03 September 2013

China Minzhong Case Study - Short Selling & Defense Mechanism

China Minzhong gave me an opportunity to study the short selling & defense mechanism on this counter. Firstly, the short seller announced its report on possible faked report. There are few things to note:

1. Concentrated clientele - with concentrated client base, it means that the company has limited source of clients and it may give negative impact to the credit rating given by the financial institutions. The short sellers suspects that the company ballooned the sales by increasing receivables (aggressive sales).  

2. Huge CAPEX along the years - with huge CAPEX, I noticed that this is not a good sign, as the company may capitalize the expenses into Non-Current Assets and amortize / depreciate in later years. Personally speaking, I prefer a company with stable or little CAPEX compared to its revenue growth. That's why I did not invest in Air Asia IPO. The moment I noticed that a company decided to build a wonderful head quarter for itself, I quickly liquidate the shares as I do not think that it is a good decision to create long term shareholder value to the investors. 

The major shareholder (Indofood) announced offer to purchase from other shareholders at $1.12. As this is mandatory but not compulsory offer, it gives room for minority shareholders to think whether to sell it to the major shareholder or do nothing but to hope this case to be closed soon.

If you look at Olam case, Olam net profit dropped after announced that it would cut down the CAPEX budget for next few years. Some investors lost confidence in it and the price is now at around $1.4X. 




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