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Zhongmin Baihui slides

1) Zhongmin Baihui Retail Group's stock price rallied over 270% in one year upon listing, but does not react to market forces or the company's financial performance, raising investor caution. 2) The company provides weak disclosures of key retail metrics and had a temporary revenue spike from an asset transfer with questionable terms. 3) The corporate structure involves a lease agreement that effectively pays the CEO, Deputy CEO and a director, questioning corporate governance.

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13th April 2015 Zhongmin Baihui Retail Group Ltd Overvalued S-Chip Chinese Retailer with Potentially Cornered Stock, Weak Performance, Sub-par Corporate Governance and Questionable Related Party Transactions INVESTOR CAUTION All information obtained from public sources. No information disclosed constitutes an investment view and none of the authors have interests in the said security
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Zhongmin Baihui Retail Group Ltd (“ZMBH”) 100% Zhongmin Baihui Develop- ment Pte Ltd 100% Zhongmin Baihui (Quanzhou) Commercial Manage- ment Co Ltd 100% Xiamen Shi Zhongmin Baihui Commercial Co Ltd 100% Zhongmin Baihui (Nanjing) Commercial Co Ltd Quanzhou ZMBH Private Sister Co Zhongmin Baihui Retail Group Ltd. Group Structure Pure Play Retail Specialist with Department Stores and Supermarkets in Attractive Venues 68% Direct Sales 14% Concessionaire comms 6% Rental Income 4% Managed Rental 6% Advertisement Fees 1% Management Fees Revenue and Net Income FY2014 RMB 946m Revenue RMB 31.8m Net Income 13 Department Stores 9 Owned 4 Managed Xiamen Wucun • Located at a major transportation hub • Estimated traffic of over ~100,000 people a day Lee Swee Keng Chen Kaitong Chairman CEO 2 *includes other income
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Investor Caution: Overvalued S-Chip Chinese Retailer 3 Stock Price too good to be true Weak disclosures and erratic financial performance Questionable corporate governance INVESTOR CAUTION 1 2 3 • Stock price rallied over 270% in 1 year upon listing • Stock price does not react to market swings, industry forces or fundamental performance • Lack of disclosure of key retail metrics • Temporary revenue spike with asset transfer • Sales contribution of new stores seem unreasonable • Asset transfer from ‘Sister company’, Quanzhou ZMBH at overpriced terms • Lease agreement which effectively pays CEO, Deputy CEO and director
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Stock Price Too Good to Be True Weak disclosures and erratic financial performance Questionable corporate governance 4 • Lack of disclosure of key retail metrics • Temporary revenue spike with asset transfer • Sales contribution of new stores seem unreasonable • Asset transfer from ‘Sister company’, Quanzhou ZMBH at overpriced terms • Lease agreement which effectively pays CEO, Deputy CEO and director Stock Price too good to be true • Stock price rallied over 270% in 1 year upon listing • Stock price does not react to market swings, industry forces or fundamental performance 1 2 3 INVESTOR CAUTION
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Stock Price Too Good to Be True 5 Stock Price Increased over 6 times IPO price in 4 months after listing, sparking SGX Trading Query First IPO in 2011, but made little notice due to IPO by placement Stock price spiked 6x in 4 months post listing Business Times posted article noticing price movement, stock price corrected downwards SGX commenced query. No news of further query after company replied saying it was unaware 6x
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Business Times Article Questions Stock Price Movement 6 While the Group responded to BT article and Trading Query, there has been no Further News Since First IPO in 2011, but made little notice due to IPO by placement Stock price spiked 6x in 4 months post listing Business Times posted article noticing price movement, stock price corrected downwards SGX commenced query. No news of further query after company replied saying it was unaware Business Times Article Response to Business Times Article R Sivanithy from BT wrote an article citing two possibilities for stock’s performance: 1. ZMBH was going to be a takeover target, which is highly unlikely since it just IPO 2. IPO shares were all placed out to a very small group of investors who are cornering the stock together Further warned that the stock could have the same fate as other stocks like Mid-Continent or Leong Hin, which were proven to be cornered and punished accordingly Company issued statement stating that article ‘might possibly explain’ the trading activity Released shareholding spread indicating increase in shareholders. Weak argument as increase was seen in small shareholders arguably buying from larger shareholders
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion SGX Conducts Query on Company Trading Activity 7 While the Group responded to BT article and Trading Query, there has been no Further News Since SGX Query on Trading Activity Response to SGX Query The Company was tasked to answer: 1. Are you aware of any information not previously announced concerning you (the issuer), your subsidiaries or associated companies which, if known, might explain the trading? - If yes, the information must be announced immediately. 2. Are you aware of any other possible explanation for the trading? 3. Can you confirm your compliance with the listing rules and, in particular, listing rule 703? To which the company replied: 1. The Company is not aware of any information not previously announced concerning itself (the Issuer) and its subsidiary, which, if known, might explain the trading 2. The Company wishes to state that an article titled “Zhongmin Baihui – Real or False Demand” published in The Business Time on 25 May 2011 might possibly explain the trading activity on 25 May 2011. Save as disclosed above, the Company is not aware of any other possible explanation for the trading. 3. The Company confirms that, to the best of its knowledge, it is in compliance with the listing rules and, in particular, listing rule 703. First IPO in 2011, but made little notice due to IPO by placement Stock price spiked 6x in 4 months post listing Business Times posted article noticing price movement, stock price corrected downwards SGX commenced query. No news of further query after company replied saying it was unaware
