Sino Grandness

[crubs]

I wouldn’t use the word "dumb", perhaps  “more clever”.
 
After nearly 7 years, who has been “more clever” in assessing benefits?
 
Who has been the clear winner?
 
Tax authority / Management / Shareholder / CB holder/Debt holder ?


[Image: t8ovv5.jpg]

This table pretty much sums up all! A few interesting observations:
- It is much of a coincidence that OCF before WCC is very similar to the sum of receivables + CAPEX
- 2 dividends were paid after IPO and subsequently stopped. Garden Fresh was launched in 2010 and could be a reason for stopping dividends after FY11. But SG seems to be going against the norm of IPO->growth->dividends (contrast what its equivalent China Minzhong, has done)
- Seems like everyone got a bite of the pie - Government got their taxes paid, bankers got their money back, suppliers are paid more promptly that is received (the amt of payables is 10x less than receivables) and also get new businesses in the form of CAPEX, EXCEPT the shareholders and CB holders thus far.

Hi weijian,

To comment on your points 

- They are in expansion mode and the cash was needed to fund working capital and build factories
- dividend payments were stopped because cash was needed to grow Garden Fresh
- Shareholders got the biggest bite of the pie. Revenue has grown 6x and adjusted profit even more since IPO. Share price has also more than doubled during that period.

[alex]

Can't see the constructive views from the discussions as mentioned. Unutilised VAT, currently, doesn't mean that it will be forfeited. Once it is in operation, it will be utilised. Unless, it closes down before sales commences.

Tax structuring, is not an easy game. In china, local governments gives out incentives to attract companies to set up businesses. You buy land/office, i give you cash incentives (or in form of rebates). This is to attract local taxes collections, including some part of the social contributions from employees will be locked in unless it is utilized there. (Aware that part of the employee contributions will be forfeited once they moved out of the city/province (i do not know which).

[weijian]

Hi weijian,

To comment on your points 

- They are in expansion mode and the cash was needed to fund working capital and build factories
- dividend payments were stopped because cash was needed to grow Garden Fresh
- Shareholders got the biggest bite of the pie. Revenue has grown 6x and adjusted profit even more since IPO. Share price has also more than doubled during that period.

hi crubs,
Thanks for the reply. Some of my comments:

- My point is more towards the 'coincidence' rather than the reason/s (which have been repeated in every single quarterly report I believe). For those who study Accounting 101, knows that the top2 items in the 'Use of Cash' pareto are frequently abused by shenanigans. This table looks amazingly similar to a short attack report I read recently (clue: the silverlake axis thread). Of course, this could be purely a coincidence and there is some confirmation bias at work here.
- I believe Chairman is a shrewd businessman. Garden Fresh would not have been conceived in just 1 year. So it is kinda puzzling that 2 years of dividends (FY09/10) was paid before a subsequent U-Turn to start to conserve cash for Garden Fresh from 2010 onwards. Nonetheless, maybe its explosive growth even surprised Chairman Huang, or he started hiring consultants....?
- Both Boon and I are referring to cash flow. Let's try to take share price out of the picture for a more unbiased view of matters. It would be great for IPO shareholders for en-cash their 'put option' at the expense of ending their love affair with SFG, a 15% annualized gain. Of course, when trees start growing higher and higher, people will believe that it can grow to the sky.

[Boon]

Hi Young Investor,
 
I will come back to you on the issue of “dumb and incapable of assessing benefits” later.
 
Hi leeta,
Your latest question is related to that of “crubs”.
 
Hi crubs,
 
What we have are the consolidated financial statements of the group. Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment.
 
Also I noticed that there is subsidiary (Shenzhen Grandness Industry People’s – Groups Co., Ltd.) that specialize in sales. I do not know how marketing costs are allocated among the subsidiaries.
 
Broadly, here are some of the major factors to consider.
 
