Sunday, 19 July 2015

Mr John McLean resigns from AFG

Enter stage right Aquatic Foods (AFG), a processor and supplier of fish and seafood which grew at an incredible pace in the three years leading to its February listing. Its products, which include Scottish mackerel, sea cucumbers, cephalopods and shellfish are processed and marketed under the Zhenhaitang brand to meet ballooning demand from China's middle classes. Its domestic market now accounts for the bulk of sales, but export markets (serviced by the Kanwa Foodstuffs brand) include South Korea, Japan, and the US.
This week, the group posted its first set of results as a listed company, including a 28 per cent revenue increase to RMB 856m (£89.1m) and a 17 per cent rise in net profit to £14.5m. House broker SP Angel expects net profits of £16m and cash profits of £21.8m in 2015, which means the shares, at 49p - a 30 per cent slump on the 70p listing price - trade on just three times forecast earnings. Even allowing for some discount caused by illiquidity, investors clearly think the story is too good to be true.
The growth has certainly been impressive. Between 2011 and its market debut, the group tripled profits and revenues through the expansion of its product line and distribution network, which now covers 16 provinces in China. This enormous growth was achieved with minimal borrowing. In fact, Aquatic had £20m cash on its balance sheet prior to its Aim listing, which raised £9.3m.
This begs the question why it needed the IPO. In its admission document, Aquatic said it will approach processing capacity this year, and needs capital for a new warehouse, equipment upgrades, distribution network expansion and an advertising campaign. At a total cost of £18.6m, this could have been entirely covered by cash reserves.
A London listing gives other benefits, of course, including greater working capital, access to future funds and a tradable currency in the company's shares, allowing Aquatic to circumvent tight controls on RMB and distribute profits and dividends. Claims an Aim listing would also enhance its reputation with Chinese customers and international distributors are harder to quantify, and seem puzzling given the organic growth, and the fact Aquatic already supplies Wal-Mart (US: WMT), the largest retailer in the world.
To assist it with the public listing, the group recruited Richard Sweet and Mircle Yap Ching Chai as non-executives. Both also sit on the board of Camkids, a link which may have warned off some investors given that company's disappointing recent history, but taken alone this does not blunt Aquatic's growth prospects or story. Indeed, none of the above screams 'red flag'.
All of which points to a disconnect between UK investors on the one hand and Aquatic's directors and larger Asia-based shareholders on the other. Could it be the market for cephalopods and sea cucumbers is too culturally alien for many UK investors, who may have adopted the Confucian adage that "real knowledge is to know the extent of one's ignorance"? It's doubtful, given the markets are awash with heavily-traded companies offering niche, complex or exotic services and products. And seafood isn't that complicated.

Let`s hope he now concentrates on his other under performers .
I wouldn`t hold my breath though .


The Wild West flavour of investing in China will be known to anyone who can spell IPO (or better yet Hanergy). But it’s not all multibillion-dollar stock losses and billionaire chairmen gone Awol. Sometimes the losses are tiny, the companies obscure and the people involved are nobodies doing business in the middle of nowhere. Don’t let that fool you, though: even if the headline is small, the headache may be huge.
Consider the case of Sorbic International: a London-listed Chinese food preservatives company with a market capitalisation of only £1.5m but a problem big enough to make anyone think twice about going into business in a country where corporate governance is stuck somewhere back in the Qing dynasty.
    Sorbic, which is based in the coastal province of Shandong but listed on London’s junior Aim exchange, this month gave the London Stock Exchange (Aim’s overseer) an update on the suspension of its shares that should be required reading for anyone who still thinks there is low-hanging wealth ripe for the plucking in the Chinese hinterland.
    Sorbic has removed its Chinese chief executive from office, and from his position as legal representative of the company in China. But sackings are never simple here — and this one has gone haywire in a way that is all too common, even in the Middle Kingdom of the 21st century.
    Wang Yan Ting, the chief executive, “declined to hand over the company’s corporate seals (chops) and business licences, which he removed from the premises before he was dismissed”, Sorbic told the market.
    That may not sound like a big deal to anyone doing business in jurisdictions where a chop is a carnivorous meal option. But corporate China is all about chops — which is why “steal the seal” is popular with disgruntled executives. With the chops and the business licences, Mr Wang can continue to control the company’s bank accounts and day-to-day operations.
    Sorbic says Mr Wang has used his power to transfer Rmb70m ($11m) of the company’s money to, well, they know not where. Worryingly, the company also pointed out that this had been brought to the attention of the local police, who “deemed Mr Wang’s non co-operation as a commercial matter and were therefore unwilling to assist”. (Sorbic says the Chinese authorities have since become involved.)
    Not surprisingly, Mr Wang disputes all this. Zhang Yingzheng, his lawyer, told the Financial Times his client did not steal the seals. “The chops are still at the company and Mr Wang is also at the company, so Mr Wang did not take the chops. He is still operating the company. How could he operate the company without the chops?”
    Nor did he divert Rmb70m in company funds, says the lawyer: Mr Wang is owed back pay, he says (an allegation Sorbic denies), and he was promised a 50.1 per cent share in the company (which Sorbic says is nothing to do with them as it relates to events “before Sorbic’s acquisition of his business”). Mr Zhang helpfully added that, should the FT not print an “accurate” version of the dispute, “we will sue you, using the weapon of the law”.
    It seems the law won’t have much of a look-in resolving the he-said he-said, though. “It’s a conundrum in China, that if you want to replace a legal rep, the change in legal rep document has to be ‘chopped’ by the outgoing legal rep, and if he takes the chops then you can’t make the change,” says John McLean, a UK accountant who is Sorbic’s non-executive chairman. “Our approach is to get him to the table to negotiate because the legal system takes a long time.”
    “The HR law in China greatly favours the employee. It can enable people basically to . . . hold the company hostage,” says Kent Kedl, head of the Control Risks consultancy in China. “Situations like this are way too common. Any labour dispute issue that we handle for clients has something similar to this: they have the chops, the keys to the safe or password or whatever,” he adds. Talk about job security: it’s not easy to see what Sorbic can do if Mr Wang continues refusing to step down.
    So those of you who can spell IPO: by all means, read the Hanergy headlines — but don’t forget the Sorbic small print.

