Wednesday, 25 April 2012

Anonymous Analytics dissects HuaBao

After their first success with Chaoda (I blogged about it here), Anonymous Analytics has exposed a second possible Chinese fraud: HuaBao International. Their 44-page report can be found on their website. A long but enjoyable article for people who appreciate these kind of financial detective stories.

Many red flags are raised, like:
  • Backdoor listing (requiring less due diligence)
  • Auditor resigning
  • Related Party Transactions
  • Extremely heavy insider selling by the chairwoman
  • Impossible high margins compared to other companies in the same industry
The share is suspended, and the company announced they will come with a detailed report. But they will always say that, so it has no real meaning.

Will AA again be proven right? I don't know for sure, but it looks quite likely.

More information in an article in Business Week.


  1. Hi after reading Bronte Capital's comment and AA's report on HuaBao I found that the company is very interesting. There are nothing wrong from P&L, Balance Sheet and Cash flow statement but as what you mention the company looks too good to be true. Besides that you forget another two red flags hightlighted by John Tempton. HuaBao's R&D cost and marketing and distribution cost is unbelievably low compare to others. I believe AA's report is genuine as they dare to accuse HuaBao are lying on the factory's photo and some of the customers reveal that they didn't buy from HuaBao at all or HuaBao only contribute a very small portion of their raw material.
    On the other hand the owner had paired down her stakes significantly.
    I just couldn't understand why there are so many people refuse to accept AA's accuse. The signs are too obvious. I really can't understand them. Maybe just like the Chinese proverb those who are involved are blurred but those who are outside are clear on what is happening.

  2. Yes, it looks like a real company, just much less good than the accounts show. The trick is to come with a few results with rising profit, giving the illusion of a fast growing company, requiring a high PE multiple. And that enables the chairwoman to cash out.

    Interesting is the dividend issue, the company did pay quite ok. However, compared to the money raised at the IPO, it is only a small fraction. And most dividend anyhow went to the chairwoman.

  3. HuiBao's spoke person said they are preparing to revenge AA's accuse. lll If there are able to do so. They won't be suspended.
    The accuse are extremely obvious. AA accuses that the factory is fake, customer never take any order or they didn't take much from HuiBao. If AA is lying HuiBao can make a press conference together with their customers to show the crowds that the orders are genuine. Besides that they can organize a field visit trip with the fund managers and invite AA's rep. They can even go one step further to lodge a defamation report on AA.

  4. Thanks, interesting developments, love to read about these issues. Company is doing tough talking, sounds all impressive but is just lawyers talk, they are hired to write strong language. If you strip it away, not much left. Many accusations have been there before, some new ones are added. For the known issues the question is: why did the company never attend to those?

    Defamation suit: if the facts are correct, then it is about interpretation, if fair comment then no case. Anyhow, they might be based in Hong Kong, and the courts will uphold the right of free speech. So the issue is if there is any error in the AA report. My guess is that they did their homework before they published the 44 pages.

  5. Any comment on Asia Citrus. The company is still alive eventhough Chaoda is falled.
    I just recall what I had learned before. If a company has extremely high ROE, low debt, cash rich, EPS growing tremendously, the company is most likely a fraud. It will be impossible for a company high ROE with low debt. The only way to do it is off balance sheet liability but this doesn't apply to HuaBao. I am confused now they dosn't have much financial assets in their balance sheet. HuaBao is an extremely good case for me to polish my skill.

  6. Hi HuaBao spoke person said that they are now trying to get their subsidiaries' tax reports from PRC's authority. They denied the accuses and they said that the discrepency is due to currency difference (RMB in their tax report & HKD in finacial report published) and timing difference (company financial year start from 1st April whereas tax report is between 1st Jan - 31st Dec).
    Below is the link

    I feel that this is a lame excuse. Currency difference and timing difference won't make the earnings differ by 30%.

  7. Thanks and I agree, sounds like a lame excuse.

    Added to that, they need to verify the 2010 accounts? They must be joking, those should already be rocksolid, or am I missing something?

    Still suspended, that also gives an indication.