China Minzhong Response Weak, Company Strong Sell: GlaucusVW Staff
Glaucus Research Group California LLC issues a rebuttal to China Minzhong Food Corporation Ltd (SGX: K2N) (BBERG: MINZ SP) and maintains a Strong Sell rating. Full rebuttal to China Minzhong Food Corporation Ltd (SGX: K2N) (BBERG: MINZ SP) below:
On August 26, 2013, we published our investment thesis on CHINA MINZHONG FOOD CORPORATION LIMITED (“Minzhong”
or the “Company”) opining that Minzhong has so significantly deceived regulators and investors about the scale of its business and its financial performance that we expected trading in its shares to be halted and its shares to be worthless. On September 1, Minzhong responded.
Although the Company tacitly acknowledged that the source materials upon which we based our opinions were true and accurate, Minzhong complained that the interpretations we made and the conclusions we drew from such evidence were not correct.
Our opinions were based on publicly available documents from independent third parties such as government registries and SAIC filing offices. To rebut our opinions, Minzhong has offered investors non-public records (such as tax filings), which Minzhong knows that neither we nor any other investor can verify or obtain because of their non-public nature. In our view, this is not a coincidence.
The balance of Minzhong’s supporting documents were either generated by the Company, thus, in our view, undermining their credibility and importance, or were affidavits from suppliers and customers, who by the Company’s own admission operated businesses without licenses or without being properly incorporated.
For investors, auditors and regulators, the most critical aspect of the response is with regards to the 2010 SAIC filings, which show that two key operating subsidiaries had tiny revenues, few assets and operated at either a net loss or at break even. In both cases, we presented SAIC filings from 2011, in each case audited by a different local accountant from the previous year, which mysteriously showed completely different historical financials for 2010! In our opinion, the Company simply doctored its historical filings to make them appear more consistent with the Singapore-filed financials.
The Company’s response is that it used an “agent” to file their SAIC files before 2011, and as a result, those pre-2011 SAIC filings, which show a small and unprofitable business, were the false and inaccurate documents. Instead, Minzhong asks the market to believe that the 2011 SAIC files are the ones to be believed.
The problem with this argument is that Minzhong’s Chairman signed both the 2010 and 2011 SAIC filings. One of the filings is inaccurate. You, the reader, must decide which set of documents, submitted with the signature of the Chairman to the Chinese government in order to comply with PRC law, are false. We have our view.
We did not and cannot cause any investor to buy or sell shares of Minzhong. We can only discuss our investment thesis and discuss the evidence upon which we base our conclusion. Investors must decide for themselves what they believe to be the true value of Minzhong’s shares – but in reviewing our original report, the Company’s response, and our rebuttal, market participants would be well served to remember that while we rely on publicly available documents which are verifiable and are generated by or submitted to independent third parties such as government offices, Minzhong is simply relying either on non-public records or documents generated by the Company – none of which can be independently verified by any investor.
Ultimately, based on the preponderance of the available information, we continue to believe that the most plausible interpretation of the evidence available in the public domain is that the Company is a fraction of its reported size and profitability and that it has made materially false and misleading statements to the public in connection with its IPO and subsequent public market activities.