Anonymous Analytics, a short biased research firm, is out with another lengthy report on an Asian based company – The firm does not put out many reports, so whenever it does its worth a look. According to research by ActivistShorts.com, AA has an average return of 8% per campaign, including a 50% return on the firm’s last report.

Additionally, this time the recommendation is a long – so its worth an extra look. The research firm shared a copy with ValueWalk ahead of release and we will have further analysis on it shortly (stay tuned). In sum, Anonymous Analytics believes Shenguan has been unfairly targeted by shorts and the company is undervalued.

What makes this EVEN more interesting is that another short biased firm, Emerson Analytics put out a lengthy report which accused Shenguan Holdings of fraud.

According to ActivistShorts

On 9-3-2014 (Hong Kong time), Emerson Analytics said Shenguan Holdings (Group) Limited hid raw material costs from its books to improve its financial outlook, confusingly appeared to charge its biggest customer at a 41% premium, reported margins that were “too good to be true,” and had other “irregularities” in its accounts. Emerson Analytics said the company adjusted margins and underreported raw material costs so as enrich themselves through more legitimate channels: an IPO, selling insider shares after going public, and issuing a dividend “which mostly ended up in their own pockets.” Emerson Analytics said the stock had 60% downside once correcting for all the fixes the company would need to make to its books.Several hours later, the company halted its stock “pending the release of an announcement regarding inside information of the Company.” On 9-29-2014 at 9 AM, the halt on the company’s stock ended.

Below is the full report from Anonymous Analytics on Shenguan Holdings

Shenguan Holdings (829.HK) is the largest manufacturer of edible collagen sausage casings in China.In 2009, the Company raised HK$1.2 billion (US$148M) through a Hong Kong listing. Over the course ofthe following two years, its share price rose nearly 300% and finally peaked in 2011.Since then, a series of fraud allegations and questions over its accounting have hit the Company.  Forits part, Management has consistently done a tragically poor job of defending the Company, and consequently,
Shenguan’s share price has experienced a multi-year decline from which it has never recovered:

Since 2011, Shenguan has been the target of a series of fraud allegations and questions over the accuracy of its accounts. These regular and repeated accusations have caused investors to steer clear of the Company and triggered a multi-year decline in its share price.

Today, shares of Shenguan are trading at all-time lows and valued as a high-probability fraud. However, this report will provide irrefutable proof that Shenguan Holdings is a real and highly profitable company, that its accounts are real and independently verifiable, and that the numerous fraud allegations against the Company have been the result of contrived or incomplete research. Our extensive due diligence is based on tax confirmations, SAIC filings, customer verification, and site visits, specifically: ? We have obtained tax confirmations which show that Shenguan’s reported gross margins and profits are accurate. These tax confirmations cannot be faked or forged by the Company, and are the silver bullet that completely destroys any further allegations of fraud against Shenguan Holdings.

We have corroborating evidence based on SAIC filings and independent disclosures by Shenguan’s largest customer that its reported revenue is accurate. We also learned through industry interviews that Shenguan is the preferred supplier of collagen casings to China’s largest pork companies, including WH Group, Yurun, and Jinlui. ? Site visits to Shenguan’s three production bases show large, well-maintained facilities with bustling activity. Our team observed substantial cargo activity and worker presence during their observation. Locals described Shenguan as a very profitable company that’s always looking for workers and runs three shifts a day to meet demand. Despite similar growth profiles, Shenguan trades at 10.6x 2015 earnings while its closest global competitors trade at 20x. This unjustifiable discount is based on an entirely false market assumption that Shenguan must be a fraud because it is so profitable. Given the evidence presented in this report, we believe Shenguan will be cleared of all substantial fraud allegations, and we expect the current discount to disappear as Shenguan begins to trade more in-line with its global peers. Even assuming a 17x multiple on 2015 earnings, we value Shenguan at HK$3.68 per share. This implies 60% upside to the current share price of HK$2.30. In addition, shareholders are rewarded with a 5% dividend yield for a total return of 65%.

Full report below – stay tuned for more

Shenguan Holdings by Carmen Lara

Shenguan holdings
Shenguan holdings