China Ouhua: red wine and red flags (5)

I have written several times before about China Ouhua Winery, and not exactly in "glowing terms". To be more exact, I haven't found a single positive aspect regarding this company.

I was therefore rather surprised when I noticed the following:

According to the website of The Edge, Fundamental Score is defined as:


The Fundamental Score is a snapshot of a company’s fundamental strength, derived from historical numbers. For those who are not familiar with financial jargons, we have condensed some of the most often-used ratios into this "Score" to reflect a company’s profitability and balance sheet strength.

The Fundamental Score ranges from 0 to 3 for easy understanding. A score of 0 means weak fundamentals and a score of 3 means strong fundamentals.


The definition of the Valuation Score is as follows:


If you are unfamiliar with financial jargons, we have condensed several of the most-often used valuation benchmarks into a Valuation Score of 0 to 3 – to determine if a stock is attractively valued or not, at this point in time.

A Valuation Score of 0 means valuations are not attractive. Vice versa, a score of 3 means valuations are attractive.


That means that China Ouhua has a fundamental strength (1.80) that is better than average and a somewhat attractive valuation (0.90).

Somewhere in the database and/or algorithms of The Edge, something must have gone horribly wrong.

Surely both the fundamental and valuation score for China Ouhua have to be 0.00.

For more background on the company and to get a flavour what this company is about (hint: managing the winery is not exacty their forte), please check the previous articles.

Qualified opinions on 6 listed companies

From MSWG's weekly newsletter of May 8, 2015:

AUDITORS ISSUED QUALIFIED OPINIONS ON 6 COMPANIES LISTED ON BURSA MALAYSIA
 

No	Name of Listed Company	Date of Announcement	Auditor	Basis of Opinion (Salient Points)
1	NPC Resources Berhad	30 April 2015	Ernst & Young	Insufficient time to perform sufficient audit procedures as the audited financial statements of three foreign subsidiaries were only available close to the date of the financial statements of the Group were approved by the Board.
2	Silver Ridge Holdings Bhd	30 April 2015	Baker Tilly Monteiro Heng	Unable to obtain sufficient and appropriate audit evidence on the recoverability of receivable.
3	Stemlife Berhad	30 April 2015	Ernst & Young	i)  Non-compliance with the requirements of MFRS 4 (Insurance Contracts) for the assessment of insurance liabilities and revenue associated with insurance contracts; and ii) insufficient access to the financial information and management of an associate.
4	Wintoni Group Berhad	5 May 2015	SJ Grant Thornton	Unable to physically sight the Group’s computer equipment.
5	China Ouhua Winery Holdings Limited	30 April 2015 & 5 May 2015	Helmi Talib & Co.	Unable to ascertain whether the net recoverable amount of an asset acquired in China will exceed the total purchase consideration.
6	Ire-Tex Corporation Berhad	5 May 2015	UHY	Unable to validate the existence of sales of RM5 million to 2 related parties which were subsequently impaired.

MSWG’S COMMENTS:

It is a bit out of the norm though not totally surprising that within a short period of time there were 6 public listed companies where their independent auditors had qualified their opinions on their audited financial statements highlighting issues of concern for investors to take note.

 

It may also serve as a ‘red flag’ or early warning signal to audited financial statement readers particularly shareholders, investors and potential investors who may need to make more informed investment decisions.

China Ouhua: red wine and red flags (4)

China Ouhua announced their audited accounts, qualified by the auditors (as was the case in the previous year), with some really bad news for the shareholders:

When Ouhua IPO-ed, they were supposed to be a fast-growing, highly profitable player in the wine industry in China.

Now it informs its shareholders that it abandoned its vineyards due to bad weather, insect pest and (worst of all) poor management? The vineyards are their main business to produce their own wine, it cant possibly get much worse than this, can it?

Despite the wine business going horribly wrong for Ouhua, they still deposited RMB 119M cash to purchase land, "conveniently" without having any independent valuation done. The transaction should have been concluded a long time ago, but is still "pending".