Business structure
Legal risks
Tax obligations and implications
Tax planning
Operating risks
Registered capital requirement
Capital structure
Source of capital – SAFE registration
Thin capitalization.
Losses carried forward
PPE depreciation profile – building vs machinery
Leasing alternative.
Profit repatriation
Withholding tax
Dividend policy – source of profit
Exit strategy –
Operating efficiency
Inter-relationship between various taxes.
Government incentives
 
A simple example of income tax saving achievable during construction/ development phase is to outsource development activities to an overseas related party (say in Hong Kong). The Hong Kong entity would be subject to HK tax rate at 16.5% percent, which may be more 
than offset by the Enterprise Income Tax (EIT) benefits of incurring the costs by the subsidiary itself (at 25 %).
 
I don’t know if outsourcing of marketing activities fall under such scheme for Sino. It used to work for of real estate developers.
 
There could be other possibilities to be exploited depending on the objective or target.


One extreme is to structure them into functional groups:
 
Development management service
Building structure
Plant and machinery
Production
Distribution/transportation
Marketing
_____________________________________________________________________________________________________ 

Hi Boon,

I am confused.

Your reply to me was : "Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment."

Your reply to leeeta was : "Without specific details, a general assessment still could be carried out, taken into consideration of factors I have listed before. But the target or objective must a clear."

That aside, I assume that you have done a general assessment of Sino Grandness's VAT offsetting based on the factors that you've mentioned. Could you share your assessment of Sino Grandness based on each individual factor that you've mentioned ? 

Business structure

Legal risks

Tax obligations and implications

Tax planning 

Operating risks

Registered capital requirement

Capital structure 

Source of capital – SAFE registration

Thin capitalization.

Losses carried forward

PPE depreciation profile – building vs machinery

Leasing alternative.

Profit repatriation 

Withholding tax

Dividend policy – source of profit

Exit strategy – 

Operating efficiency

Inter-relationship between various taxes. 
Government incentives

Explaining how you used each factor to assess Sino Grandness VAT offsetting can help us understand why you said it is far from conclusive and expressed doubt in other forumer's reasons. 

Hi crubs,

Apology for the confusion if it is my fault.

What I am saying is structure is set up to support business objectives/targets/strategy.
 
In both your question 1 & 2, there are no clear objectives.
 
What do you mean by net positive or negative.
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[CityFarmer]

The discussion is confused, but the points made by Boon has made a clearer picture to me, on the company cash flow, although nothing substantial can be concluded from there.

IMO, conclusion isn't compulsory in forum, and I didn't see a conclusion from Boon yet or did i miss it? Readers can move-on with their further research and may be to contribute back here.

A good try, Boon. Thank you

Regards
Cityfarmer

[portuser]

Cityfarmer 

In post 1118, I described how VAT works and how the cash flow of a newly-formed subsidiary is strained as it has no output VAT to offset the input VAT until it sells its ware. Meanwhile, input VAT is classified as “VAT receivables” and included in “other receivables”.

As there was unease among some readers of rising VAT receivables in recent years, I cited a situation which gives rise to VAT receivables:
 
"Sino Grandness sets up subsidiary to build and own new factory. Before production commences, the subsidiary has no [output] VAT to offset the [input] VAT paid to the contractors. The strain on cash flows is severe. (emphasis add)
 
"When it starts selling later on, the subsidiary can retain [output] VAT equal to the [input] VAT paid earlier to contractors. Cash flow  improves as a result." 

Unfortunately, selective reading of post 1118 has led to protracted search for ways to obviate the drawback of input VAT being stuck, without first understanding the rationale of the current arrangement and appreciaing the fact that input VAT is not forfeited. 

To begin with, forming local subsidiaries is a common practice in China. Local governments offer cheaper land, reduced land use tax, grants, etc to attract investments. Lower outlay for land purchase will go some way in relieving the strain on cash flow caused by input VAT being held up.
 
Are Sino's decisions to form subsidiaries in Hubei and Anhui unwise? Not knowing the incentives given by the local governments, we are in no position to answer.

