Sino Grandness

[Adagio]

The main point by Newman9 of Value Investor Club is that Sino Grandness has inflated its sale.

Is this possible?

From Portuser post in this forum:

Garden Fresh booked the following sales in recent periods:
2012……………………………RMB 865m
2013……………………………RMB 1,382m
First half 2014……..……..RMB 879m

If it inflated sales 2x, then it had to hide RMB 1,563m (half of the sum of RMB 865m, RMB 1,382m and RMB 879m) of fictitious sales in its balance sheet.

Reported assets of Sino Grandness (RMB 1,585m as at 30 June 2014) were not large enough to hide RMB 1,563m.

Short-seller’s claim is that sales inflation is 5x at least. In which case there was RMB 2,500m to hide in the RMB 1,585m balance sheet.


Assets - Liabilities = Shareholders' equity. Equity include share capital, retained earnings (accumulated P&L) and other reserves including revaluation reserves.

Inflating assets to cover inflated sales
Accounting double entry for recognizing sale is usually:
Dr Cash/trade receivables (asset)
Cr Sale (P&L)

Assets include inventory, PPE (fixed assets). Did customers of Sino Grandness barter trade with inventory/PPE such that the entry is Dr Inventory/PPE Cr Sale?

Is it possible that cash, receivables, inventory, PPE be overstated by RMB2,500 mil ?

There are probably 6 teams of professionals (some Big 4 accounting firms) that had scrutinized Garden Fresh accounts. They represented bondholders 1 & 2, HKSE, Thai investors, Asdew and the auditors of Garden Fresh. This should greatly reduce investors' risks and any concerns about subsequent write down/write off of asset values. So far there is only 1 Newman9 and we do not know if he is a professional consultant or not. 我们在明，他在暗。

Of course there are also the independent directors in Sino Grandness and Garden Fresh who I hope they had done their due diligence too.

With so many bad presses on Chinese companies' frauds and lessons learnt, these professionals involve in the due diligence work would have carried out more steps and going to the sources for direct verifications.

It is also unlikely that the inflated sales had been expensed off because that would mean the retained earnings of Sino Grandness will be much lower than what it is now.

Let's hope that Newman9 can share further where he thinks the inflated sales are hidden in the accounts.

[Young Investor]

Chinafarmer
Thank you for alerting us on whether Goldman Sachs is still holding on to 2012 bonds and have not passed all to other investors.
Please see the following post in Nextinsight:
"IPO is still under process - listing in HK these days is a lengthy process but the company is not in a rush as current cash flow needs are sufficient. Also, the company has a very good relationship with Goldman Sachs and the terms of the convertible bond agreement are that both parties can extend beyond June 2015 if it is mutually agreed upon. Chairman is very confident that Goldman will seek to hold until IPO but even if they choose to redeem, company can use internal cash flow + bank borrowings (current gearing ratio is almost negligible while company has many pledgeable assets) to pay back convertible bondholders."
Do you think Chairman of Sino Grandness dares to say Goldman is still in when it is not?  

[chinafarmer]

Chinafarmer
Thank you for alerting us on whether Goldman Sachs is still holding on to 2012 bonds and have not passed all to other investors.
Please see the following post in Nextinsight:
"IPO is still under process - listing in HK these days is a lengthy process but the company is not in a rush as current cash flow needs are sufficient. Also, the company has a very good relationship with Goldman Sachs and the terms of the convertible bond agreement are that both parties can extend beyond June 2015 if it is mutually agreed upon. Chairman is very confident that Goldman will seek to hold until IPO but even if they choose to redeem, company can use internal cash flow + bank borrowings (current gearing ratio is almost negligible while company has many pledgeable assets) to pay back convertible bondholders."
Do you think Chairman of Sino Grandness dares to say Goldman is still in when it is not?  

I do not regard nextinsight highly and am thus not in the position to comment on the above posting, but to each his own.

I suggest you ask the company directly. Specifically you should ask when references to Goldman were made in the context of the CB issue, were they referring to Goldman as the MANAGER of the CB or the ultimate bondholder? Simply ask the loquat who holds beneficiary interests in the CB.

