Their report can be found here.
Main issue: Glaucus claims that Prince Frog's revenue is hugely overstated. It does give quite a bit of information to support its claim.
After releasing the report, the share price dropped quickly, about 25%.
HKEX has halted trading in the company, pending a clarification by the company.
The allegations are not new, a blogger has written before about the issue that revenue might be overstated.
However, I have received a research report by CLSA (dated August 24, 2013) which refers to an "in-depth" study done through more than 200 interviews with Chinese parents and found that Prince Frog is the 2nd best known brand behind Johnson & Johnson. This result is very different from the numbers presented by Glaucus.
The question is, was this study by CLSA done in a proper way, 200 is not that high number, and of the group of interviewed people was not chosen random, then the results might be biased.
Prince Frog did a conference call today, to clarify the items raised. However, quite a few answers were rather "evasive" (in my opinion). Two examples:
- Q: Given that the company has the frog cartoon, shouldn’t consumers throughout the country all know of the brand?
- A: The brand survey was based on 15-50 year olds. Children recognize the brand; but parents don’t necessarily. The survey methodology from Nielson was limited to 13,500 people across 30 cities.
- My opinion: 13,500 people is a lot; the answer on parents not knowing the brand is rather strange.
- Q: Clarification on insider Xie’s sell down in the stock?
- A: At the beginning of 2012, Mr Xie sold shares to the market to increase the free float to improve liquidity due to investor demand.
- My opinion: well, that is an "interesting" way to bring it. If a company books stellar results and the free float is limited, then the share price can only go one direction, up. Insiders selling while the company claims to book excellent results will always turn investors jittery.
I guess we have to wait for an official announcement by the company, where they can give a detailed explanation of the situation.