Bemused, I wrote on 28 Jan:
 
“I do not think it is worthwhile to prolong discussion on the subject of VAT group offsetting as the facts about Sino Grandness are very clear."   (post 1154)
 
 

[CityFarmer]

Dear portuser,

The discussion wasn't confused by your contributions. Both of you, have added clarify on the matter. I do agree with you, no substantial conclusion (or verdict) can be derived now, and good time to wrap it up on the disagreement.

I do agree with the "JV" between local gov and companies as described. I am more to your side, on this matter, with my understanding on China-based companies studied and owned. Most are using the same approach, likely for good reason(s).

Boon has given a good picture, on the cash flow. You have contributed yours with good reasoning, rather than ONLY "opinion(s)" or "as told".

You deserve a thank too.

Thank you, a good try too.

Regards
Cityfarmer

[Boon]

Mr Boon,

Your statement:
"The problem wouldn’t even exist in the first place, if procurement is probably (you must have meant properly) structured, IMO."
made in connection with Sino setting new subsidiaries is clear -- Sino is no good.

You are now wondering "Who has been the clear winner? Tax authority / Management / Shareholder / CB holder/Debt holder ?" and has highlighted the RMB 676m paid in 6 years and 9 months.

Are you saying that government is the clear winner, in your opinion?  

You should have known that large companies engage tax specialists to do tax planning and compliance for them. Are you not pleased that Sino Grandness has paid large sums to government?

In the real world, there is such thing as win-win. Companies that are doing well pay more taxes to government, which then spend on improving infrastruture. Companies in turn enjoy the benefits, eg lower transportation cost on better road system, improved rail etc........

[Edited by moderator: Removed an inappropriate statement]

Hi Young Investor,
 
Thanks for the correction. It was meant to be “properly”.
 
Your statement: “You should have known that large companies engage tax specialists to do tax planning and compliance for them.”
 
So how large is large?
 
What if I think that Sino Grandness is a small company, say compared to Apple, can I draw a conclusion, based on your statement, that SG does not engage tax specialist.
 
The size of the pie generated over the 6.75 year period was RMB 2,890 m, as measured by OCF b4 wcc.
 
RMB 676 million is equivalent to a 23% of the pie.
 
RMB 24 m of dividend to shareholder is equivalent to less than 1% of the pie.
 
Who has got a bigger bite? 
_____________________________________________________________________________________________________________________________________

[Boon]

Hi Young Investor,
 
I will come back to you on the issue of “dumb and incapable of assessing benefits” later.
 
Hi leeta,
Your latest question is related to that of “crubs”.
 
Hi crubs,
 
What we have are the consolidated financial statements of the group. Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment.
 
Also I noticed that there is subsidiary (Shenzhen Grandness Industry People’s – Groups Co., Ltd.) that specialize in sales. I do not know how marketing costs are allocated among the subsidiaries.
 
Broadly, here are some of the major factors to consider.
 
Business structure
Legal risks
Tax obligations and implications
Tax planning
Operating risks
Registered capital requirement
Capital structure
Source of capital – SAFE registration
Thin capitalization.
Losses carried forward
PPE depreciation profile – building vs machinery
Leasing alternative.
Profit repatriation
Withholding tax
Dividend policy – source of profit
Exit strategy –
Operating efficiency
Inter-relationship between various taxes.
Government incentives
 
A simple example of income tax saving achievable during construction/ development phase is to outsource development activities to an overseas related party (say in Hong Kong). The Hong Kong entity would be subject to HK tax rate at 16.5% percent, which may be more 
than offset by the Enterprise Income Tax (EIT) benefits of incurring the costs by the subsidiary itself (at 25 %).
 
I don’t know if outsourcing of marketing activities fall under such scheme for Sino. It used to work for of real estate developers.
 
There could be other possibilities to be exploited depending on the objective or target.


One extreme is to structure them into functional groups:
 
Development management service
Building structure
Plant and machinery
Production
Distribution/transportation
Marketing
_______________________________________________________________________________________________________ 

Hi Boon,

I am confused.

Your reply to me was : "Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment."

Your reply to leeeta was : "Without specific details, a general assessment still could be carried out, taken into consideration of factors I have listed before. But the target or objective must a clear."