My understanding is that in many cases, the investment banker earns a placement fee from the company for fund raising and also charges the investors a management fee.

[chinafarmer]

YoungInvestor,

Since you have kindly pointed me out to the nextinsight posting, I would like you to consider the point you raised.

"+ bank borrowings (current gearing ratio is almost negligible while company has many pledgeable assets) to pay back convertible bondholders."

Why did the loquat not consider bank borrowings in the first place instead of the CB issue? Isn't the bank interest lower than that of the CB? Isn't a bank loan non dilutive vs. the CB issue?

[specuvestor]

The main point by Newman9 of Value Investor Club is that Sino Grandness has inflated its sale.

Is this possible?

From Portuser post in this forum:

Garden Fresh booked the following sales in recent periods:
2012……………………………RMB 865m
2013……………………………RMB 1,382m
First half 2014……..……..RMB 879m

If it inflated sales 2x, then it had to hide RMB 1,563m (half of the sum of RMB 865m, RMB 1,382m and RMB 879m) of fictitious sales in its balance sheet.

Reported assets of Sino Grandness (RMB 1,585m as at 30 June 2014) were not large enough to hide RMB 1,563m.

Short-seller’s claim is that sales inflation is 5x at least. In which case there was RMB 2,500m to hide in the RMB 1,585m balance sheet.


Assets - Liabilities = Shareholders' equity. Equity include share capital, retained earnings (accumulated P&L) and other reserves including revaluation reserves.

Inflating assets to cover inflated sales
Accounting double entry for recognizing sale is usually:
Dr Cash/trade receivables (asset)
Cr Sale (P&L)

Assets include inventory, PPE (fixed assets). Did customers of Sino Grandness barter trade with inventory/PPE such that the entry is Dr Inventory/PPE Cr Sale?

Is it possible that cash, receivables, inventory, PPE be overstated by RMB2,500 mil ?

There are probably 6 teams of professionals (some Big 4 accounting firms) that had scrutinized Garden Fresh accounts. They represented bondholders 1 & 2, HKSE, Thai investors, Asdew and the auditors of Garden Fresh. This should greatly reduce investors' risks and any concerns about subsequent write down/write off of asset values. So far there is only 1 Newman9 and we do not know if he is a professional consultant or not. 我们在明，他在暗。

Of course there are also the independent directors in Sino Grandness and Garden Fresh who I hope they had done their due diligence too.

With so many bad presses on Chinese companies' frauds and lessons learnt, these professionals involve in the due diligence work would have carried out more steps and going to the sources for direct verifications.

It is also unlikely that the inflated sales had been expensed off because that would mean the retained earnings of Sino Grandness will be much lower than what it is now.

Let's hope that Newman9 can share further where he thinks the inflated sales are hidden in the accounts.

Hi Adagio

Pls see my repost below.

^^^A/R hides sales but cash and FA hides EARNINGS. It is incorrect to just use the asset to approximate the "fake sales".

If you clean them out your earnings will be affected. In fact thats why u see some dubious companies go for disastrous acquisitions for "one-time write offs"

The issue with Auditors are 2 folds: Firstly they are employed by the company itself and the conflict of interest is as obvious as the LIBOR scandal. Anyone with any common sense can see these systems are flawed. I've suggested that listed companies should pay into a common fund with contribution adjusted by market cap and administered by SGX to hire and assign auditors independently to different listed stock.

Secondly auditors are concerned primarily with historic accuracy of accounts rather they make sense. They just match numbers and are not concerned about whether the large amount in the invoice make sense from a small company, or whether the market size of the industry can support such sales. End of day if numbers match but the invoices are fraud, they will claim they can't do much for forged documentations. Nonetheless we still need auditors to give us a first cut and more often than not, that IDs are awake, who presumably knows more about the business itself than just the numbers

[simpleman]

Just wonder what are the factors Wellcome, the largest supermarket chains in Hong Kong, and 7-Eleven, the largest convenience store chain, took into account in putting loquat juice on their shelves? Did Sino Grandness succeed in conning them?

