Glaucus Research Has Price Target Of Zero For CHINA LUMENA

Glaucus Research Group California LLC initiates coverage on China Lumena New Materials Corp (HKG:0067) with a Strong Sell rating

CHINA LUMENA NEW MATERIALS CORP (“Lumena” or the “Company”) produces and sells thenardite and polyphenylene sulfide (“PPS”) products in China. In this report we present publicly available tax records and stamped hard copies of SAIC filings which, in our opinion, indicate that Lumena’s sales are 90% less than the sales reported to investors and regulators in the Company’s Hong Kong filings. Our price target on its HKEX-listed shares is HKD 0.00

Glaucus Research summary below

CHINA LUMENA NEW MATERIALS CORP (“Lumena” or the “ Company”) produces and sells thenardite and polyphenylene sulfide (“PPS”) products in China. We believe that Lumena has made numerous material misrepresentations to investors and the Hong Kong Stock Exchange (“HKEX”), both in its 2009 IPO prospectus and in subsequent financial statements. In this report we present publicly available tax records and stamped hard copies of SAIC filings which, in our opinion, indicate that Lumena’s sales are 90% less than the sales reported to investors and regulators in the Company’s Hong Kong filings.

 

Glaucus Research on PPS

PPS

 

1. PPS Sales and Profitability 90% Less than Reported. According to Lumena’s HKEX filings, its operating subsidiary, Deyang Chemical, accounted for ~72% of its PPS revenues in FYs 2011 and 2012. Yet Deyang Chemical’s SAIC filings show that its revenues were only RMB 189mm (90% less than reported by Lumena) and RMB 181mm (91% less than reported by Lumena) in FYs 2011 and 2012, respectively. SAIC filings also show that contrary to being a profitable enterprise, Deyang Chemical barely broke a profit before taxes. This suggests Lumena has been vastly overstating the size and profitability of its primary business segment.

 

1. Deyang Tax Records Undermine Reported PPS Earnings. A ranking of top taxpaying businesses for 2011 published by the  city of Deyangshows that Lumena’s other PPS operating subsidiary, Deyang Materials, is ranked 74^th, which is 58 spots behind a publicly listed company which reported less than RMB 89mm in total taxes paid in 2011 (VAT and income taxes). This means that Deyang Materials paid far less than RMB 89mm in taxes in 2011, even though we estimate that it should have paid over RMB 378mm in taxes in 2011 (VAT and income taxes) for Lumena’s reported PPS financials to be true.

 

Glaucus Research on financials

 

3.   SAIC Filings of Largest Customer Suggest Fabricated Sales. Chengdu Yijing, Lumena’s largest customer, reportedly purchased RMB 339mm and RMB 443mm of products from the Company in 2009 and 2010, respectively. Yet SAIC filings show that Chengdu Yijing’s total cost of goods sold (the amount it purchased from its suppliers) was RMB 37mm and RMB 35mm in 2009 and 2010, respectively, indicating that Lumena’s actual sales were 90% less than Lumena’s reported figures.

 

Glaucus Research  

1. Hard Copies of SAIC Filings Suggest Doctored Financials. In 2010, Lumena had only two operating subsidiaries, both of which sold thenardite products. According to Lumena’s HKEX filings, these subsidiaries reportedly generated RMB 2.0 billion in combined revenues and RMB 1.1 billion in combined profits in 2010. Yet SAIC filings for both entities show combined revenues of only RMB 151mm (7.7% of reported by Lumena) and no net profits!

1. Is China Really So Constipated? Lumena claims to sell ~300,000 tons of medical thenardite, primarily used as a laxative, every year. If this is true, we estimate that Lumena would have to sell an average of 30 doses of medical thenardite ever year to every human being in China over the age of 14. This simply defies credibility.

 

Glaucus Research on transactions

1. Hidden Beneficiary to Suspicious Transaction? In 2005, Lumena’s former Chairman sold an equity stake in a subsidiary to a supposedly independent third party only to buy back the same equity four years later, immediately after going public in 2009, with cash raised from the capital markets, for 3100% percent more than the price at which theformer Chairman sold it. Such returns appear too good to be true, raising our suspicions that perhaps an insider was the hidden beneficiary of the transaction.

 

Glaucus Research GLOBAL

 

1. Lucrative Commodity Business Too Good to be True. Lumena’s reported EBIT margin of 56% (average 2008-2012) defies credibility when we consider that other large-scale public companies selling thenardite and PPS report EBIT margins of between 5% and 10%. Indeed, Lumena reports similar EBIT margins as Mastercard (NYSE: MA). This does not pass the smell test.

 

1. Valuation. As of June 30, 2013, Lumena had approximately RMB 4.2 billion of onshore (PRC) bank debt outstanding and another USD 120 million of convertible bonds due May 12, 2014 (with an effective interest rate of 25.97%), which we believe Lumena musteither restructure or issue over 1 billion shares in new equity in order to pay off. 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 profitability, we doubt the authenticity of its reported receivables, cash balance and PP&E. Given the limited offshore assets available for seizure and the difficulty recovering onshore assets (property and equipment) under China’s byzantine judicial system, we have a price target on its shares of HKD 0.00.

Full report from Glaucus Research summary below

 

Glaucus Research-China_Lumena-HK_0067-Strong_Sell_March_25_2014