I am afraid that either this transaction will go through, and the land is useless given the abandoned vineyards, or the transaction will not go through, and the deposit will not be returned.

Michael Lewis wrote in "Crash Boys":


"Financial regulators, like editorial writers, are at best the markets’ last line of defense; they are less inclined to join any battle than they are to wander in afterward and shoot the wounded."


Malaysian regulators have done some enforcement that (I think) falls in this last category ("wander in afterward and shoot the wounded"), for instance:

SAAG: " ..... Notwithstanding that SAAG had been de-listed ...."
Carotech: "..... Notwithstanding that CAROTEC was de-listed ....."
MAE Models: "..... Notwithstanding that MAEMODE was de-listed ....."
EcoFuture: ".... Notwithstanding that EFUTURE had been de-listed ....."
Baswell: ".... Notwithstanding that BASWELL had been de-listed ....."
Axis: "..... Notwithstanding that AXIS had been de-listed ....."
NAMFATT: "..... Notwithstanding that NAMFATT has been de-listed ....."
Global Carriers: "..... Notwithstanding that GLOBALC was de-listed ....."
Kenmark: "..... notwithstanding that KENMARK had been de-listed ...."
Intelligent Edge Technologies: "..... Notwithstanding that IE was de-listed ....."


I hope that the regulators in the case of Ouhua will not wait for the company to be delisted, and take appropriate action now, it is long overdue in my opinion.

They should order an in-depth investigation, not only at the current situation and the recent developments, but also at the whole IPO process, the warranties and representations that were provided, all the parties involved (the promoter, the bankers, the advisors, the pre-IPO shareholders) and the roles they played. They should also interview the many directors that have resigned, and the previous auditor.

China Ouhua: red wine and red flags (3)

China Ouhua (about which I wrote before, here and here) announced its quarterly results.

That these results again are bad will not surprise many.

As usual the downtrend in wine consumption in China is mentioned as the scapegoat. Although there is indeed a downtrend, I don't think it can sufficiently explain why China Ouhua can barely turnover RM 1 Million in one quarter.

Another matter is that I doubt if anyone at China Ouhua even checked the announcements:

China Ouhua: red wine and red flags (2)

China Ouhua Winery was listed end of 2010, exactly from that moment onwards its financials started to deteriorate severely. Something that is (unfortunately) not uncommon for companies that seek a listing on Bursa Malaysia, and even more common in the case of China listed companies.

The results so far:

       Revenue  PATMI
2010    209M     52M
2011    198M     28M
2012     76M      0M
2013     18M    -47M
 
For those who think that it can't get any worse, I have bad news. China Ouhua managed to book a revenue for the first three months of 2014 of barely RM 1 million. Even most ACE listed companies would be ashamed of such low numbers.

Sometimes business can be brutal, the price of raw materials rise, margins decrease, a bad one-off event, etc. But when a company has hardly any revenue, how can it ever come back again?

The company was described as "one of the top 10 wine companies in China (based on Frost & Sullivan's market research of China's wine market in 2009). It has a vertically integrated business model and is the first player in the PRC wine industry to establish speciality wine stores as a mode of distribution. It also owns one of the largest matured vineyards in Shandong."

If that is still true, then I feel sorry for China's wine industry.

I hope the authorities will look into this case.

China Ouhua: red wine and red flags

On October 23, 2013, China Ouhua Winery announced the following:

Auditors resigning is a large red flag.

The new auditor, Helmi Talib & Co, was appointed to audit the 2013 accounts and their results were published.

The one thing a reader should look out for in audited accounts, is if the accounts are qualified, which would be a huge red flag.

And the accounts of China Ouhua Winery are indeed qualified:

There are more red flags regarding China Ouhua Winery, for instance many changes recently in the boardroom and audit committee:

The share graph since its IPO, not a pretty picture: