China Minzhong (Glaucus)

We believe that Minzhong, like Chaoda, has so significantly deceived regulators and investors about the scale of its business and its financial performance that we expect trading in its shares to be halted and its shares to be worthless. 1. Fabricated Sales. Publicly available filings indicate that Minzhong fabricated sales figures to its top two customers. a. Top Customer Incorporated After The Track Record Period. Corporate registry records show that a Taiwan-based food distributor, which was supposedly Minzhong’s largest customer in the pre-IPO track record period (2007-2009), was only incorporated in November 2009, suggesting, in our view, that Minzhong simply fabricated the sales figures in its Prospectus. b. SAIC Filings Indicate Faked Sales. SAIC files show that Minzhong’s second largest customer, which purportedly accounted for RMB 142 million in sales in 2009, had zero revenues and zero COGS in 2009. c. Undisclosed Related Party. Minzhong reported in its Prospectus that its top customers were independent third parties. But SAIC filings show that Minzhong’s second largest customer was not only co-founded by Company Chairman Mr. Lin Guo Rong but that Lin Guo Ping, who served as a legal representative of a Minzhong subsidiary, simultaneously served as the supervisor of the Minzhong customer. It appears that Minzhong failed to disclose such material connections to investors. 2. Top Supplier’s Business License Revoked pre-IPO. SAIC filings show that Minzhong’s largest supplier during the pre-IPO track record period, which purportedly accounted for 18% of the Company’s total purchases in 1Q2010 and was the Company’s primary source of mushroom spores (reportedly its best selling product), was deregistered and stripped of its business license for violating PRC law in February 2010, a mere two months before Minzhong’s April 2010 IPO. In our opinion, the implication of this deregistration is that the supplier was not a major operating business and that Minzhong fabricated payments to its largest supplier. 3. Attempted Cover Up? After a wave of accounting scandals and de-listings among other SChips in early 2011, it appears that Minzhong doctored the historical financials of certain subsidiaries in their respective SAIC filings to make them appear consistent with Minzhong’s Singapore-filed financials. Prior to the apparent cover up, SAIC filings suggest that Minzhong’s assets and earnings were a small fraction of what the Company claimed in its Singapore-filed financials. 4. Suspicious Capital Expenditures. S-Chips and US-listed reverse mergers engaging in fraud often overstate reported capital expenditures to mask fake sales on the balance sheet. In FYs 2011 and 2012, Minzhong claims to have spent around RMB 1.2 billion on the construction of a new industrial park in Putian. Yet SAIC filings show an increase of only RMB 203 million in PP&E during the same period. More suspiciously, the industrial park was not pledged as collateral for the Company’s bank loans; instead, Minzhong’s creditors sought personal, unsecured guarantees from the Company’s Chairman and its suppliers. We believe that this is further evidence that Minzhong vastly overstated its capital expenditures. 5. Reinventing the Wheel. The Company’s business model is as old as agriculture itself, yet it so vastly outperforms other fresh produce growers that its reported financial performance defies credibility. a. EBITDA. Minzhong’s reported EBITDA margins on fresh produce, its most profitable segment, averaged an absurd 66% during the past five years. b. Ballooning Receivables. The Company’s receivables have skyrocketed of late, despite the fact that its credit terms have not changed. We believe that the persistent and unexplained growth in receivables is caused by the need to account for fake income on the balance sheet. c. Negative Free Cash Flow. Since its IPO, Minzhong has generated negative free cash flow of RMB 1 billion. Much like other S-Chips which have been delisted under suspicion of impropriety, the Company relies on debt or equity financing as its primary source of cash generation. 6. Valuation. As of March 31, 2013, Minzhong had approximately RMB 1.1 billion of onshore liabilities outstanding, including bank loans and trade payables due to unsecured onshore creditors in the PRC. In a liquidation scenario, the holders of onshore liabilities have historically taken priority over offshore equity holders. Because we believe that the Company has significantly overstated its sales and its capital expenditures, we doubt the authenticity of its reported receivables, cash balance and PP&E. Given the limited offshore assets available for seizure (cash denominated in USD, SGD, or Euro was limited to RMB 8 million as of 6/30/2012) and the difficulty recovering onshore assets (property and equipment) from alleged fraudsters under China’s byzantine judicial system, we put a price target on Minzhong’s shares of SGD 0.00.