China Minzhong Food Corporation

[grubb]

I remember reading about Chaoda Modern last year. Its a similar biz to CMZ. Here's the report by anonymous analytics for some interesting reading.

http://www.scribd.com/doc/66708096/Chaod...6-Sep-2011

[desmondxyz]

CIMB ceasing coverage (after calling an outperform recently!)

********************

We have been sharing Glaucus’s concerns for some time, especially the first two. MINZ had issued newshares (98m) to Indofood on 15 Feb13, at S$0.915 apiece or 0.7x its FY12
book value. It soon followed this upwith an unsuccessful attempt to issue bonds on 8 Mar 13. We found this intensive capital-raising worrying. The company’s willingness to dilute EPS at such an unfavourable price suggests to us a desperate need for cash when this shouldn’t have been the case. Capex was supposed to be
lower this year (according to guidance) with positive free cash flow anticipated by us. Further, Olympus Capital, one of its major shareholders before IPO, had disposed of its remaining 10.3% stake on 6 Dec 12. It is hard to believe management was not aware of both Indofood’s and Olympus Capital’s intentions, considering their transactions were back-to-back. If Indofood’s expertise had been
what MINZ was solely after, management could have arranged
for Indofood to take over Olympus’s stake.
Pressure from investors to pay dividends probably weighed on the
company. We sensed that it was going to pay dividends for the first
time this quarter, which could have catalysed its share price; hence, our previous Outperform. However, we believe raising equity from Indofood to pay dividends would have compromised the quality of any payout, as it could have represented a mere “transfer” of cash.
We were also worried by its spiking receivable days. FY12 receivable days were 85, up from 45 in FY10 and 43 in FY11. See our report: Look beyond
the stellar earnings.

Hehe....they shared the same concerns with Glaucus and yet they keep issuing BUY call for this counter....

Lesson: If analyst coverage can be trusted, Sh** also can be eaten.

[opmi]

CIMB ceasing coverage (after calling an outperform recently!)

********************

We have been sharing Glaucus’s concerns for some time, especially the first two. MINZ had issued newshares (98m) to Indofood on 15 Feb13, at S$0.915 apiece or 0.7x its FY12
book value. It soon followed this upwith an unsuccessful attempt to issue bonds on 8 Mar 13. We found this intensive capital-raising worrying. The company’s willingness to dilute EPS at such an unfavourable price suggests to us a desperate need for cash when this shouldn’t have been the case. Capex was supposed to be
lower this year (according to guidance) with positive free cash flow anticipated by us. Further, Olympus Capital, one of its major shareholders before IPO, had disposed of its remaining 10.3% stake on 6 Dec 12. It is hard to believe management was not aware of both Indofood’s and Olympus Capital’s intentions, considering their transactions were back-to-back. If Indofood’s expertise had been
what MINZ was solely after, management could have arranged
for Indofood to take over Olympus’s stake.
Pressure from investors to pay dividends probably weighed on the
company. We sensed that it was going to pay dividends for the first
time this quarter, which could have catalysed its share price; hence, our previous Outperform. However, we believe raising equity from Indofood to pay dividends would have compromised the quality of any payout, as it could have represented a mere “transfer” of cash.
We were also worried by its spiking receivable days. FY12 receivable days were 85, up from 45 in FY10 and 43 in FY11. See our report: Look beyond
the stellar earnings.

Hehe....they shared the same concerns with Glaucus and yet they keep issuing BUY call for this counter....

Lesson: If analyst coverage can be trusted, Sh** also can be eaten.

one down. how many more to go??? hahaha...

[heifien91]

You are absolutely right, good call. I need to make up my damn mind this time.

Hi Wildreamz,

I am not invested in CMZ or any other s-chips but what I would like to say would be would it be wise to just start panic selling all your s-chips just due to this one case? Perhaps you need to slow down and think through of the past agms you attended for the other s-chips and consider if management has not be transparent in any way.