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion ‘Gravity-Defying’ Stock Price 8 Stock Price Climbs Steadily; Undeterred by Market Swings, Industry Forces or Earnings Announcements 0 200 400 600 800 19-Jan-11 19-Jan-12 19-Jan-13 19-Jan-14 19-Jan-15 ZMBH STI Index 0 200 400 600 800 1000 19-Jan-11 19-Jan-12 19-Jan-13 19-Jan-14 19-Jan-15 ZMBH Parkson Retail New World Sun Art Golden Eagle Intime Retail -10.00% 0.00% 10.00% 20.00% (10.0) 0 10.0 Net Income Profit margin Price Performance against STI Price Performance against peers ZMBH net income and margins (Rebased to 100) (Rebased to 100) (NI) (Profit margin)
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Shareholding Momentum of ZMBH 9 86.2% of TSO Held by Insiders with Little Institutional Shareholding; IPO Subscribers Sold Positions *Blue highlights indicate institutional shareholders Post-IPO ----> Holders Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Lee, Sw ee Keng (Executive Chairman) 49.90 49.90 49.90 49.90 49.90 49.90 49.90 49.90 49.90 39.79 39.79 39.79 39.79 42.14 43.24 43.24 44.24 44.24 Chen, Kaitong (Chief Executive Officer) 46.57 46.57 46.57 46.57 46.57 46.57 46.57 46.57 46.57 40.47 40.47 40.47 40.47 40.47 41.47 41.47 42.02 42.02 Su, Caiye (Non-Exec Non- Indep Director) 23.28 23.28 23.28 23.28 23.28 23.28 23.28 23.28 23.28 20.03 20.03 25.31 26.78 26.78 26.78 26.78 26.78 25.28 Lim, Kok Tong - 19.07 19.07 19.07 19.07 19.07 19.07 19.07 19.07 19.07 19.07 19.07 19.07 18.67 21.59 21.59 21.59 21.59 Low , Chui Heng (Exec Director) 21.87 21.87 21.87 21.87 21.87 21.87 21.87 21.87 21.87 18.62 18.62 18.62 19.62 19.62 16.62 16.62 13.12 13.12 Su, Jianli (Deputy CEO) 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 CIMB-Principal Asset Management Bhd - 7.23 7.23 7.23 7.23 - - - - 2.46 2.46 2.46 2.46 3.53 3.53 3.53 3.53 3.53 Wee, Choo Chuan - - - - - - - - - 1.00 1.00 1.00 1.00 1.53 1.53 1.53 1.53 1.53 Cai, Yuedong - - - - - - - - - - - - - 1.00 1.00 1.00 1.00 1.00 Lim, Soo Seng - - - - - - - - - - - - - 1.00 1.00 1.00 1.00 1.00 Lam, Chun Lim - 3.00 3.00 3.00 3.00 1.26 1.26 1.26 1.26 0.75 0.75 0.75 0.75 0.99 0.99 0.99 0.99 0.99 Lim, Eng Hock - - - - - - - - - - - - - 0.96 0.96 0.96 0.96 0.96 Wong, Kao Lek - - - - - - - - - - - - - 0.94 0.94 0.94 0.94 0.94 DBS Group Holdings Limited, Asset Management Arm- - - - - - - - - - - - - 0.85 0.85 0.85 0.85 0.85 Nee, Lung-Yuan - - - - - 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 Lim, Tiong Kheng - 0.78 0.78 0.78 0.78 0.64 0.64 0.64 0.64 - - - - - - - - - Goh, Yeo Hw a - 1.20 1.20 1.20 1.20 - - - - - - - - - - - - - Liow , Lip Kee - 0.38 0.38 0.38 0.38 - - - - - - - - - - - - - Low , Thiam Chuan - 0.64 0.64 0.64 0.64 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 - - - - - Ng, Gek Heok - 0.33 0.33 0.33 0.33 - - - - - - - - - - - - - Shi, Jianghe - 0.95 0.95 0.95 0.95 0.58 0.58 0.58 0.58 - - - - - - - - - Weng, Wenw ei - 0.60 0.60 0.60 0.60 - - - - - - - - - - - - - Yap, Wee Yeow - 1.00 1.00 1.00 1.00 1.17 1.17 1.17 1.17 0.75 0.75 0.75 0.75 - - - - - Low , Lian Tee - 0.50 0.50 0.50 0.50 0.57 0.57 0.57 0.57 - - - - - - - - - Low , Lian Yeok - 0.70 0.70 0.70 0.70 0.87 0.87 0.87 0.87 0.92 0.92 0.92 0.92 - - - - - Teoh, Chin Hong - 0.44 0.44 0.44 0.44 - - - - - - - - - - - - - Lion Global Investors Limited - 0.47 0.47 0.47 0.47 - - - - - - - - - - - - - OSK International Asset Management Sdn Bhd - - - - - 1.53 1.53 1.53 1.53 0.95 0.95 0.95 0.95 - - - - - 1 2 Subscribers at IPO • Shareholders accounted for ~8% TSO at IPO • Sold down their holdings in less than 2 years, walked away with a profit of at least 270% • Made possible by CIMB broker, Lim Kok Tong? 2 Current Shareholders • Insiders hold 86.2% of total shares outstanding • Only 2 institutional shareholders: DBS and CIMB • 14% free float but stock is still too resilient? 1
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Low Average Daily Trading Volume 10 30-Day Avg Trading Volume Never Exceeded 1% of TSO Even at Height of Trading during Price Spike Even with free float at 14% of total shares outstanding, stocks in this segment are likely held by related investors who hardly trade. Minimal trading of the remaining volume is able to imbue the stock price with a resilience to continue climbing further 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 0 0.5 1 1.5 2 2.5 Price (LHS) 30D Avg Trading Vol as % of TSO (RHS) 30-Day Average Trading Volume as % of TSO Low trading volume needed to sustain price (Price) (30 ADTV as %TSO)
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Weak Disclosures and Erratic Financial Performance Questionable corporate governance 11 • Asset transfer from ‘Sister company’, Quanzhou ZMBH at overpriced terms • Lease agreement which effectively pays CEO, Deputy CEO and director Stock Price too good to be true • Stock price rallied over 270% in 1 year upon listing • Stock price does not react to market swings, industry forces or fundamental performance 1 INVESTOR CAUTION Weak disclosures and erratic financial performance • Lack of disclosure of key retail metrics • Temporary revenue spike with asset transfer • Sales contribution of new stores seem unreasonable 2 3
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Poor Financial Performance reflects Weak Execution ZMBH’s performance are below peers for both department stores and supermarket peers. As a small player, there is low optimism that the company can survive in the retail industry which is in structural decline due to e-commerce 8.9% 18.3% 14.1% 17.5% 14.7% 22.2% 0% 5% 10% 15% 20% 25% ZMBH Golden Eagle Intime Retail Parkson Retail New World SunArt (% of gross revenue) 17.4% Peers gross margin comparison Relatively low gross margin compared to peers… -14 -390 -301 -435 -24 -500 -450 -400 -350 -300 -250 -200 -150 -100 -50 0 ZMBH Golden Eagle Intime Retail Parkson Retail New World SunArt (days) -375 Peers cash conversion cycle …with weak cash conversion cycle showing weak bargaining power over supplier N/A 12
