As far as I can see, all the reasons given sound reasonable and might strengthen the case for Glaucus Research:
- Two comparable businesses are Chaoda Modern (almost certainly a fraud) and China Green (fair share of CG issues)
- Limited management ownership of Minzhong who received their shares at almost zero cost gives a temptation for the management to act in their own benefit at the expense of that of the other shareholders
- GIC of Singapore came in much more early than the IPO, they might have done due diligence in 2006, but the company has changed a lot since then
- The business model is cash flow negative, the land is leased and thus the company can not borrow against it, share placements are far more likely than dividends
I wrote one time before about short seller Glaucus, from an article in The Business Times (Singapore):
"Those which act responsibly like Glaucus by providing full disclosure can complement regulatory efforts and should be viewed as an important component of the governance framework."
Glaucus Research is one of those research institutions who focus on short selling of possible frauds and/or overvalued companies. Its website can be found here.
For those who question their motives, they are very open about it in their disclaimer:
Other well known short sellers are Muddy Waters, Citron Research and James Chanos.
Some more information on Glaucus Research can be found in this interview with Soren Aandahl in the SCMP.
The same founder was interviewed in The Edge, and mentioned that they were actively looking into a Singaporean company. Well, the Singapore share market didn't have to wait long. On Monday August 26, 2013 Glaucus published its report about Singapore listed China company "China Minzhong Food Corporation".
The information that it contained is highly damaging, that is, if it is indeed true. It is also insightful, how these short sellers do their research and what indicators they look at. One suspicious indicator was that the margins of Minzhong compared to other players in the same industry were just much too good to be true. Something else was that the company claimed to make a lot of profit, but it didn't show up in the cash.
One interesting chart in the report reveals the large number of S-chips (China companies listed in Singapore) that have gone down so far:
Worrisome, also since many of the better auditors were involved, apparently that is no guarantee that the accounts can be trusted.
A lot of supporting evidence on China Minzhong (either directly or circumstantial) is presented in the 49 page report, plus several documents as supplemental evidence.
On a side note, in Glaucus' report about China Metal Recycling (which company the SFC tries to wind up, meaning the allegations were indeed true) it does mention, rather interestingly, that it received a lot of support from local Chinese organisations in their search for evidence.
At least one prediction came true so far:
"we believe that Singapore regulators will halt trading of Minzhong's shares pending a full investigation into the Company".
That did indeed happen, after the share tumbled about 50% in high turnover in a matter of just two hours.
One letter in the Singapore media suggested that the SGX should have halted trading more early, and that circuit breakers would have had the desired effect.
Regarding the quality of the allegations by Glaucus, I leave it to the readers to form their own opinion, they do appear rather convincing to me. A lot of discussion is going on at the Valuebuddies forum regarding this case. A good write up can be found here, from blogger "Ninja Master Fund".
China Minzhong so far has only reacted in a rather standard letter (which can be found on the SGX website), without any detail at all, just claiming that Glaucus "misunderstood" their business model.
We have to wait for much more specific information regarding the detailed allegations by Glaucus, that Minzhong overstated their revenue and profit significantly and other serious matters.
Minzhong did release their quarterly earnings numbers, which on the surface appear to be very good.
But the million dollar question is: are they really believable? According to Glaucus, they aren't.
In one contest however, Glaucus seems to have the clear advantage, the beauty of their logo.
Bursa Malaysia has recently started to promote short selling. Are they ready for these kind of events, if something similar would occur? Would they welcome short sellers like Glaucus Research?
And on another matter, are they really still keen to list Chinese company on Bursa?
To the Malaysian readers: Happy Merdeka.