    Would you trust this man ?

    On Monday AIM-listed Aquatic Foods Group plc (AFG), a Jersey-based holding company with its main assets in Shandong Province in China, held its AGM. Ahead of that gathering it was announced that Mr John McLean (hitherto the Deputy Chairman and Senior non-Exec) had withdrawn his candidacy for re-election to the board. Red Flag? Read on (especially if your name is Xavier Rolet, CEO of the LSE).
    The company, just like Naibu (before it ‘fessed up that it couldn’t get hold of the cash and revelations here on ShareProphets that its CEO was in jail and that it had large undisclosed borrowings, and then delisted),  Sorbic (also given the order of the boot by AIM after its head honcho ran off with all the cash as well as the assets), Gate Ventures (exit due today), Jiasen (ejection surely inevitable very soon), JQW, Camkids and I daresay a few more (the list gets longer every few days), seems to be drowning in cash and yet the shares have nose-dived since IPO in February of this year. I have no idea of the investment proposition beyond the name and frankly I don’t care because certainly something smells fishy.
    The company joined the Casino on 3 Feb 2015, with S P Angel acting as both Nomad and Broker,  raising £9.3million at 70p a share. Last night the shares closed at 23.5p and thus the shares are sporting a drop of 66% in just over 5 months. Just on Monday the company offered a trading update showing revenues on the up by some 26% and an unchanged rose-tinted outlook, having reported FY14 net profit after tax of RMB 138million (c. £14million) and cash of RMB 194million (c. £20million) and that was before placing proceeds at admission of £9.3million gross (call it £8.8million net).
    Here we have a company which was awash with (give or take) £30million of cash – call it around 30p a share, ball-park, when the results were announced and generating vast and growing profits. Yet there was no dividend. Now, with the shares at just 23.5p it would appear that the shares are, just like all the other China Norfolks, trading at a discount to cash.
    Mr John Mclean, still on the board of now ex-AIM-listed China Norfolk Sorbic, has seen fit to walk from his post at Aquatic. Why? The company reported FY14 cash in hand and at banks, less restricted cash, of RMB187m. Take off borrowings of RMB 41million and you are still left with net (and, we are assured, growing) cash of about £14million, plus the admission placing proceeds of, say, £8.8million net. With admission costs, surely there was net unrestricted cash of at least £22million when the company reported FY14 results. Why no dividend? Why did Mr McLean, having seen the gaffer at Sorbic run off with all the assets yet he appears to have stayed on there, decide to walk from Aquatic?
    Why have the shares crashed, with only good news in trading updates – and, indeed, a ‘know-of-no-reason’ RNS in the face of the share price decline?  Why has Mr McLean stepped down from this poster-boy for all that is good about AIM-listed Chinese companies (apart from the share price)? Why is the company trading at a substantial discount to cash, and (at worst) on a par with net unrestricted cash, yet is awash with the stuff in ever growing proportions and company growth is around 25%?
    Could it be that as with, say, Jiasen (JSI) nobody believes the numbers? Given the recent history of AIM-listed Chinese outfits, who would take the risk here? Given the lack of action by the FCA, AIM Regulation, the LSE and all the other regulators which could have stepped in over Naibu (it is not as if they weren’t warned) and now the quiet delisting of Sorbic and Gate in the wake of unexplained Nomad resignations, what reassurance is there for investors that this is not just another Norfolk?
    Aquatic just could conceivably be the bargain of the decade, but as with Jiasen which currently trades on a discount to (claimed) cash of about 80% and sitting on an historic yield of 80% plus, who would take the chance? Are the numbers presented just codswallop, shoal upon shoal of red herrings presented by a shiver of sharks? (ok, enough cheap fish gags…)
    But In the absence of the LSE showing any sign of taking its responsibilities seriously (other than to grab as much money as possible in the short term, and allow the crony capitalists to do the same) this has to be yet another AIM-Casino China bargepole stock.
    Are you reading this Xavier Rolet, CEO of London Stock Exchange Group (LSE), which is doing its best to recruit yet more China frauds to the Casino (see HERE) and discourage anything remotely above board? As Warren Buffet might put it, the tide is going out. Trust me, Mr Rolet, I really do not want to see what lurks beneath the waves. I would suggest that investors take the same view of Aquatic.
    Turn your backs now - don’t wait for the trunks.

    No comments:

    Post a Comment