That aside, I assume that you have done a general assessment of Sino Grandness's VAT offsetting based on the factors that you've mentioned. Could you share your assessment of Sino Grandness based on each individual factor that you've mentioned ? 

Business structure

Legal risks

Tax obligations and implications

Tax planning 

Operating risks

Registered capital requirement

Capital structure 

Source of capital – SAFE registration

Thin capitalization.

Losses carried forward

PPE depreciation profile – building vs machinery

Leasing alternative.

Profit repatriation 

Withholding tax

Dividend policy – source of profit

Exit strategy – 

Operating efficiency

Inter-relationship between various taxes. 
Government incentives

Explaining how you used each factor to assess Sino Grandness VAT offsetting can help us understand why you said it is far from conclusive and expressed doubt in other forumer's reasons. 

Hi Boon,

Combining your 2 statements "Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment." and "Without specific details, a general assessment still could be carried out, taken into consideration of factors I have listed before. But the target or objective must a clear." are you essentially saying that you did a general assessment because you did not have details and that your assessment is not meaningful ?

Also, you listed factors needed to take into consideration when analysing Sino Grandness's VAT receivables but you were unable to answer them yourself and proceeded to make judgements. Basically, you did not do the research that you yourself said was needed and yet you proceed to make a judgement on Sino Grandness's VAT ? Your research methodology seems inconsistent.

My point is, one cannot be quick to pass judgement and suggest fraud if insufficient research is done. If there are questions or doubts, further and deeper research and probing is needed. 

There are many avenues for deeper research into this issue and Sino Grandness in general. Since you have said there is not enough information for meaningful assessment, may I suggest you attend their quarterly briefings, agms, contact their IR and consider their words before you come to a judgement. 

crubs's questions:

Just to be clear, can you clarify your stance on 
 
1) Companies in China incorporating local subsidiaries for factories. Is it a net positive or negative ? What are some of the factors you considered ?
 
2) Specifically for Sino Grandness, do you think their group structure is appropriate, all things considered ?
 
 
________________________________________________________
Hi Boon,
 
Combining your 2 statements "Without the financial statement of individual subsidiaries, it would hard to make a more meaningful assessment." and "Without specific details, a general assessment still could be carried out, taken into consideration of factors I have listed before. But the target or objective must a clear." are you essentially saying that you did a general assessment because you did not have details and that your assessment is not meaningful?
 
(Boon’s reply:
 
“Less meaningful” is NOT the same as “not meaningful”)
 
Also, you listed factors needed to take into consideration when analysing Sino Grandness's VAT receivables but you were unable to answer them yourself and proceeded to make judgements. Basically, you did not do the research that you yourself said was needed and yet you proceed to make a judgement on Sino Grandness's VAT ? Your research methodology seems inconsistent.
 
(Boon’s reply:
 
When you say “analyzing Sino Grandness VAT receivables” what are you referring to?
 
If it is in the context of why is it “ballooning”, how relevant are other factors that I have listed to this ?
 
So far, there don’t seem to be a COMPLETE explanation (both qualitative and quantitative) for the "ballooning".
 
I have questioned it many times but I have not make a judgment or draw a conclusion on it?
 
If it is in the context of “setting up structure to match business objectives”, VAT is one of the many factors in my list that needs to be taken into consideration but it is not the only one.)
 
My point is, one cannot be quick to pass judgement and suggest fraud if insufficient research is done. If there are questions or doubts, further and deeper research and probing is needed.
 
(Boon’s reply:
 Have I suggested fraud?)
 
There are many avenues for deeper research into this issue and Sino Grandness in general. Since you have said there is not enough information for meaningful assessment, may I suggest you attend their quarterly briefings, agms, contact their IR and consider their words before you come to a judgement. 
 
(Boon’s reply:
 Do you think Sino Grandness would provide financial statements of all its subsidiaries?)
 

[Boon]

Name some SGX listed companies with operations in China that do and do not have “VAT receivables/payables” being listed on their financial statements.
 
What are the possible interpretations to those that do not have?
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