some confidence.

AK71 said...

Hi Serendib,

I am definitely no Caterpillar. LOL. :)

JCK said...

Hi AK

Hopefully nothing comes out of the accounting queries.

AK71 said...

Hi JCK,

Will just have to wait for this to run its course. No point thinking about it anymore. :)

Tien Song Chuan said...

http://www.businesstimes.com.sg/premium/top-stories/china-minzhong-gets-ambushed-shortseller-20130827

AK71 said...

CIMB in February rated China Minzhong “outperform” and in June set a price target of 1.27 Singapore dollars (99 U.S. cents), reasoning that the company “was going to pay dividends for the first time this quarter, which could have catalyzed its share price.”

But CIMB now believes that “raising equity from Indofood to pay dividends would have compromised the quality of any payout, as it could have represented a mere ‘transfer’ of cash.”


CIMB good. ;)

AK71 said...

Minzhong’s biggest investor isn’t concerned. PT Indofood Sukses Makmur, the parent of Indonesia’s biggest instant-noodle maker and Minzhong’s largest shareholder, is comfortable with its investment, director Thomas Tjhie said yesterday by telephone from Jakarta.

Indofood, which doubled its stake in Minzhong to 29.3 percent in March, conducted due diligence on the company before it made its investment, Tjhie said, adding that he has spoken to Minzhong’s chief financial officer about the Glaucus report.

Indofood shares declined as much as 3.4 percent to 5,700 rupiah and was unchanged at 5,900 as at 11 a.m. in Jakarta trading. The stock lost 5.6 percent yesterday.


Source:
http://washpost.bloomberg.com/Story?docId=1376-MS4K636TTDSJ01-00AOR20U4NNPE3DP0BGTT6MR1R

Tien Song Chuan said...

All these "professional" stock analysts said the stock is a buy.

Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.
Warren Buffett

ian said...

Just want to point that that Minzhong's CFO, Siek Wei Ting, is Singaporean (former NTU graduate). Highly like he would have risked being involved in a fraud and risk going to jail.

Tien Song Chuan said...

ian: You mean Singaporeans do not commit crimes? How about those fraudsters in the City Harvest Kong Hee - Ho affair? It is all about greed.
http://therealsingapore.com/content/e-mail-shows-how-city-harvest-leaders-tried-doctor-documents

Capricon said...


Just to share a blog I read and it always reminds me to stay vigilant in investing china companies.

http://pertama8.blogspot.sg/2012/10/inflated-revenues-profits-and-misuse-of.html

AK71 said...

Hi Capricorn,

Many take the easier path of simply not investing in S-chips. This was something I did too, for a time.

jovan said...

Hi AK,

Some quotes in life that I think is really good to share here too

"Some people can be mean and treat you poorly. Dont take it personally. It says nothing about you but a lot about them" :)

source from https://www.facebook.com/lessonslearnedinlife

PS: I am vested too and I click it submit button myself

thank you
Jovan

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