Hsin Chong Group Holdings Ltd (HKG:0404) short case from the famous short research firm Anonymous Analytics has just been unveiled- readers can find the full report on the company below.
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Hsin Chong Group Holdings
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We believe the current non-Executive Chairman is using Hsin Chong as his personal dumping ground for problematic and nonrevenue generating development properties at the expense of minority shareholders.
Site visits and satellite images suggest that Hsin Chong has misled investors about the commercial viability of its two biggest properties.
Hsin Chong has been OCF negative in each of 2013, 2014, 2015 and interim 2016, and recently cut its long-standing dividend. We have serious concerns over its substantial debt obligations.
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Market Cap: HK$3.5 billion
Recent Price: HK$0.62
Target Price: HK$0.12
Expected Return: -81%
Opinion: Strong Sell
We believe that Mr. Lin Zhuo Yan, the current non-Executive Chairman, is using Hsin Chong as his personal dumping ground for problematic and non-revenue generating development properties at the expense of minority shareholders. Since 2011, Hsin Chong has acquired a number of development properties that were either owned by Mr. Lin or his wife, or can be directly linked to Mr. Lin.
This report will present the evidence – including site visit photos and satellite images – that lead us to believe that two of the Company’s biggest property acquisitions have languished for years while Hsin Chong continues to mislead investors about the commercial viability of these properties. Each year, Hsin Chong claims that monetization of these properties is just around the corner, but we can find no evidence that this is true.
In one case, Hsin Chong spent ~HK$4 billion on the acquisition and construction of a property that sits empty as one of China’s notorious ghost towns in a location that Bloomberg calls “Ground Zero of China’s Slowdown.”
In another case, Hsin Chong spent HK$5.9 billion on a property that has been sitting idle for years, having failed to attract international brands and commercial tenants.
Relative to Hsin Chong’s HK$3.5 billion market cap, these acquisitions were substantial in scope.
Furthermore, both of these properties were acquired from vendors that included Mr. Lin and his wife, at vastly inflated prices relative to their original purchase price. These acquisitions have burdened Hsin Chong with significant share dilution and increased debt which we believe have led to a host of other problems with the Company, including:
Based on Company disclosures, we estimate Hsin Chong will pay well over HK$700 million per year in cash interest expenses alone. As of the most recent reporting period, the Company only had HK$1.1 billion in cash on its balance sheet.
Hsin Chong has been both operating cash flow negative and investing cash flow negative in each of 2013, 2014, 2015, and interim 2016. In order to preserve funds, Hsin Chong has suspended its long-standing dividend.
Based on our research, we believe Hsin Chong is having serious problems monetizing its land bank.
Furthermore, we have serious concerns over the Company’s substantial debt obligations.
Considering the evidence and the analysis presented in this report, we value Hsin Chong at HK$0.12 per diluted share. With shares currently trading at HK$0.62, our valuation suggests a potential 81% downside.
Hsin Chong is a construction and property development company listed on the Hong Kong stock exchange under the ticker 404.HK. For most of its 75+ year history, Hsin Chong was primarily a construction company, with contracts focused in Hong Kong.
In 2011, Hsin Chong decided to expand into the property development business with its first major land acquisition. A number of other substantial acquisitions have since followed, transforming Hsin Chong from primarily a construction company to primarily a PRC-focused Property Development and Investment (“PDI”) company. In fact, Hsin Chong’s PDI business has so eclipsed its construction business that we consider the latter almost immaterial to its current HK$3.5 billion market cap. For example, a research report dated 26 January 2015 from Emperor Securities estimates that 93% of Hsin Chong’s market value is derived from its PDI business.1
Unfortunately, we believe Hsin Chong has misled investors about the commercial viability of its properties. This report presents evidence that Hsin Chong’s new non-Executive Chairman has enriched himself and his associates by unloading problematic properties onto shareholders at vastly inflated prices, while burdening the Company with share dilution and increased debt. Our research shows that most of these properties have languished for years and failed to attract tenants. Specifically, this report will focus on Tieling and Foshan, which are the Company’s two largest property acquisitions and account for nearly all of Hsin Chong’s land bank:
The Tieling acquisition was originally sold to investors as “a sustainable source of the Group’s revenue and profit over the next five to eight years.”2 In reality, we believe this acquisition paved the road for years of subsequent destruction of shareholder value at the hands of Mr. Lin and his associates.
In November 2011, Hsin Chong acquired 17 parcels of undeveloped land covering approximately 1.8 million square meters in Tieling, Liaoning Province.3 Total consideration paid for the acquisition was HK$1.8 billion.4
Outrageously, the original vendors – which included a related party – had completed the acquisition of the land only five months prior for a mere RMB439 million (HK$575 million).5 More on this later.
According to the 2011 annual report, Hsin Chong had ambitious plans for the land:
Hsin Chong Group report continues below in PDF