Finally Prince Frog responds (2)

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.

Finally Prince Frog responds

Five weeks ago Glaucus Research launched its attack on Prince Frog. Trading in the shares of the latter company was halted and Prince Frog prepared an answer to the allegations. Only now the official reply was published. The time it took to respond is worrisome long, normal would be a reply within one week.

The reaction of the market was not good:

Although quite a bit of answers are given (in total 24 pages), doubts remain. I think Prince Frog could have been more specific in several cases.

Some reactions:

Bloomberg
Wall Street Journal

I expect Glaucus to respond soon.

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 (2)

It is already eight days ago that Glaucus published its report about Prince Frog, but the company still hasn't officially responded.

However, as "Imenwe" pointed out in the comments of my previous posting:

• BFM paid attention to this case (worrisome were some negative comments at the end about short sellers);
• Kim Eng (Hong Kong) wrote a company update about Prince Frog

Until now, the company has hinted (during conference calls) at several scenario's, but I find them not very convincing. Also, the longer it takes for the company to officially reply, the more worrisome it will get. A strong, confident company should first of all never have been in this place (especially since several rumours have been aired before), secondly should have quickly come with an accurate and strong riposte.

The reports both by Nielsen and the government of China are too different from what Prince Frog reports. I find it hard to reconcile them.

The extremely high margins and short "average days inventory turnover" versus industry players are worrisome.

The issue of Prince Frog having more sales in the lower tier cities, and less sales in the Tier 1 and 2 cities in China: I find that strange. Glaucus writes that Prince Frog has previously mentioned themselves that that was not the case. Also, a company that claims it grew eight fold compared to the industry only doubling its revenue, to me the way to do that is to aggressively market ones products in the bigger cities. In the smaller cities it is possible to do, but it would depend on huge manpower, and it takes a long time for that network to grow. In the areas of branding (getting good quality shelve space), marketing and distribution lots of effort have to be done.

If I had to make a choice which party to believe, based on the information that I now have, I would definitely choose Glaucus. For the shareholders of Prince Frog, I hope I am wrong.

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.