Glaucus Research Group California LLC initiates coverage on ASIA PLASTIC RECYCLING (TWSE: 1337) with a Strong Sell rating, report below

ASIA PLASTIC RECYCLING HOLDING LIMITED (“APR” or the “Company”) claims to be the #1 producer of EVA (foam rubber) products in China. In this report, we present publicly available tax and land records that, in our opinion, indicate that APR has made material misrepresentations to Taiwan investors and regulators regarding its earnings and assets. We believe, based on the independent evidence presented in this report, that APR’s actual earnings are around 90% less than the figures reported in the Company’s Taiwan filings. Because of APR’s significant indebtedness we put the value of APR’s equity at TWD 0.00 per share.

ASIA PLASTIC RECYCLING HOLDING LIMITED (“APR” or the “Company”) claims to be the #1 producer of EVA (foam rubber) products in China. In this report, we present publicly available tax and land records that, in our opinion, indicate that APR has made material misrepresentations to Taiwan investors and regulators regarding its earnings and assets. We believe, based on the independent evidence presented in this report, that APR’s actual earnings are around 90% less than the figures reported in the Company’s Taiwan filings. Because of APR’s significant indebtedness we put the value of APR’s equity at TWD 0.00 per share.

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ASIA PLASTIC RECYCLING

  1. Overstated Capital Expenditures. Independent public land records and a governmentwebsite indicate that APR overstated its capital expenditures by at least RMB 422mm on the 2011-2013 expansion of its Fujian and Jiangsu facilities. In our opinion, this evidence suggests that either insiders diverted the missing funds or that the Company’s capital expenditures were artificially inflated to hide fake sales on the balance sheet.

 

  1. Fujian Factory Land Acquisition Cost Overstated by 4x. APR claims to have spentRMB 126 million in 2011 to acquire 137 mu of additional land for the expansion of the Fujian facility. However, according to publicly available land records posted on  soudi.cn, APR purchased this land at auction from the Land and Resources Bureau ofJinjiang for only RMB 31 million, which is 75% less than the RMB 126mm in acquisition cost reported to Taiwan investors and regulators.

 

  1. Total Fujian Expansion Project Cost Overstated by ~3x. APR claims to have spent atotal of RMB 600 million on the expansion of its Fujian factory between 2011 and 2013. However, a government  website states that APR invested a total of only RMB 212 million on the expansion of the factory, 65% less than the cost of RMB 600mm reported to Taiwan investors and regulators.

 ASIA PLASTIC RECYCLING

  1. Jiangsu Land Acquisition Cost Overstated by 2.5x. In 2012, APR reportedly acquired150 mu of land for RMB 57.9mm (average of RMB 386,000 per mu) for the expansion of its Jiangsu facility. But according to records from the Department of Land and Resources

 

of Jiangsu Province, which are available to any investor online (by clicking  here), APR only paid an average of RMB 163,000 per mu (a total of RMB 23.6mm) for the land purchase, meaning that APR spent 59% less than the RMB 57.9mm reported to Taiwan investors and regulators.

 ASIA PLASTIC RECYCLING

  1. Government Tax Records Indicate Net Income Overstated by ~10x. The Jinjiang city(Fujian province) government publishes an annual list,  available to any investor online, which ranks the top taxpaying businesses operating in Chendai county, Jinjiang city. APR, whose headquarters, production base and only meaningful PRC operating subsidiary are based in Chendai, reported to Taiwanese investors and regulators that it paid RMB 381mm in PRC income taxes and (we estimate) RMB 302mm in VAT from 2010 through 2013. Yet

according to the Jinjiang government, APR only paid between RMB 28mm and RMB 80mm in total taxes from 2010 through 2013, which is 96% to 88% less than the amount reported to Taiwanese investors and regulators during that period. This suggests that APRhas vastly exaggerated the scale and profitability of its business.

ASIA PLASTIC RECYCLING

  1. Tax Records Place APR Behind Purportedly Smaller Competitors. The sameChendai county tax records show that APR paid roughly the same amount of taxes from 2010 through 2012 as two competitors producing EVA foam products in Fujian who reported between 81% to 94% less revenue in 2012 than APR.

 

  1. Lucrative Commodity Business Too Good to be True. APR collects scraps of recycled materials (like discarded shoe soles) and converts them into sheets of EVA foam. This is alow-tech process, and the end product is a commodity. Yet, unbelievably, APR reports the same EBIT margins as Microsoft.

 

  1. EBIT. APR’s reported EBIT margins averaged 33% from 2010 to 2012 vs. an averageof 7% for APR’s private local competitors.

 

  1. APR’s Average Selling Prices are Suspicious. APR claims to sell EVA foam productsfor approximately the same prices as EVA foam products made with virgin (non-recycled) raw materials. This is suspicious because APR’s EVA foam products are made from recycled materials which cost 65%-80% less than virgin material. Foam made from low-quality recycled materials sells for a substantial discount to foam made from virgin materials.

 

  1. Margins are Too Consistent. The other suspicious element of APR’s margins is thatthey are remarkably consistent from year to year. For example, APR’s average selling prices decreased by 27% in 2012 and its costs did not materially change (vs. 2011), yet its gross margin increased from 38% to 40% that year.

 

  1. Sales per Employee. APR’s reported sales per employee of RMB 1.436 mm in 2012 is~4x the average sales per employee reported by its private local competitors.

 

  1. Suspicious Sales Growth. APR reported average sales growth of 19% between 2010and 2012. SAIC filings show that its private local competitors grew sales at an average of 0% over the same period, suggesting APR is artificially inflating its reported growth.

 

  1. Serial Capital Raising With No Apparent Bona Fide Purpose. Despite a significantcapital infusion from a 2011 IPO, in 2012, APR issued follow-on equity, convertible bonds and over TWD 1 billion in bank debt. Investors should not be fooled. Any dividends paid to date appear to be financed by the large 2012 debt offerings.

 

  1. Valuation. As of December 31, 2013, APR had approximately TWD 3.6 billion of onshore(i.e. PRC) liabilities outstanding, including TWD 1.8 billion in debt and another TWD 1.8 billion in various trade payables due to unsecured onshore creditors.

ASIA PLASTIC RECYCLING

In a liquidation scenario, the holders of onshore liabilities will take priority over offshore (i.e. non-PRC) equity and debt holders. Because independent evidence suggests that the Company has overstated its earnings by 10x and major capital expenditures by 3x, we doubt the authenticity of its reported receivables, cash balance and fixed assets. Given the limited offshore assets available for seizure (only a minimal amount of cash denominated in USD/HKD/TWD as of 12/31/2013) and the difficulty recovering onshore assets (property and equipment) under China’s byzantine judicial system, we put a price target on ASIA PLASTIC RECYCLING shares of TWD 0.00.

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