Prince Frog as quiet as a mouse, NQ’s "Top Ten Lies", China Minzhong's earnings dive

I wrote before about "Prince Frog", it is already more than 2 weeks and the company has still not officially replied, worrisome. The longer it takes, the higher the chance the company is indeed a fraud.


Regarding NQ Mobile, targeted by Muddy Waters, the latter has written a new report called "NQ’s Top Ten Lies Since Friday". It can be found here. I am not an expert in this matter, but I did speak to someone knowledgeable in this area, and he told me that NQ Mobile was suspicious for a longer time, that there were enough rumours regarding the company.


Regarding China Minzhong, which was targeted by Glaucus, the company announced its quarterly results.

This looks like a nice picture:

But this not, earnings are down by 60%:

And this one is rather strange:

Cash up a lot, but borrowings also, why would a company want to borrow so much money if it has RMB 1.57 Billion in cash?

Indofood has acquired 89% of the company, we will have to wait how that will work out.

These are tough times for China based companies listed overseas, but they only have themselves to blame, in my opinion. Conservative accounting, a healthy dose of transparency and rewarding the shareholders through sizeable dividends would go a long way to battle the sceptical observers. But I haven't seen much of that lately.

Glaucus targets Prince Frog

Glaucus Research (about which we have written before, in the case of  Singapore listed China Minzhong) this time has targeted "Prince Frog International Holdings Ltd" (1259.HK), a Hong Kong listed, China based producer of child care products.

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.

Glaucus vs Minzhong, some observations

The attention for the “Singapore Squeeze” (Financial Times) Glaucus vs Minzhong seems to wane. Probably good, since a lot more is happening in the world these days. Still some observations:


A good article can be found here, comparing the Glaucus vs China Minzhong case with the Muddy Waters vs Olam case.

Some more background of the situation in China can be found here.

"SIAS calls on regulators to punish short sellers", article in The Business Times.

"The heavy weight of the law must be felt by these mischievous perpetrators,” said SIAS President and Chief Executive David Gerald"

(SIAS is more or less the MSWG of Singapore)

Strong words, but the reader probably already know that I completely disagree with this argument. If people buy shares, convince others about their investment case (using subjective or even wrong arguments) and subsequently sell their shares for a tidy profit, that is exactly the same. And if those people would be prosecuted, countries better build a few more jails, since this is happening every day of the year in every country of the world.

In addition to that, Glaucus was very transparent about their interest, and their arguments were backed by a lot of data and arguments. One might not agree with some, but that is something else.

"The SIAS said yesterday that it has had meetings with China Minzhong and is satisfied the company has “vindicated itself”."

I find that a bold and rather naïve statement, I think to give such a definite answer much more work has to be done to give such a definite answer. Somebody on the Valuebuddies forum mentioned:

"China Aviation Oil, ACCS, HongXing and Jurong Technologies had been awarded Transparency award by SIAS and many investors had been hurt by investing into these companies. How many more of such useless awards does the Singapore market need to see before such awards are stopped?"


In my previous posting "And Glaucus responds ...." I wrote several times that it looked like Minzhong admitted that certain things were not in order.

Associate professor Mak Yuen Teen from the NUS Business School puts it more specific in a letter to The Business Times (emphasis mine):

"Is China Minzhong saying it keeps 2 sets of books?"

"China Minzhong has provided a succession of rebuttals to the allegations of US-based short seller Glaucus Research Group, including highly detailed ones on Sept 1 and 3, complete with extracts of source documents. Although its efforts in rebutting the allegations are commendable, they are unlikely to completely dispel the concerns raised by Glaucus. The source documents provided by the company can understandably provide only a partial picture of the true situation.

While the company has cited the fact that it has consistently received clean opinions from its external auditors and that the auditors have not withdrawn their opinions, the auditors themselves have been silent. Given the well-known challenges faced by auditors in China and the fact that all of China Minzhong's business is conducted through subsidiaries there, the auditors may be reluctant to bet their partners' bonuses that the allegations of Glaucus are totally without basis. It is likely that only a comprehensive special audit will be able to dispel all the concerns raised by Glaucus, but we cannot realistically expect a company to commission a special audit each time allegations are made about its financials.

Unfortunately, China Minzhong's latest announcement on Sept 3 contains statements that may not help its cause in dispelling concerns. It stated that "Glaucus's assertion that documents that are publicly available are more reliable than those not in the public domain is flawed. The public information was not obtained independently by the regulators but based on our filings. Where there is inconsistency in information, it is only logical to look to the source documents to verify the truth . . . for SAIC (State Administration for Industry & Commerce) filings, given the purpose and intention of such filings, the key consideration is to ensure that the company operates within its permitted business scope and duly informs SAIC of changes to its registered particulars". It stated that it places great emphasis on the accuracy of accounts which affect its tax liability but appears to admit that its SAIC filings may be inaccurate.

