Sino Grandness Food Industry Group Ltd (Sfgi:Sp)
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SINO GRANDNESS FOOD INDUSTRY GROUP LTD (SFGI:SP) Author: newman9 (Value Investors Club) Date: 10/22/2014 Recommendation: SHORT Price: S$0.525 (US$0.413) Price Target: S$0.00 Market Cap: S$308mm (US$242 mm) ***SUPPLEMENTAL FOLLOW-UP REPORT TO BE READ IN CONJUNCTION WITH ORIGINAL REPORT ACCESSIBLE HERE OR IN APPENDIX*** Disclaimer: As of the publication date of this report, the authors of this report have short and other positions in Sino Grandness and stand to realize gains in the event that the price of the stock decreases. Following publication of the report, the authors may transact in the securities of the company covered herein. The authors have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this report. All content in this report represent the authors’ opinions. The authors have obtained all information herein from sources believed to be accurate and reliable. However, the authors make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained in this report. The authors expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained in this report. Discussions regarding potential future events and their impact on any issuer are based solely on historic information and estimates and/or opinions, are provided for illustrative purposes only, and are subject to further limitations as specified elsewhere in this report. No guarantee can be made of the occurrence of such events or the actual impact such events would have on any issuer's future performance. INTRODUCTION On September 4, 2014, we posted a research report outlining our view that Sino Grandness has materially misrepresented published financials. This is a supplemental follow-up report which is intended to be read in conjunction with the original report which can be accessed here and is also included as an appendix to this report. In this follow-up, we address the following: 1. While we probably should have done this the first time, we will provide additional details about our due diligence efforts including many pictures documenting our site visits. Perhaps a picture is worth a thousand words. We think investors will find this helpful to verify our due diligence efforts and also get a taste of what we saw. 2. The “Frost & Sullivan Report” and the recent investment by Thoresen Thai Agencies (TTA) should not be a substitute for due diligence and should certainly not be taken as “proof” that Company financials are accurate. Investors should recall that Frost & Sullivan was the industry consultant engaged to prepare the independent data for the Tianhe Chemicals Group (1619:HK) prospectus published just in June of this year. Tianhe has seen its stock fall by over 40% after being accused of fraud by Anonymous Analytics. Frost & Sullivan has been involved with other frauds as well. Moreover, when some of the smartest money managers in the world have been duped by Chinese frauds, we are not sure why investors would be inclined to take comfort from the relatively small investment of a Thai shipping and commodity conglomerate. 1 | P a g e ADDITIONAL BACKGROUND ON DUE DILIGENCE In our original report, we referenced the extensive retail and production site visits that our local researchers conducted. We probably should have included pictures the first time around, but we thought our findings were pretty obvious and didn’t want to extend what was already a 30-page report. Well, we have changed course and in the following section we will share some additional details about our visits, including a bunch of photos which investors might find helpful. Our researchers visited 92 different retail sites Our researchers visited 92 different retail sites, and found Garden Fresh products in 47 of the stores. Guangdong and Zhejiang provinces are estimated to account for 50% of beverages sales. Additionally, the Company has production capacity in Sichuan province and purportedly sells its products there. As such, our researchers visited stores in Guangzhou (33 stores), Hangzhou (20 stores), Chengdu (18 stores), Shanghai (11 stores), and Shenzhen (10 stores). The site visits were roughly evenly split across modern channel retailers such as Vanguard, Ren Ren Le, 7-Eleven, Wal-Mart, Carrefour, and JUSCO, and a variety of corner shops. The corner shops were chosen based on their proximity to modern channel retailers. Please see the original report for the feedback we received during these site visits, which was overwhelmingly negative and casts significant doubt on the quantum and direction of reported sales. What follows is a non-exhaustive sample of our photos documenting our site visits. These photos should provide some more context to the original report. 