China Minzhong Food has dismissed claims of fraud against it by a shortseller as a misunderstanding of its business and said that it would issue a response by the end of the week


Now Minzhong says it was misunderstood

It dismisses fraud claims but will respond only later; analysts seek strong response


[SINGAPORE] China Minzhong Food Corp has dismissed claims of fraud against it by a shortseller as a misunderstanding of its business and said that it would issue a response by the end of the week. The company delayed reporting its full-year results from yesterday morning to yesterday evening to address some of the issues raised by shortseller Glaucus Research Group, but those numbers would mean little until Minzhong gives its response, observers said. “It really has no meaning if people have doubt about the numbers, so the main thing is to restore investors’ confidence,” Voyage Research analyst Ng Kian Teck said.

Late yesterday, Minzhong reported a 4.9 per cent decline in fourth-quarter net profit to 162.7 million yuan, or 0.25 yuan per share, for the period ended June. For the full year, net profit rose 11.1 per cent to 755.1 million yuan, or 1.28 yuan per share.

Minzhong has declared a dividend of one Singapore cent per share.

Trade receivables turnover days, a metric that Glaucus raised questions about, increased by 31 days to 116 days.

Glaucus this week issued a report alleging that Minzhong faked its past sales numbers and manipulated receivables and capital expenditure to cover its tracks.

In a statement, Minzhong said that Glaucus misunderstood its business. “The company has done a preliminary review of the report and notes that most of the issues raised by Glaucus with regard to the financials of the company were nothing new and arose out of a complete lack of understanding of the company’s business model as well as the operating environment in China.

“They have also failed to analyse the company’s growth path over the years and have chosen to take snapshots of the company’s results at specific times.”

Minzhong expects to issue its response by the end of the week, and has extended its trading halt to Friday’s close.

On Monday, the company had said it “will take all necessary steps to defend its reputation and will not hesitate to take legal action against those who put up and disseminate false or misleading statements without due regard to their truth and for the purpose of inducing others to deal in securities”.

PT Indofood, Minzhong’s largest shareholder with a 29.3 per cent stake, is also waiting to hear Minzhong’s side.

“Indofood is still awaiting for the response from CMZ,” Indofood director Thomas Tjhie said via e-mail. “Currently, Indofood remains committed to its investment in the company.” It is the unusually serious nature of Glaucus’s allegations that will require an equally strong answer, Voyage’s Mr Ng said.

Referring to Muddy Waters attack on Olam International near the end of 2012, Mr Ng said it “was more about accounting treatment, but this one, it’s very serious. It’s like an outright slap.” Minzhong will have to mount a robust defence to survive those allegations, he added.

“What the public wants is for them to address whatever they’ve raised, especially about the sales channels,” Mr Ng said. “Are the sales numbers true? . . . It’s quite challenging for Minzhong now, and market confidence is not strong.”

Minzhong may even have to consider opening up more of its inner workings than normal, if that is what it takes to refute the allegations.

“I know there are some trade secrets involved, but it would be good if they can show some invoices,” said Mr Ng. “They cannot leave the halt with so many questions lying around.”

Glaucus said that the incorporation date and regulatory filings of two top customers suggest that Minzhong faked sales during its initial public offering in 2010.

It also claimed Minzhong’s regulatory filings in China were inconsistent with its financial filings in Singapore. Minzhong’s unusually high profit margins, rising receivables, cash flow and recent capital expenditures are also suspicious, Glaucus said.

Minzhong said: “The company would seek to substantiate in its detailed response to the report that its financials are sound and that there were no fabricated sales or alleged cover-up by the company.

“In particular, the company wishes to highlight that its accounts have been prepared in accordance with Singapore Financial Reporting Standards and audited by external auditors Crowe Horwath First Trust LLP, and there has been no qualification in their reports over the years.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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