For the recent 4 years, Sino Grandness has been stating that its loquat juice has been on sale at Careffour, Walmart and 7-Eleven. The shortseller has not denied this. But if loquat juice is not selling well, can it remain on their shelves

[CY09]

We should not be jumping to conclusions too fast. As seen by the CMZ case, the accused company may not have been inflating figure.

For SFIG, there seems to be merits to that it has inflated its sales figure through the higher growth of receivables than sales etc. However, it may be not be inflating its figures as well as it previously had some fund companies holding stakes and personally, I know one of these funds does a very thorough due diligence while investing in the components of their concentrated portfolio.

Similarly, the auditor checks may not be thorough as the auditors are not compensated with a stake in the investments. Perhaps one way forward is to instead pay these auditors audit fees, issue them shares of the company instead. Then companies like Gaoxian (E&Y) may not happen. On the other hand, it is worth noting that the CEO has raised his stakes in the company unlike China Eratat or even Qingmei where the CEO/Chairman sells down their stake to some unknown/unreputable individuals despite the undervaluation of their company

[Young Investor]

Chinafarmer

Thank you for informing us that your “understanding is that in many cases, the investment banker earns a placement fee from the company for fund raising and also charges the investors a management fee.”

Therefore, it is your assumption that Goldman Sachs is not holding on 2012 CBs.

What is your analysis of para 13.2 in Sino’s circular dated 4 Jul 2012 (in relation to the issue of 2012 convertible bonds) that when some bondholders redeemed their 2011 CBs in Oct 2014, all 2012 CBs holders could have asked for accelerated redemption.

I understand that when a company issues two CBs, it is common to have accelerated redemption for the second tranche if holders of the first tranche redeem. This is a basic protection mechanism given to latecomers.

Did 2012 CBs holders turn a blind eye on redemption of 2011 CBs by some holders?

I read somewhere that 2012 holders knew Garden Fresh had no money and cooperated by not pressing for accelerated redemption. This assumption is quite amusing.

[chinafarmer]

Chinafarmer

Therefore, it is your assumption that Goldman Sachs is not holding on 2012 CBs.

Please retract your above statement.

I have not assumed Goldman is not holding.

In my posts, I all along maintained that you as an investor must ask the company specifically about the matter. I myself do not know and cannot assume anything too.

My first post in this forum was to ask investors to consider if Goldman is the ultimate bondholder and even if Goldman is and has not redeemed, it adds little credibility to the loquat being real as evident in my illustration of China Essence and others. The intention of my post was to warn investors the pitfall the common argument of giving merit to the loquat since Goldman has not abandoned ship.

As to your question about why the 2012 bondholders did not redeem when they could, the more apt question you should ask is whether the loquat is able to pay the entire redemption amount in Oct 2014 given their financial position.

[cracker]

I do not believe that Goldman was acting as a middleman/agent and here are 2 reasons why.

1. 2 years ago when Goldman Sachs subscribed to the bonds, a Goldman Sachs representative was also given a board position in Sino Grandness. I believe this implies that the bonds were subscribed by Goldman Sachs itself and not as an agent/middleman. Otherwise, why would Goldman be given a board seat simply for acting as an agent?

2. Furthermore, as we know, both Goldman Sachs (about 80%) and SHK (about 20%) had subscribed to the bonds. We also know that this time round that about 80% of bonds were extended while the remaining 20% were redeemed. I have been informed that the 20% redeemed were from SHK due to their funding requirements - the remaining 80% which has been extended was all Goldman. If Goldman was acting as a middleman, it is extremely unlikely that ALL the investors it was acting as a middleman for would have unanimously chosen to extend while ALL SHK investors would have chosen to redeem (on top of the fact that I have been informed that SHK itself has chosen to redeem due to fund expiry dates and requirements it had to meet, implying also that it was acting for itself). The unanimity implies that it is simply 2 entities making the decisions - Goldman and SHK themselves.