Just my two cents.

[Temperament]

If i want to invest like a "Venture Capitalist", why S CHIPS? Singapore and Malaysia don't have CHIPS to invest meh?

[specuvestor]

Personally I tend to listen more to people who tells me their investing mistakes than those cocktail talks of amazing stories of buying at bottom sell at top. Oei Hong Leong's AIG trade vs his FX losses is a good case in point.

Losing young is a good thing because u lose less and you have the CAPACITY to claw back in next 30 years. Not so easy to cope if you lose $1m at 55. No one rides a bike without falling down. My personal opinion is that you look to sell half first such that you limit your downside and if stock rebounds you have an option to sell out. This takes away the assumption that you are making the right decision when you are actually making a binary decision. It is definitely easier for the psyche as well, which is actually very important in times of stress.

I agree with d.o.g that it is highly likely that CMZ is a legit and good business in the beginning. However that does not mean that subsequently we should not monitor its progress. Satyam is another case in point. Frankly I don't think the argument about operating margins are valid as much as questioning the margins of software companies. Their industry is as such. Go ask how much margin vegetable sellers or durian sellers make. It is the logistics and opex that is paramount.

Secondly I think people put too much weight on Templeton and GIC and subsequently Indofood. They are good catalysts and increases confidence and hence one's asset allocation. Without the benefit of hindside I would put more money on stocks with these pedigrees rather than those without.

Thirdly which I think is most important is that people focus too much on P/L OR bookvalue rather than working capital and cashflow. It is evident in this forum as well. Those focusing on P/L are supposedly growth investors and those on book value are value investors. Buffett focuses on business, which is cashflow. A fundamental investing look at all these aspects of a business, from major shareholder incentives, to management, to growth prospects to funding cost. Fundamental investing is really boring becuase it takes a lot of hardwork and digging out the whole picture rather than just a singular number like PE or BV. That's what it means when it say we need to understand the business.

Nonetheless value investing means we necessarily need to be contrarian. Question is whether 1) we did our homework thorough hence our comfort level 2) our expertise for eg don't try to be involved in sophisticated structure when you are just opmi and no idea why 3) asset allocation is appropriate

my 2cts contribution to this saga

Seriously, if their fraud is really so blatant (faking their largest customer etc), why no one before us, GIC or Indofood, realized before hand? What are the buy side analyst doing? Why didn't I realize before hand? Gosh.

No need to feel awful. Everyone makes mistakes. Live and learn. What doesn't kill you, will make you stronger.

One thing to remember regarding GIC is that they invested a long time ago. It is entirely possible that at that time, China Minzhong was fully legitimate. However the company's farming acreage quadrupled in size in the subsequent years.

Most likely, GIC did not check as thoroughly after investing. It's like buying a 4-block complex of buildings when only the first block is up - if the first block checks out, you pay up and assume the other 3 upcoming blocks will be of the same quality. However, there is no guarantee that these future blocks will indeed be of equivalent quality unless you inspect them as closely as you did the first block - which you probably won't.

I realized this last year and got out. The loss was painful, but I've had worse. With Minzhong I broke 3 simple rules of thumb. It had a limited track record, the managers were not the largest shareholders, and the business model consumed cash instead of generating it. China Minzhong is/was a reminder that I should not try to outsmart myself too often. Rules exist for a reason - to keep us out of trouble! Rules can be broken, but at one's own peril.

I only bailed in after Indofood bailed in..

As for Indofood, the controlling shareholder is Anthoni Salim, the youngest brother of Andree Halim, who controls QAF. Their father is the late Sudono Salim a.k.a. Liem Sioe Liong. Why is this relevant? Because in June 2005, QAF bought 55% of China Food Industries, which was subsequently discovered to be a fraud. Clearly, QAF didn't do its due diligence properly, and now, it seems, Indofood didn't either. Does this hands-off approach to investing run in the family? Only the brothers themselves know for sure.