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Poor Financial Performance reflects Weak Execution Mediocre results in the past does not give hope for the future Declining net income since IPO in 2011… -7 16 11 10 32 -10 -5 0 5 10 15 20 25 30 35 2010 2011 2012 2013 2014 (RMB m) IPO ZMBH Net Income …with poor strategy resulting in store closures In January 2015, announced closure of Xiamen Zhongshan, located on one of Xiamen’s busiest streets Closure of Xiamen Zhongshan Nanjing Nanzhan has been delivering persistent losses Closure of Nanjing Nanzhan 13 However, 3x Profit spike
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Boost in Revenues and Net Income, Margin Declines 14 -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% (50.0) 0 50.0 100.0 150.0 200.0 250.0 300.0 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Revenue (LHS) NI (LHS) Profit margin (RHS) (RMBm) Revenue Tripled, Bringing Profit back into Positive Territory; though Margins Lower than before While revenue tripled due to 2 new stores and 2 transferred- in stores … … profit margin declined, with management citing gestation period of new stores to put drag on profits (Profit Margin)
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Improbable Sales psf contribution from New Stores 15 For Revenue to have Tripled, Stores had to Contribute an average of RMB 1,011 psf in 2013 High growth spike 168 366 241 350 852 727 523 481 642322 451 343 403 481 458 386 343 510 490 817 584 753 1,333 1,184 909 824 1,152 - 500.0 1,000.0 1,500.0 31-Dec- 10 31-Dec- 11 31-Dec- 12 31-Mar- 13 30-Jun- 13 30-Sep- 13 31-Dec- 13 Existing (3) New (4) PSF SGD sales growth by category Direct sales RMB psf Concessionary sales psf Split between new and old assets due to asset transfer Contribution: 2013 average sales psf: RMB 1,011 For revenue to have tripled, stores had to contribute an average of RMB 1,011 PSF By backward induction, existing stores need to generate RMB 824 psf and new stores RMB 1,152 psf Sales psf seem improbable as the largest stores Xiamen Wucun, currently only generates RMB 1,000 Sales psf by segment (RMB) ZMBH current top-performing store: Xiamen Wucun generates RMB ~1,000 psf
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Huge-off Balance Sheet Operating Leases 16 Lease Agreements when Capitalized, Portrays Riskier Leverage Ratios in RMBm Year Lease expenses % Lease of SG&A Total Lease commitments 2009 3.9 83% 384.6 2010 29.5 63% 363.9 2011 41.3 60% 476.1 2012 56.5 49% 872.0 2013 86.4 38% 1,165.7 2014 117.5 45% 1,140.9 Adjusted Leverage Ratio Current Leverage Ratio 11.4xN.ANo long term debt Leases Capitalized Minimum lease payments capitalized at 3% cost of debt amounting to RMB 1.2b of lease obligation ZMBH’s adjusted leverage ratio of 11.4x is too high compared to the peer average of only 2.2x. This highlights additional cash flow commitments and default risk of ZMBH
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Questionable Corporate Governance 17 Stock Price too good to be true • Stock price rallied over 270% in 1 year upon listing • Stock price does not react to market swings, industry forces or fundamental performance 1 Weak disclosures and erratic financial performance • Lack of disclosure of key retail metrics • Temporary revenue spike with asset transfer • Sales contribution of new stores seem unreasonable 2 Questionable corporate governance • Asset transfer from ‘Sister company’, Quanzhou ZMBH at overpriced terms • Lease agreement which effectively pays CEO, Deputy CEO and director 3 INVESTOR CAUTION
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion ZMBH’s ‘Sister Company’ Raises a Couple of Red Flags 18 Management agreements and asset transfer 1 Group structure allows potential conflicts of interests to happen ! Lease agreement 2 Storage and delivery 3 Zhongmin Baihui Retail Group Ltd - “ZMBH” 100% Hui’an Hongyi 49% Sis Co. Zhongmin Baihui (Quanzhou) Commercial Mgmt Co Ltd - “QZM” Management Agreements & Asset Transfers 1 2 Lease Agreement Xiamen Shi Zhongmin Baihui Commercial Co Ltd - “X” 30% Citi-Base Commerce Logistics (Xiamen) Co Ltd 100% Quanzhou ZMBH “QZMBH” All Other Shareholders Chinese Board of Directors 100%38.5%61.5% 3 Storage & Delivery
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion ZMBH’s ‘Sister Company’ Raises a Couple of Red Flags 19 Quanzhou Zhongmin Baihui Shopping Co. Ltd (“QZMBH”) owned by CEO, Deputy CEO and Director Name Position in ZMBH Shareholding in ZMBH Shareholding in QZMBH Lee Swee Keng Executive Chairman 22.5% - Chen Kaitong CEO 21.4% 61.7% Su Jianli Deputy CEO and exec director 12.9% 30.9% Su Caiye Non-exec Director 2.9% 7.5% Lim Kok Tong - 11.0% - Low Chui Heng Executive Director 6.7% - Wee Choo Chuan - 1.0% - % TSO of shareholders owning >1% 78.4% - % TSO of QZMBH directors 37.2% 100.0% Chen Kaitong CEO Su Jianli Deputy CEO Su Caiye Non-Exec Director QZMBHDirectors 37.2%ownership in list co. ZMBH 100%ownership in sister co. QZMBH Management agreements and asset transfer Lease agreement for Hui’an Hongyi 1 2 QZMBH directors hold 37.2% interest in ZMBH and are able to influence decision that could be advantageous to them where it concerns QZMBH
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Attempt to Refute Potential Conflict of Interest 20 Statement in Prospectus Explaining the Potential Conflict of Interest: Cites Geographical Differences Feeble attempt at refuting the potential conflict of interest by stating the geographical differences of ZMBH and QZMBH’s stores. It is akin to saying Coca Cola is not Coca Cola because one is found in America while the other in Hong Kong
