One person was so kind to send me the comments by CLSA (one of the brokers whose reports tend to have a rather high quality). I mostly agree with their opinion, some snippets (and comments by me in blue):
Good news for Prince Frog today as the HKEx has given the company the green light to address investors and publish an important clarification document. While the company’s defence leaves open questions about its market share, we are encouraged that management of Prince Frog is taking the issue seriously.
[of course they had to, if they had not addressed the issues, that would have been the largest red flag possible]
We cut our target multiple to 9x 15CL PE, a 50% discount to peers given the overhang of the market share question. We cut our recommendation from BUY to O-PF and would be BUYers of the stock below HK$3.5.
[my problem with valuing this kind of companies is that either some of the accusations of Glaucus are true (in which case any price might be too high), or all accusations are wrong (in which case the current price might be decent); the large drop in share price seems to indicate that some investors think there is at least a decent chance that (part of) the accusations of Glaucus are true]
The lengthy clarification document provides a comprehensive defence of the company aimed primarily at discrediting the Glaucus short-seller report. While it lacks hard evidence (bank statements, sales receipts, etc.) [that was one of my problems with the report, it could have been much more concrete, another area is comparisons with other companies in the same industry] the simple fact that the exchange allowed the company to publish should be viewed as a positive. The continued implicit backing by the company’s auditor is also a key point which is inferred from the document.
Prince Frog has provided a lengthy defence based mostly on the fact that their sales are in 3rd and 4th tier cities and it is unclear if Nielson’s data set covers the area where Prince Frog is making its sales. In specific Prince Frog notes: “the Company’s sales revenue derived from distributors located in the third and fourth-tier cities had consistently accounted for approximately 70% to 77% of the Group’s total sales in each financial year from 2008 to 2012.” The argument is that Neilson could not possibly cover these areas with a high percentage of accuracy hence the conclusion from the short seller report must be flawed.
While we believe the logic makes sense, there are going to be continued questions and overhang on this point. There is nothing new in the clarification document that would give investors more confidence in the company’s sales figures.
["high percentage of accuracy", when differences between methods used are very large, then there is no need for a high percentage of accuracy, so this issue will indeed remain]
The other major issue raised in the short-seller report is that the company’s taxes paid did not match with a list published by the local government. The company’s defence here is that there was an option to “opt in” to the government’s list of top paying enterprises. The company only opted in starting in 2012 which is why they were not on the list previously. A letter which confirms this was provided to the company and reviewed by the company’s law firm and stock exchange.
[I agree, anyhow these tax issues in China seem to be rather murky]
The report ends with:
More information is always good and we hope the company will continue to disclose this information in the future.