[WolfT]

If i want to invest like a "Venture Capitalist", why S CHIPS? Singapore and Malaysia don't have CHIPS to invest meh?

Uncle Temperament, it is because s-chip looks cheap as compared to the rest of the local stocks. The rush and greed to built wealth asap also plays a part of the decision making...

[CityFarmer]

My sympathies Ray168, Wildreamz and others vested on CMZ.

I have similar experience, with losses in 5-digits figures. The experience has made me a wiser (hopefully) and luckier man to avoid further major losses.

To share the lesson learned below
- Never invest unless fully understand the business model, even trusted sifus or famous fund managers are vested. For e.g. Boustead, with quite a number of experience buddies here vested and with good performance so far. I didn't invest due to my lacking of understanding on its business model.
- Never put more than a limit on single stock, no matter how promising the future prospect.
- Always align the performance with external figures e.g. industrial, customer, and supplier if possible.

The approach seemed working so far to me.

(not vested)

[level13]

I hate to say this, but chances are this glaucus report is the nail in the coffin for CMZ shareholders.

The reason i am saying that is because if i am Chairman Lin, i wont be able to refute the allegations in a believeable & convincing manner.

As d.o.g mentioned earlier, the following are 4 main findings of the report:

1. Late incorporation of the largest customer;
2. Second largest customer was an undisclosed related party and too small;
3. Too-small industrial park; and
4. Massively revised SAIC filings

Lets go through some of the possible ways to argue that the allegations are false:

1) the documents put forth by glaucus are fakes.....
(Not convincing and easily shot down. If i were glaucus, the first thing i will do is ensure that the documents i have is real, credible and up to date.)

2) give some reasons that the disclosure required is not material and un-necessary.....
(Not convincing too....... when in doubt, disclose)

3) mention that the cap exp has been set aside but the building of the industrial park is still in its early stages......
(maybe..... but again that will lead to another series of questions.......)

4) mentioned that the company need to revise filings due to some unforeseen circumstances
(Not convincing....... sound like trying too hard)

Perhaps other forummers can come up with more credible reasons and arguements. But ultimately, to get away with ALL the allegations that surfaced seems to be too tall an order. I guess CMZ is forced into a corner now with no chance of escape.

[CityFarmer]

CIMB ceasing coverage (after calling an outperform recently!)

********************

We have been sharing Glaucus’s concerns for some time, especially the first two. MINZ had issued newshares (98m) to Indofood on 15 Feb13, at S$0.915 apiece or 0.7x its FY12
book value. It soon followed this upwith an unsuccessful attempt to issue bonds on 8 Mar 13. We found this intensive capital-raising worrying. The company’s willingness to dilute EPS at such an unfavourable price suggests to us a desperate need for cash when this shouldn’t have been the case. Capex was supposed to be
lower this year (according to guidance) with positive free cash flow anticipated by us. Further, Olympus Capital, one of its major shareholders before IPO, had disposed of its remaining 10.3% stake on 6 Dec 12. It is hard to believe management was not aware of both Indofood’s and Olympus Capital’s intentions, considering their transactions were back-to-back. If Indofood’s expertise had been
what MINZ was solely after, management could have arranged
for Indofood to take over Olympus’s stake.
Pressure from investors to pay dividends probably weighed on the
company. We sensed that it was going to pay dividends for the first
time this quarter, which could have catalysed its share price; hence, our previous Outperform. However, we believe raising equity from Indofood to pay dividends would have compromised the quality of any payout, as it could have represented a mere “transfer” of cash.
We were also worried by its spiking receivable days. FY12 receivable days were 85, up from 45 in FY10 and 43 in FY11. See our report: Look beyond
the stellar earnings.

Hehe....they shared the same concerns with Glaucus and yet they keep issuing BUY call for this counter....

Lesson: If analyst coverage can be trusted, Sh** also can be eaten.

A reminder: Let's be mindful on the word(s) used, for the benefit of buddies' reading pleasure