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 1. Questionable Asset Transfer from QZMBH to ZMBH 21 Problem #1 Transaction Consideration: Pre-determined amount with Doubts on Independent Valuer • Transfer of 2 fully operational, revenue-generating stores from QZMBH to ZMBH • Quanzhou Quanxiu and Quanzhou Tumen Transaction consideration of “up to RMB 10m” was first stated in announcement Stated use of an independent valuation to value rent and tenancy AGM and EGM followed. No public announcement on independent valuation Effects of transaction seen in next AR. Only brief mention of valuation done Deal announcement: Statement to engage independent valuer to assess fair market value Annual Report 2013: Footnote to Intangible Assets asserting that an independent valuer was engaged So was there even an independent valuer? 1
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 1. Questionable Asset Transfer from QZMBH to ZMBH 22 Problem #1 Transaction Consideration: RMB 9.0m Consisting a Total of RMB 7.8m of Intangible Assets • Transfer of 2 fully operational, revenue-generating stores from QZMBH to ZMBH • Quanzhou Quanxiu and Quanzhou Tumen • amounts to more than half of consideration • Company justifies goodwill by citing long established vicinity of stores • Seems more like an item to ‘markup to RMB 10m’ to effectively pay QZMBH directors 4.9m goodwill • Determined by ‘independent valuer’4.0m lease contract • Implied valuation multiple: 7.5x Price-to-Book 1.2m PP&E Chronological order in which transaction consideration was made seems suspicious as an ‘up to RMB 10m” amount was pre-determined. Also, if QZMBH directors acted in best interests for ZMBH, this transaction would be kept lean with little intangible assets. Could be paying themselves 1
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 1. Questionable Asset Transfer from QZMBH to ZMBH 23 Problem #2 Profit Contribution: Stores Financials Raise Questions on Future Viability • Transfer of 2 fully operational, revenue-generating stores from QZMBH to ZMBH • Quanzhou Quanxiu and Quanzhou Tumen The ease of arranging such an asset transfer to ZMBH could suggest an equal possibility for ZMBH to transfer loss-making assets to QZMBH to potentially boost financial performance and cover up losses in the event of a downturn Management estimates of store profit is RMB 5m. At ZMBH’s 1% profit margin, each store generates RMB 500m. Translates to an improbable asset turnover of 417x of RMB 1.2m of PP&E Store transfers helped boost FY2014 profit by 3 times. This raises the question if ZMBH can sustain growth on it’s own 1
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 1. Questionable Asset Transfer from QZMBH to ZMBH 24 Problem #3: Asiasons as an Underwriter • Transfer of 2 fully operational, revenue-generating stores from QZMBH to ZMBH • Quanzhou Quanxiu and Quanzhou Tumen Additional warning sign was that the independent financial advisor for the asset transfers is Asiasons Capital, the company that was caught up in the penny stock scandal along with Liongold and Blumont, leaving the professionalism of their advice in doubt 1
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 2. Lease Agreements with Hui’an Hongyi benefitting QZMBH 25 • ZMBH from Hui’an Hongy, which is 49% owned QZMBH • Quanzhou Hui’an Huixing Store • Related party lease agreement between ZMBH and Hui’an Hongyi owned by QZMBH and Fujian Hongyi Real Estate Group • This lease transaction is problematic as Hui’an is 49% owned by QZMBH • Each lease payment of RMB 10m effectively pays RMB 4.9m of back to the Directors of QZMBH Hui’an Hongyi is ZMBH’s lessor and is 49% owned by Quanzhou ZMBH 2
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 3. Joint Venture Logistics Centre with Citi-Base 26 • Prospectus outlined a plan to setup a logistics centre to store seasonal merchandise and deliver merchandise to ZMBH’s department store • Setting up a related logistics centre allows ZMBH to potentially shift inventory and transfer expenses to the JV yet recognize profit earned from the sale of the good as can be witnessed from the steady increase in the Logistics Centre’s assets • Adjusting for these assets reverts ZMBH’s inventory turnover to its initial turnover before the setup of the logistics centre, suggesting assets are indeed shifted to the logistics centre Logistics Centre Summary Financials 2011 2012 2013 2014 Total Assets 15.11 28.06 55.94 82.54 % growth 86% 99% 48% Total Liabilities (0.002) (0.006) (0.017) (0.007) Revenue - - - - Other comprehensive income (0.5) (1.9) (1.7) (1.7) Inventory Turnover 2010 2011 2012 2013 2014 Group Inventory 11.4 22.5 48.3 136.7 116.3 % growth 98% 115% 183% -15% Direct sales 39.04 136.02 163.59 671.15 645.47 Inventory turnover 3.44 6.05 3.39 4.91 5.55 inventory incl Citi-Base Inventory - 37.61 76.36 192.64 198.84 Adj Inventory turnover - 3.62 2.14 3.48 3.25 3.44 6.05 3.39 4.91 5.55 3.44 3.62 2.14 3.48 3.25 2010 2011 2012 2013 2014 Inventory turnover Adj Inventory turnover Logistics Centre setup in 2011 Problem #2 Profit Contribution: Stores Financials do not Reflect in Group Figures Inventory Turnover upon adjusting for JV assets 3
Insight: • Revenue increase was not due to ‘a slew of new stores’ but 4 stores of which 2 were new and 2 were transferred-in from Quanzhou ZMBH. • There was no mention Quanzhou ZMBH in the article. Insight: • Mr. Lim Kok Tong own 11% of TSO and seems to play a significant role. Besides being a shareholder in ZMBH, it was disclosed in the prospectus that Mr. Lim also holds shares in a related party companies to ZMBH, Singapore Hancai and the former Quanxin (S) Pte Ltd • While there is no proof of a direct link, Mr. Lim Kok Tong may have assisted in engaging CIMB to underwrite and place ZMBH’s shares. As a stockbroker, Mr. Lim would have connections through whom he can raise money from and assist in the placement of ZMBH’s shares Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Additional Insights from Media Sources 27 Interview with The Edge Singapore on 18 February 2015 Under the section titled “Strong Growth”, the article stated that the revenue which increased 207% was due to a slew of new store openings and cutting 1,000 jobs. Under the section titled “An unusual S-Chip”, it was revealed that one of the substantial shareholders Mr. Lim Kok Tong, is a stockbroker at CIMB who helped restructure the company in 2009 and bought over the shares of another Singaporean shareholder who wanted to sell his positions.
Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Conclusion 28 Stock Price too good to be true Weak disclosures and erratic financial performance Questionable corporate governance INVESTOR CAUTION 1 2 3 • Stock price rallied over 270% in 1 year upon listing • Stock price does not react to market swings, industry forces or fundamental performance • Lack of disclosure of key retail metrics • Temporary revenue spike with asset transfer • Sales contribution of new stores seem unreasonable • Asset transfer from ‘Sister company’, Quanzhou ZMBH at overpriced terms • Lease agreement which effectively pays CEO, Deputy CEO and director If the Group only raised RMB 9m, why access the capital markets to IPO in the first place? To triple their book value of equity by cornering the shares and selling off? Some IPO investors have done that In the meantime while looking for an opportune moment to monetize their shares, management is potentially tunneling to QZMBH
Appendix 1 Appendix 1: Supplemental Case Study 1: Mid-Continent 29 Mid-Continent Equipment Group – July 1998 Listing on SESDAQ @ $0.15 p/shr Total shares issued 18,000,000 Placement tranche 16,200,000 Employee tranche 1,300,000 Public tranche 500,000 Mr. Tan Hong Pheng & Mr. Gwee Yow Pin knew that there were 5 private placees holding over 80% and will not sell their shares Cornered stock by buying most or all of the available stock on the market $0.15 $0.85 after 8 trading days • Trading Suspended by SES • OCBC buys jdhback shares from minority shareholders at $0.59 Mid-Continent Equipment Group launched an IPO on July 1998, placing 18 million shares at 15 cents each. Set up in 1978, the Company is owned by managing director Mr Ong Eng Kee and mainboard- listed Ipco International. The public tranche which issued 500,000 shares to the public, was over- subscribed 19 times. Knowing that more than 80% of the shares were subscribed by shareholders who will not sell, Mr Tan Hong Pheng and Mr Gwee Yow Pin purchased almost or all stocks available in the market, causing the stock price to rally to 85 cents in 8 trading days. A trading suspension was imposed by the Singapore Exchange. The IPO manager, OCBC Bank repurchased shares from minority shareholders at 59 cents per share. Even as Mr. Tan and Mr. Gwee tried to appeal, they were fined $30,000 (instead of the maximum of $50,000 and 7 years in jail) for conspiring to create a misleading appearance in the market
Appendix 1 Appendix 1: Supplemental Case Study 2: Links Island 30 Links Island: February 2000 Links Island listed on 28 February 2000 with 190 million shares on issue, offered at 28 cents. At its IPO, Links Island had 6,588 public shareholders and a free float of more than 23%. Following the IPO, the counter traded within a range of 20.5 to 35 cents, closing at 33 cents on 19 June 2000, reflecting an 18% increase over the IPO price in four months. On 20 June 2000, Links Island shares gained 6 cents to close at 39 cents and continued to rise to a peak of $1.43 on 3 August 2000, closing at $1.14 on that day. The counter closed at $1.29 on 14 August 2000, a surge of 231% from its closing price of 39 cents on 20 June 2000. Before the suspension of trading on 16 August 2000, the counter traded at $1.10 and the free float of Links Island shares had declined to less than 8% of the total number of shares outstanding. The SGX investigation also revealed large off-market married deals and co-ordinated buying or selling of Links Island shares at the same time. Such co-ordinated purchases accounted for a significant portion of the market volume on certain days. Upon investigation, SGX announced that its investigations had revealed that a corner situation had arisen in Links shares. In accordance with the SGX Rules, the SGX Settlement Committee decided that all outstanding market trades in Links shares done during 14 - 16 Aug 2000 will be settled by way of cash instead of delivery, at the fair settlement price of $1.21.
Appendix 1 Appendix 1: Supplemental Case Study 3: Leong Hin 31 Enviro-Hub Holdings Ltd (former Leong Hin Holdings Ltd): 2002 – 2003 Leong Hin Holdings Ltd is a construction company was listed on the main board of the Singapore Exchange Limited on 5 October 1998 at an IPO price of $0.23. Mr. Chan Chwee Yong Bernard, the Managing Director and Mr. Chan Peng Kheng (his brother) was the Executive Chairman of Leong Hin. As at November 1999, both brothers held 8,853,225 million of Leong Hin shares each in their names and another 38 million shares were each held by two companies owned by them with their respective spouses. Out of the 8,853,225 million Leong Hin shares held in their individual names, Mr. Bernard Chan pledged 8 million shares to various financial institutions for margin trading while Mr. Chan’ Peng Kheng pledged 4 million shares. Out of the shares held by the investment companies, 14 million were pledged to various financial institutions for credit facilities and 15 million shares for the 2 personnel respectively. The brothers had a co-conspirator Ang Tian Kiat, who subscribed to $1 million shares during the initial public offering of the shares. 0 100 200 300 400 500 0 0.2 0.4 0.6 0.8 Millions
Appendix 1 Appendix 1: Supplemental Case Study 3: Leong Hin (cont’d) 32 Enviro-Hub Holdings Ltd (former Leong Hin Holdings Ltd): 2002 – 2003 (cont’d) Between 1 June 2000 and 22 April 2003, it was found that the Chan brothers together with Ang conspired to create a false appearance with respect to the market for Leong Hin shares by dominating the market in those shares in the stock market. Some 74 accounts in the names of Ang and seven other nominees with eight stock-broking firms were used in the trading which helped create a false appearance of active trading. Bernard had the consent of two of the account holders to use their accounts for the trades. Leong Hin shares were bought and sold on almost every trading day to kick up the share price. These sales and purchases were ‘wash sales’, i.e. share transactions in which there was no change in the beneficial ownership. Out of 725 tradable days, the accounts were used to make 80% of purchases on 472 days and 80% of sales on 473 days and 30% purchases on 697 days and 30% per cent sales on 701 days. There were also days when the trades in the shares amongst the controlled accounts accounted for the entire market demand and supply. The price of Leong Hin shares rose from $0.455 on 1 June 2000 to $0.765 on 22 April 2003 outperforming the STI and the sector index for construction equities during this entire period. When the scheme came to an end, the share price plunged about 75% from $0.765 to close at $0.195 on 23 April 2003. It has been admitted that the orders for the Leong Hin trades in the accounts were given by Mr. Ang and Mr. Bernard Chan. It has also been admitted that all the trades conducted were financed by both accused persons. Mr. Bernard Chan was sentenced to a $20,000 fine and one month imprisonment while his brother Mr. Chan Peng Kheng were sentenced to 6 months imprisonment.
Appendix 2 Appendix 2: Investment in Subsidiaries 33 Investment in Subsidiaries in RMB '000s 2009 2010 2011 2012 2013 2014 Investment in subsidiaries 11,278.1 30,005.1 55,702.5 71,628.6 80,023.1 80,023.1 Proportion of Ownership Interest Implied Capital Name and Country 2009 2010 2011 2012 2013 2014 Invested Xiamen Shi Zhongmin Baihui Commercial Co. Ltd (PRC) 100% 100% 100% 100% 100% 100% 30,005.1 Zhongmin Baihui Development Pte Ltd (Singapore) - - 100% 100% 100% 100% 20,811.8 Zhongmin Baihui (Nanjing) Commercial Co., Ltd (PRC) - - 100% 100% 100% 100% 20,811.8 Zhongmin Baihui (Quanzhou) Commercial Co., Ltd (PRC) - - - - 100% 100% 8,394.6 Looks okay.
Appendix 3 Appendix 3: Amount due from Subsidiaries 34 Amount due from Subsidiaries Amount due from Subsidiaries Reported at a Company level and consolidated into Group financials figures in RMB 2010 2011 2012 2013 2014 Amount due from subsidiaries (non-trade) - 68,439 90,842 131,220 126,370 Amount due from Subsidiaries Reported at a Group level <-- IPO <-- Asset Transfer 2009 2010 2011 2012 2013 2014 Amount due from related parties trade 898,675 45,960 - 15,998 662,532 Amount due from related parties non-trade 7,909,930 25,159 - - 405,895 3,052,702 Amount due to related parties trade 315,283 74,973 540,128 1,357,249 853,885 Amount due to related parties non-trade 23,862,780 11,616,075 111,435 - 9,117,602 6,474,886 Asset Transfer Amt due to rp cos of acq (cur) 5,769,554 938,553 Amt due to rp cos of acq (non-cur) 2,117,000 0 Asset Transfer Agreement 7,886,554 938,553 1 2 Amount due to related parties decreased at IPO probably to settle accounts in good order before listing. Related parties would have gained some at this point 1 Amount increases in 2013 due to asset transfer agreement requiring ZMBH to pay considerations to QZMBH over next 2 years 2 Must be closely monitored
Appendix 4 Appendix 4: Use of IPO Proceeds 35 Use of IPO Proceeds Seems to be in good order • Company frequently updates and discloses the use of IPO proceeds • Only change in use of IPO proceeds recorded was to establish the Nanjing store. The store has been unsuccessful though • IPO proceeds of SGD 9m will not be the main source of funds if company intends to do anything fraudulent • IPO proceeds have since been fully utilized

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Zhongmin Baihui slides

  • 1.