Is this a public admission that it is keeping two sets of books? Rather disconcertingly, it does not seem to see anything wrong with filing inaccurate information in order to comply with regulatory requirements.

Given that the company's filings to SAIC in China may be inaccurate, how can investors be sure that its financial statements and announcements to the Singapore Exchange here are really true and fair, especially when it is clear that regulatory enforcement is easier for Chinese authorities than for Singapore authorities?

China Minzhong's statement also confirms the challenges of doing proper due diligence for Chinese companies using publicly available information, even those filed with regulatory authorities in China, and once again highlights the risks of investing in Chinese companies."

And Glaucus responds .....

Glaucus Research responded within one day on the documents submitted by China Minzhong.

I invite the reader to go through the whole document, the executive summary only takes one page, the more detailed information another 15 pages.

I find it a good, proper and fast response.


From the front page of The Business Times (Singapore) of today, some snippets with comments of mine in [red]:


"It [Minzhong] will also conduct more rigorous checks on the documentation of its customers and suppliers in China.

[sounds like an admission that the documentation of customers and suppliers was indeed not in order]

Mr. Lin: "China is still a developing country. Many things are still not regulated...."

[sounds like an admission that certain items might indeed not have been properly regulated]

"Among various things, Glaucus raised suspicions that China Minzhong's past sales and purchases might have been fabricated.

This was because a key customer which China Minzhong said had contributed to its sales from fiscal year 2007 onwards was found to have been incorporated only in November 2009.

Another key supplier had been deregistered and stripped of its business license in February 2010, but China Minzhong continued to trade with it until October 2010 until the company failed to meet supply quality.

Both China Minzhong CFO Ryan Siek Wei Ting and Mr. Lin yesterday shrugged off the accusations, noting that doing business in China is not a black-and-white matter as the regulatory environment is weak."

[it would have helped if they had been more specific]

"Said Mr. Siek: "When you do business, obviously the formal entity is important. But I think what is more important [seems to indicate that the formal entity might not have been in order] is that the sales are genuine, you really deliver the products, get the receipts, and collect the cash".

[one problem is that the receipts are not available in public, and most likely run in the thousands and thousands of papers, Minzhong only showed a hand full of them]

Lin said: "Business in China is complicated. But facts are facts. You can't run away from the customs, you don't have to use other documentation to catch me out."

[one problem is that the customs documentation is not available in public, and most likely runs in the thousands and thousands of papers, Minzhong only showed a hand full of them]


I find the general impression of all of the above rather weak. It seems to indicate that certain things were indeed not in order, but by showing a few, selected documents (documents that we can't verify) everybody has to believe them.

At the very least, minority shareholders of Minzhong should have been clearly warned about all these matters, which issues are not in black-and-white, which entities might not have been properly registered, etc.

And also, China Minzhong has deliberately chosen not to list in China, but in highly regulated Singapore. It has to take the consequences of that decision.

I think this is the moment that the authorities and the independent directors have to show leadership, and order a independent investigation into the matters raised by Glaucus.

And Indofood makes an offer .....

The Minzhong/Glaucus saga took yet another turn, this time majority investor Indofood (PT Indofood Sukses MakmurTBK) made an offer to acquire the shares of Minzhong for SGD 1.12 per share. The announcement can be found here.

Surely most minority investors of Minzhong, who must have worried a lot over the weekend, will be happy with this new development.

Minority investors of Indofood however might not share this joy, the share of Indofood went more than 9% down today on the news of the acquisition.

If Glaucus will still respond to the defence put up by the management of Minzhong, I don't know, I definitely hope so, but it might not be useful anymore given the take-over offer by Indofood.

Since Indofood is a listed company, observers might still be able to follow the future performance of Minzhong. And that might give an indication who eventually was right, Glaucus or the management of Minzhong or both to a certain extent.


Today in The Straits Times a rather strange (at least in my humble opinon) article appeared under the title "Time to rein in errant short-sellers" by Goh Eng Yeow.  The article is behind a paywall, but the text can be found here.

Some snippets, with my comments in red:


"The time has surely come to deal with the foreign short-sellers who have been wreaking havoc on the local stock market."

Wreaking havoc? Only two companies, Olam in November 2012 and Menzhong last week, while both have had their fair share of criticism before the reports of the short sellers came out.

Olams case: in response to the report the company has shored up its balance sheet with a rights issue, has tidied up its balance sheet and has increased communications with the investors. Olam also dropped its planned court case against Muddy Waters. Net effect has been (very) positive for the shareholders of Olam.

Minzhongs case: Glaucus came with a report that looked initially quite impressive, Minzhong came with a decent, equally lengthy answer, Glaucus has yet to respond.

For both companies, the jury is still out, much too early to tell, especially in Minzhong's case.

But even more interesting, who wrote the following:

"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."?

The answer is none other than The Business Times, sister organisation of The Straits Times, both owned by SPH.

