SINO GRANDNESS: Another negative report (with holes)

Loquat Fan contributed this article to NextInsight

Loquat drinks are the key products of Garden Fresh, the beverage subsidiary of Sino Grandness.Today, we heard of another negative report targeting Sino Grandness. The authors, "GeoInvesting", titled their report "Is This Singapore Listed Company Rotten At Its Core?"

The report had been preceded by a similar one by "Newman9" in Oct 2014 (see: SINO GRANDNESS: CEO flies to S'pore, assures analysts and investors).

One difference is that "Newman9" had a short position on Sino Grandness while "GeoInvesting" claims not to have (which makes you question why they devoted time and resources to put together this report). 

"GeoInvesting"  deals with three main issues concerning Sino Grandness:

(1) inconsistency between State Administration for Industry and Commerce (SAIC) filings in China and Singapore Stock Exchange filings;

(2) on-the ground checks, whereby "GeoInvesting" chatted up security guards at the gates of Sino Grandness' factories, concluding that the company was experiencing low or non-existent business activities; and 

(3) sale inflation.

"GeoInvesting" wondered how sales of Sino Grandness' beverage subsidiary, Garden Fresh, could have grown despite a declining number of distributors.

They wrote:

"According to Garden Fresh’s IPO prospectus, the number of its distributors decreased by 8.6% from 257 in 2013 to 235 in 2014. This number further decreased to 207 in 2015. However, the company managed to grow its beverage business revenue from 1.38 billion RMB in 2013 to 1.88 billion RMB in 2014, an increase of 35.8%, and grow another 23.6% to 2.32 billion RMB in 2015.  From our perspective, the shrinking number of distributors is more reflective of the weakness of the business as indicated by our on-the-ground due diligence rather than the strength reported in the IPO filing."

"GeoInvesting" appears to be unaware of Garden Fresh's explanation of the decrease in distributors which can be found in its application proof dated 1 April 16 to the Hong Kong Exchange: 

"We terminated our relationship with a large number of distributors in 2014 compared to that in 2013, mainly because we started managing our distributors more actively, based on stricter standards that correspond to the development of our business, and accordingly, terminated, a number of underperforming distributors whose distribution channels were not extensive enough for our expanding business. In 2015, we added less new distributors compared to 2014 because of our stricter standards and a consolidated trend among distributors." 

The application proof also explains why Garden Fresh does not allow sub-distribution: 

"In China's packaged food and beverage industry, producers typically adopt the traditional distribution model under which there are very few main distributors who are responsible for distributing products to retailers and other points of sale. This type of distribution model poses inherent difficulties for the producers to access the performance of the sub-distributors and to effectively monitor the distribution of their products. However, we have, across our distribution network, one distributor in the district or distribution channel designated in the respective distribution agreement, thereby creating a flat layer of multiple distributors across our distribution network."

Next, "GeoInvesting" wrote: "We expected to see robust business operations at each of these subsidiaries, but instead were surprised to see several facilities shut down or idled. Based on our due diligence and observations, we believe that SGFI’s canned business is shrinking, if not totally shutting down, rather than expanding. 

"GeoInvesting" is apparently not aware that Sino Grandness' canned food factories do not operate outside harvest seasons. Page 97 of Sino's IPO prospectus states the following:

"In view of the seasonal nature of our raw materials, our production of different canned fruits and vegetables are conducted during the respective raw materials’ harvesting seasons."

Finally, on the issue of the filings, "GeoInvesting" wrote: 

"We obtained 2014 and 2015 SAIC files for SGFI beverage subsidiaries in July and again in August. The SAIC files obtained in July indicated light production according to revenue numbers, leading us to believe that combined with our on-the-ground due diligence, SGFI’s revenues reported in press releases and annual reports to investors are significantly overstated.

"The company’s SAIC files that we obtained in August show numbers for its beverage subsidiaries that are significantly bigger than numbers we obtained in July.  We believe the company amended its filings so they would essentially “match” the numbers being reported in the prospectus of the beverage business as it prepares to go public in Hong Kong."

 

The following article provides the reasons for SAIC filings not matching with United States' SEC filings. (It follows that the same likely applies to SGX filings) : http://www.prnewswire.com/news-releases/benjamin-wey---a-china-experts-views-on-understanding-saic-and-sec-filing-discrepancies-for-us-listed-china-based-companies-103869893.html

The concerns over SAIC and SEC filing mismatches are overblown and unnecessary. The reason is simple: investors lack basic understanding of China's corporate registration processes and are comparing very different items. It is important to understand what these documents are, what they are not, and why it would be incorrect and ignorant to allege companies as frauds based on SAIC documents.  -- Benjamin Wey, a bi-lingual expert on China and the President of New York Global Group, a leading middle market advisory firm on Wall Street specialized in executing China related transactions