    13th April 2015 ZhongminBaihui Retail Group Ltd Overvalued S-Chip Chinese Retailer with Potentially Cornered Stock, Weak Performance, Sub-par Corporate Governance and Questionable Related Party Transactions INVESTOR CAUTION All information obtained from public sources. No information disclosed constitutes an investment view and none of the authors have interests in the said security
  • 2.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Zhongmin Baihui Retail Group Ltd (“ZMBH”) 100% Zhongmin Baihui Develop- ment Pte Ltd 100% Zhongmin Baihui (Quanzhou) Commercial Manage- ment Co Ltd 100% Xiamen Shi Zhongmin Baihui Commercial Co Ltd 100% Zhongmin Baihui (Nanjing) Commercial Co Ltd Quanzhou ZMBH Private Sister Co Zhongmin Baihui Retail Group Ltd. Group Structure Pure Play Retail Specialist with Department Stores and Supermarkets in Attractive Venues 68% Direct Sales 14% Concessionaire comms 6% Rental Income 4% Managed Rental 6% Advertisement Fees 1% Management Fees Revenue and Net Income FY2014 RMB 946m Revenue RMB 31.8m Net Income 13 Department Stores 9 Owned 4 Managed Xiamen Wucun • Located at a major transportation hub • Estimated traffic of over ~100,000 people a day Lee Swee Keng Chen Kaitong Chairman CEO 2 *includes other income
  • 3.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Investor Caution: Overvalued S-Chip Chinese Retailer 3 Stock Price too good to be true Weak disclosures and erratic financial performance Questionable corporate governance INVESTOR CAUTION 1 2 3 • Stock price rallied over 270% in 1 year upon listing • Stock price does not react to market swings, industry forces or fundamental performance • Lack of disclosure of key retail metrics • Temporary revenue spike with asset transfer • Sales contribution of new stores seem unreasonable • Asset transfer from ‘Sister company’, Quanzhou ZMBH at overpriced terms • Lease agreement which effectively pays CEO, Deputy CEO and director
  • 4.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Stock Price Too Good to Be True Weak disclosures and erratic financial performance Questionable corporate governance 4 • Lack of disclosure of key retail metrics • Temporary revenue spike with asset transfer • Sales contribution of new stores seem unreasonable • Asset transfer from ‘Sister company’, Quanzhou ZMBH at overpriced terms • Lease agreement which effectively pays CEO, Deputy CEO and director Stock Price too good to be true • Stock price rallied over 270% in 1 year upon listing • Stock price does not react to market swings, industry forces or fundamental performance 1 2 3 INVESTOR CAUTION
  • 5.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Stock Price Too Good to Be True 5 Stock Price Increased over 6 times IPO price in 4 months after listing, sparking SGX Trading Query First IPO in 2011, but made little notice due to IPO by placement Stock price spiked 6x in 4 months post listing Business Times posted article noticing price movement, stock price corrected downwards SGX commenced query. No news of further query after company replied saying it was unaware 6x
  • 6.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Business Times Article Questions Stock Price Movement 6 While the Group responded to BT article and Trading Query, there has been no Further News Since First IPO in 2011, but made little notice due to IPO by placement Stock price spiked 6x in 4 months post listing Business Times posted article noticing price movement, stock price corrected downwards SGX commenced query. No news of further query after company replied saying it was unaware Business Times Article Response to Business Times Article R Sivanithy from BT wrote an article citing two possibilities for stock’s performance: 1. ZMBH was going to be a takeover target, which is highly unlikely since it just IPO 2. IPO shares were all placed out to a very small group of investors who are cornering the stock together Further warned that the stock could have the same fate as other stocks like Mid-Continent or Leong Hin, which were proven to be cornered and punished accordingly Company issued statement stating that article ‘might possibly explain’ the trading activity Released shareholding spread indicating increase in shareholders. Weak argument as increase was seen in small shareholders arguably buying from larger shareholders
  • 7.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion SGX Conducts Query on Company Trading Activity 7 While the Group responded to BT article and Trading Query, there has been no Further News Since SGX Query on Trading Activity Response to SGX Query The Company was tasked to answer: 1. Are you aware of any information not previously announced concerning you (the issuer), your subsidiaries or associated companies which, if known, might explain the trading? - If yes, the information must be announced immediately. 2. Are you aware of any other possible explanation for the trading? 3. Can you confirm your compliance with the listing rules and, in particular, listing rule 703? To which the company replied: 1. The Company is not aware of any information not previously announced concerning itself (the Issuer) and its subsidiary, which, if known, might explain the trading 2. The Company wishes to state that an article titled “Zhongmin Baihui – Real or False Demand” published in The Business Time on 25 May 2011 might possibly explain the trading activity on 25 May 2011. Save as disclosed above, the Company is not aware of any other possible explanation for the trading. 3. The Company confirms that, to the best of its knowledge, it is in compliance with the listing rules and, in particular, listing rule 703. First IPO in 2011, but made little notice due to IPO by placement Stock price spiked 6x in 4 months post listing Business Times posted article noticing price movement, stock price corrected downwards SGX commenced query. No news of further query after company replied saying it was unaware