2 | P a g e At a 7-Eleven in Guangzhou, our researchers spotted Garden Fresh loquat juice and loquat & mango juice placed low in the fridge. You will notice there are two facings and the bottles are not prominent. The loquat juice is discounted from RMB 6.00 to RMB 5.00, which could reflect poor sell-through. Garden Fresh loquat juice and loquat & mango juice at a 7-Eleven in Guangzhou. Source: newman9 At another 7-Eleven in Guangzhou, our researchers found Garden Fresh loquat & mango juice placed on the bottom shelf of the fridge. Again there are two facings and the bottles are not prominent. The juice is once again discounted. Garden Fresh loquat & mango juice placed at another 7- Eleven in Guangzhou. Source: newman9 3 | P a g e At an Aeon (JUSCO) in Guangzhou, our researchers were unable to find Garden Fresh products at all. However, they were able to find several facings of Kagome loquat juice on the bottom shelf of the fridge. There were no Garden Fresh products at Aeon (JUSCO) in Guangzhou. There were products of a competitor, Kagome. Source: newman9 At a Carrefour in Guangzhou, our researchers found one of the more prominent placings for Garden Fresh products. Again, we see a couple facings. Garden Fresh products at a Carrefour in Guangzhou. This is one of the more prominent placings we found. Source: newman9 4 | P a g e At a Family Mart in Shanghai our researchers found Garden Fresh loquat juice on the top shelf at the back of the store. Garden Fresh loquat juice at Family Mart in Shanghai. Source: newman9 During our conversations with distributors and retailers, we heard that the Garden Fresh products were not turning well. In other words, the product was just sitting on shelves rather than selling through to consumers. We were able to corroborate this when we checked the bottles and found 2013 production dates during our visits in July and August 2014. Garden Fresh in a Chengdu store stamped with an October 9, 2013 production date. Photo taken August 2014. The old production dates suggest slow turns on the shelves. Source: newman9 5 | P a g e Please keep in mind that in addition to the site visits, we had hours upon hours of conversations with industry participants such as distributors, procurement managers, competitors, contract manufacturers, and other sources to form a holistic view of Sino Grandness and Garden Fresh. We have thoroughly documented these conversations although they are not in an easy to share format for obvious reasons. Again, please refer to the original report for details on our conversations. We would strongly urge investors to do their own independent checks rather than to rely on trade shows or other checks facilitated by Sino Grandness. Our researchers also visited all 3 of the Garden Fresh production factories Our researchers also visited the Garden Fresh factories to observe levels of activity. They found the factories were essentially idle. Garden Fresh (Sichuan) Fruit & Vegetable Our researchers visited the Garden Fresh (Sichuan) Fruit & Vegetable Beverage factory located at 206 Xinqiong Road, Linchiung Industrial Park, Qionglai City, Chengdu City, Sichuan Province. Exterior view of the Garden Fresh (Sichuan) Fruit & Vegetable factory Source: newman9 Given this is the only factory that is currently operational and purportedly has 70,000-100,000 tonnes of beverages capacity, we expected to see significant activity. Our researchers monitored the factory for two days. On the first day, no vehicles entered or exited the complex. On the second day, a mid-size truck with a packaging company’s name on the door entered the factory. Given Company reported capacity and sales, we would have expected to see something more like 60-150 delivery vans per day, not just a single packaging company truck over the course of two days. 6 | P a g e After monitoring the Sichuan factory for two days, this was the only vehicle our researchers saw enter or exit the complex. Source: newman9 Garden Fresh (Hubei) Food & Beverage Our researchers also visited the Garden Fresh (Hubei) Food & Beverage Factory located at No. 175 Guangjiazhou Road, Dangyang City, Hubei Province. Exterior view of the Garden Fresh (Hubei) Food & Beverage factory Source: newman9 Our researchers monitored the factory for two days and saw only one truck the entire time. It entered the complex at 9am and sat idle as little red boxes were loaded onto the vehicle. We are not sure what was in the boxes, but we doubt it was juice products. The truck remained at the factory that evening. During their site visit, our researchers also saw a couple employees leaving the Hubei factory. 7 | P a g e Over the course of two days, our researchers saw only one truck enter the Hubei factory. On the second day, it entered the factory in the morning and remained there that evening.