"The latest attack came last week and sent the market into a spin, yet the basis of the seller's claims against a locally listed firm did not appear to stand up to much scrutiny."

One single China based company send the Singaporean share market into a spin?

Glaucus' report does not stand up to much scrutiny? Everyone his opinion, but I think it is much too early to draw that conclusion. I don't think the statements by Minzhong have been checked yet, also, there is still enough room for questions.

Short-sellers sell borrowed stocks in the belief that the share price will fall, resulting in a handy profit if their bets prove correct.  But the means some of them use to try to herd other investors into making those bets pay off leave much to be desired.

And what about people who have long positions and make all kind of bullish projections/rumours, not based on any reality, sending the shares up, enabling them to sell their shares at a profit?

There has to be symmetry in this argument, Glaucus is at least transparent about it's position.

But the fact is that Glaucus has a chequered record. US-listed China real estate website play SouFun Holdings, which it attacked in April, has since doubled in price.

There is no short-seller with a 100% track record. There is also no fund manager being "long" with a 100% track record of making profits. Being a short-seller is extremely tough, since on average shares will increase in value.

True, there are US activist hedge funds that claim to play a vigilante role in the market by uncovering fraud in misbehaving publicly listed firms by taking up "short" positions against them and then publishing damning reports to drive the share price down. Since they are people who purportedly put their money where their mouth is, this is supposed to give credence to their allegations. But the fact remains that most of these operators are unregulated, unlicensed research outfits, unlike the professional stock analysts employed by banks and stockbroking outfits, who are subject to a host of tough rules imposed by the Monetary Authority of Singapore (MAS) and the Singapore Exchange.

I am following the share markets for more than 20 years, but I have never taken any report from any broker ever serious. In much too many cases they are conflicted and simply can't issue a "sell" advice, even if they want to. To assume otherwise would be extremely naïve.

"Professional stock analyst", sorry to say, I find many disappointing, if they would really be good they probably would be fund manager.

The fact that MAS is regulating their operations has nothing to do with the quality (or lack of it) of the broker recommendations.

What the MAS has to do is to examine Glaucus' allegations carefully and determine if any securities laws have been broken - and ask for redress from its US counterpart, if this is indeed the case.

And what the SGX has to do is to examine Glaucus' allegations carefully and determine if any securities laws have been broken by Minzhong - and ask for redress from its China counterpart, if this is indeed the case.

On our part, efforts should be made to level the playing field. For a start, let us make it mandatory for all short-sellers to disclose their positions. The current practice of asking them to volunteer the information simply does not wash.

I am all in favour of transparency. But now we are at it, shouldn't all writers of all reports also declare their positions, be it short or long?

If the SGX (or Bursa Malaysia for that matter) doesn't want these kind of short-sellers, then they should simply ban short selling: "if you can't stand the heat, get out of the kitchen".

If there had been more of these short-sellers a few years ago, who had signalled the many, many fraud cases in China listed companies on the SGX, surely the damage would have been much more limited, the SGX would have taken more measures at an earlier stage, the public would have incurred much less damage and the reputation of the SGX would have been much better.

"Time to rein in errant short-sellers", I would prefer "Time to rein in errant journalists".

And Minzhong responds .....

The response by China Minzhong filed at the SGX website can be found here, with annexures here, here and here.

The quantity of the response is good, 19 pages filled with information. Certain points look convincing, but others leave questions, at least to me.

For instance:

• Page 3, Glaucus claimed that Hong Kong Yifenli Trading Co. was incorporated only in November 2009, Minzhong responds by showing sales contracts. But when was Yifenli then incorporated, and would it not have been more convincing to show the incorporation papers?
• Putian Daziran Vegetable Produce Co did not report any cost of goods sold according to Glaucus, Minzhong responds again with sales contracts, but did this company file them with the SAIC?

Interestingly, again a discussion about EBITDA, Minzhong responds that its definition of EBITDA is different from the one used by Glaucus. That can happen, since EBITDA is not defined by GAAP (Generally Accepted Accounting Principles). Another reason not to use these "bull shit" (Mungers words) numbers anymore. I hope that the Malaysian companies (who started to use these EBITDA numbers more and more often) take note.

And there is even a Malaysian twist to the story, quite a few of the vegetable contracts that are shown are shipped to Klang.

Interesting to watch how events will unfold, the suspension of the shares will be lifted from tomorrow onwards (at least Minzhong has requested that), how will the share price react?

Also, what will the answer of Glaucus be, it is hard to believe they will not come with a response from their side.

And lastly, will the SGX order (for instance) an independent investigation in the case, with the documents supplied by Glaucus and Minzhong to start with? To clean the air for once and for all?

Glaucus whacks China Minzhong

I updated the below posting several times with new information that I found. Very interesting is this link from Lighthouse Advisors in which they explained in their June 2012 report (starting the last paragraph of page 3) why they divested their stake in Minzhong.

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.

Glaucus:

China Minzhong:

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.