  • 8.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion ‘Gravity-Defying’ Stock Price 8 Stock Price Climbs Steadily; Undeterred by Market Swings, Industry Forces or Earnings Announcements 0 200 400 600 800 19-Jan-11 19-Jan-12 19-Jan-13 19-Jan-14 19-Jan-15 ZMBH STI Index 0 200 400 600 800 1000 19-Jan-11 19-Jan-12 19-Jan-13 19-Jan-14 19-Jan-15 ZMBH Parkson Retail New World Sun Art Golden Eagle Intime Retail -10.00% 0.00% 10.00% 20.00% (10.0) 0 10.0 Net Income Profit margin Price Performance against STI Price Performance against peers ZMBH net income and margins (Rebased to 100) (Rebased to 100) (NI) (Profit margin)
  • 9.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Shareholding Momentum of ZMBH 9 86.2% of TSO Held by Insiders with Little Institutional Shareholding; IPO Subscribers Sold Positions *Blue highlights indicate institutional shareholders Post-IPO ----> Holders Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Lee, Sw ee Keng (Executive Chairman) 49.90 49.90 49.90 49.90 49.90 49.90 49.90 49.90 49.90 39.79 39.79 39.79 39.79 42.14 43.24 43.24 44.24 44.24 Chen, Kaitong (Chief Executive Officer) 46.57 46.57 46.57 46.57 46.57 46.57 46.57 46.57 46.57 40.47 40.47 40.47 40.47 40.47 41.47 41.47 42.02 42.02 Su, Caiye (Non-Exec Non- Indep Director) 23.28 23.28 23.28 23.28 23.28 23.28 23.28 23.28 23.28 20.03 20.03 25.31 26.78 26.78 26.78 26.78 26.78 25.28 Lim, Kok Tong - 19.07 19.07 19.07 19.07 19.07 19.07 19.07 19.07 19.07 19.07 19.07 19.07 18.67 21.59 21.59 21.59 21.59 Low , Chui Heng (Exec Director) 21.87 21.87 21.87 21.87 21.87 21.87 21.87 21.87 21.87 18.62 18.62 18.62 19.62 19.62 16.62 16.62 13.12 13.12 Su, Jianli (Deputy CEO) 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 5.63 CIMB-Principal Asset Management Bhd - 7.23 7.23 7.23 7.23 - - - - 2.46 2.46 2.46 2.46 3.53 3.53 3.53 3.53 3.53 Wee, Choo Chuan - - - - - - - - - 1.00 1.00 1.00 1.00 1.53 1.53 1.53 1.53 1.53 Cai, Yuedong - - - - - - - - - - - - - 1.00 1.00 1.00 1.00 1.00 Lim, Soo Seng - - - - - - - - - - - - - 1.00 1.00 1.00 1.00 1.00 Lam, Chun Lim - 3.00 3.00 3.00 3.00 1.26 1.26 1.26 1.26 0.75 0.75 0.75 0.75 0.99 0.99 0.99 0.99 0.99 Lim, Eng Hock - - - - - - - - - - - - - 0.96 0.96 0.96 0.96 0.96 Wong, Kao Lek - - - - - - - - - - - - - 0.94 0.94 0.94 0.94 0.94 DBS Group Holdings Limited, Asset Management Arm- - - - - - - - - - - - - 0.85 0.85 0.85 0.85 0.85 Nee, Lung-Yuan - - - - - 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 0.83 Lim, Tiong Kheng - 0.78 0.78 0.78 0.78 0.64 0.64 0.64 0.64 - - - - - - - - - Goh, Yeo Hw a - 1.20 1.20 1.20 1.20 - - - - - - - - - - - - - Liow , Lip Kee - 0.38 0.38 0.38 0.38 - - - - - - - - - - - - - Low , Thiam Chuan - 0.64 0.64 0.64 0.64 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 - - - - - Ng, Gek Heok - 0.33 0.33 0.33 0.33 - - - - - - - - - - - - - Shi, Jianghe - 0.95 0.95 0.95 0.95 0.58 0.58 0.58 0.58 - - - - - - - - - Weng, Wenw ei - 0.60 0.60 0.60 0.60 - - - - - - - - - - - - - Yap, Wee Yeow - 1.00 1.00 1.00 1.00 1.17 1.17 1.17 1.17 0.75 0.75 0.75 0.75 - - - - - Low , Lian Tee - 0.50 0.50 0.50 0.50 0.57 0.57 0.57 0.57 - - - - - - - - - Low , Lian Yeok - 0.70 0.70 0.70 0.70 0.87 0.87 0.87 0.87 0.92 0.92 0.92 0.92 - - - - - Teoh, Chin Hong - 0.44 0.44 0.44 0.44 - - - - - - - - - - - - - Lion Global Investors Limited - 0.47 0.47 0.47 0.47 - - - - - - - - - - - - - OSK International Asset Management Sdn Bhd - - - - - 1.53 1.53 1.53 1.53 0.95 0.95 0.95 0.95 - - - - - 1 2 Subscribers at IPO • Shareholders accounted for ~8% TSO at IPO • Sold down their holdings in less than 2 years, walked away with a profit of at least 270% • Made possible by CIMB broker, Lim Kok Tong? 2 Current Shareholders • Insiders hold 86.2% of total shares outstanding • Only 2 institutional shareholders: DBS and CIMB • 14% free float but stock is still too resilient? 1
  • 10.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Low Average Daily Trading Volume 10 30-Day Avg Trading Volume Never Exceeded 1% of TSO Even at Height of Trading during Price Spike Even with free float at 14% of total shares outstanding, stocks in this segment are likely held by related investors who hardly trade. Minimal trading of the remaining volume is able to imbue the stock price with a resilience to continue climbing further 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 0 0.5 1 1.5 2 2.5 Price (LHS) 30D Avg Trading Vol as % of TSO (RHS) 30-Day Average Trading Volume as % of TSO Low trading volume needed to sustain price (Price) (30 ADTV as %TSO)
  • 11.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Weak Disclosures and Erratic Financial Performance Questionable corporate governance 11 • Asset transfer from ‘Sister company’, Quanzhou ZMBH at overpriced terms • Lease agreement which effectively pays CEO, Deputy CEO and director Stock Price too good to be true • Stock price rallied over 270% in 1 year upon listing • Stock price does not react to market swings, industry forces or fundamental performance 1 INVESTOR CAUTION Weak disclosures and erratic financial performance • Lack of disclosure of key retail metrics • Temporary revenue spike with asset transfer • Sales contribution of new stores seem unreasonable 2 3
  • 12.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Poor Financial Performance reflects Weak Execution ZMBH’s performance are below peers for both department stores and supermarket peers. As a small player, there is low optimism that the company can survive in the retail industry which is in structural decline due to e-commerce 8.9% 18.3% 14.1% 17.5% 14.7% 22.2% 0% 5% 10% 15% 20% 25% ZMBH Golden Eagle Intime Retail Parkson Retail New World SunArt (% of gross revenue) 17.4% Peers gross margin comparison Relatively low gross margin compared to peers… -14 -390 -301 -435 -24 -500 -450 -400 -350 -300 -250 -200 -150 -100 -50 0 ZMBH Golden Eagle Intime Retail Parkson Retail New World SunArt (days) -375 Peers cash conversion cycle …with weak cash conversion cycle showing weak bargaining power over supplier N/A 12
  • 13.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Poor Financial Performance reflects Weak Execution Mediocre results in the past does not give hope for the future Declining net income since IPO in 2011… -7 16 11 10 32 -10 -5 0 5 10 15 20 25 30 35 2010 2011 2012 2013 2014 (RMB m) IPO ZMBH Net Income …with poor strategy resulting in store closures In January 2015, announced closure of Xiamen Zhongshan, located on one of Xiamen’s busiest streets Closure of Xiamen Zhongshan Nanjing Nanzhan has been delivering persistent losses Closure of Nanjing Nanzhan 13 However, 3x Profit spike
  • 14.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Boost in Revenues and Net Income, Margin Declines 14 -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% (50.0) 0 50.0 100.0 150.0 200.0 250.0 300.0 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Revenue (LHS) NI (LHS) Profit margin (RHS) (RMBm) Revenue Tripled, Bringing Profit back into Positive Territory; though Margins Lower than before While revenue tripled due to 2 new stores and 2 transferred- in stores … … profit margin declined, with management citing gestation period of new stores to put drag on profits (Profit Margin)
  • 15.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Improbable Sales psf contribution from New Stores 15 For Revenue to have Tripled, Stores had to Contribute an average of RMB 1,011 psf in 2013 High growth spike 168 366 241 350 852 727 523 481 642322 451 343 403 481 458 386 343 510 490 817 584 753 1,333 1,184 909 824 1,152 - 500.0 1,000.0 1,500.0 31-Dec- 10 31-Dec- 11 31-Dec- 12 31-Mar- 13 30-Jun- 13 30-Sep- 13 31-Dec- 13 Existing (3) New (4) PSF SGD sales growth by category Direct sales RMB psf Concessionary sales psf Split between new and old assets due to asset transfer Contribution: 2013 average sales psf: RMB 1,011 For revenue to have tripled, stores had to contribute an average of RMB 1,011 PSF By backward induction, existing stores need to generate RMB 824 psf and new stores RMB 1,152 psf Sales psf seem improbable as the largest stores Xiamen Wucun, currently only generates RMB 1,000 Sales psf by segment (RMB) ZMBH current top-performing store: Xiamen Wucun generates RMB ~1,000 psf
  • 16.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Huge-off Balance Sheet Operating Leases 16 Lease Agreements when Capitalized, Portrays Riskier Leverage Ratios in RMBm Year Lease expenses % Lease of SG&A Total Lease commitments 2009 3.9 83% 384.6 2010 29.5 63% 363.9 2011 41.3 60% 476.1 2012 56.5 49% 872.0 2013 86.4 38% 1,165.7 2014 117.5 45% 1,140.9 Adjusted Leverage Ratio Current Leverage Ratio 11.4xN.ANo long term debt Leases Capitalized Minimum lease payments capitalized at 3% cost of debt amounting to RMB 1.2b of lease obligation ZMBH’s adjusted leverage ratio of 11.4x is too high compared to the peer average of only 2.2x. This highlights additional cash flow commitments and default risk of ZMBH
  • 17.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Questionable Corporate Governance 17 Stock Price too good to be true • Stock price rallied over 270% in 1 year upon listing • Stock price does not react to market swings, industry forces or fundamental performance 1 Weak disclosures and erratic financial performance • Lack of disclosure of key retail metrics • Temporary revenue spike with asset transfer • Sales contribution of new stores seem unreasonable 2 Questionable corporate governance • Asset transfer from ‘Sister company’, Quanzhou ZMBH at overpriced terms • Lease agreement which effectively pays CEO, Deputy CEO and director 3 INVESTOR CAUTION
  • 18.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion ZMBH’s ‘Sister Company’ Raises a Couple of Red Flags 18 Management agreements and asset transfer 1 Group structure allows potential conflicts of interests to happen ! Lease agreement 2 Storage and delivery 3 Zhongmin Baihui Retail Group Ltd - “ZMBH” 100% Hui’an Hongyi 49% Sis Co. Zhongmin Baihui (Quanzhou) Commercial Mgmt Co Ltd - “QZM” Management Agreements & Asset Transfers 1 2 Lease Agreement Xiamen Shi Zhongmin Baihui Commercial Co Ltd - “X” 30% Citi-Base Commerce Logistics (Xiamen) Co Ltd 100% Quanzhou ZMBH “QZMBH” All Other Shareholders Chinese Board of Directors 100%38.5%61.5% 3 Storage & Delivery
  • 19.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion ZMBH’s ‘Sister Company’ Raises a Couple of Red Flags 19 Quanzhou Zhongmin Baihui Shopping Co. Ltd (“QZMBH”) owned by CEO, Deputy CEO and Director Name Position in ZMBH Shareholding in ZMBH Shareholding in QZMBH Lee Swee Keng Executive Chairman 22.5% - Chen Kaitong CEO 21.4% 61.7% Su Jianli Deputy CEO and exec director 12.9% 30.9% Su Caiye Non-exec Director 2.9% 7.5% Lim Kok Tong - 11.0% - Low Chui Heng Executive Director 6.7% - Wee Choo Chuan - 1.0% - % TSO of shareholders owning >1% 78.4% - % TSO of QZMBH directors 37.2% 100.0% Chen Kaitong CEO Su Jianli Deputy CEO Su Caiye Non-Exec Director QZMBHDirectors 37.2%ownership in list co. ZMBH 100%ownership in sister co. QZMBH Management agreements and asset transfer Lease agreement for Hui’an Hongyi 1 2 QZMBH directors hold 37.2% interest in ZMBH and are able to influence decision that could be advantageous to them where it concerns QZMBH
  • 20.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Attempt to Refute Potential Conflict of Interest 20 Statement in Prospectus Explaining the Potential Conflict of Interest: Cites Geographical Differences Feeble attempt at refuting the potential conflict of interest by stating the geographical differences of ZMBH and QZMBH’s stores. It is akin to saying Coca Cola is not Coca Cola because one is found in America while the other in Hong Kong
  • 21.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 1. Questionable Asset Transfer from QZMBH to ZMBH 21 Problem #1 Transaction Consideration: Pre-determined amount with Doubts on Independent Valuer • Transfer of 2 fully operational, revenue-generating stores from QZMBH to ZMBH • Quanzhou Quanxiu and Quanzhou Tumen Transaction consideration of “up to RMB 10m” was first stated in announcement Stated use of an independent valuation to value rent and tenancy AGM and EGM followed. No public announcement on independent valuation Effects of transaction seen in next AR. Only brief mention of valuation done Deal announcement: Statement to engage independent valuer to assess fair market value Annual Report 2013: Footnote to Intangible Assets asserting that an independent valuer was engaged So was there even an independent valuer? 1
  • 22.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 1. Questionable Asset Transfer from QZMBH to ZMBH 22 Problem #1 Transaction Consideration: RMB 9.0m Consisting a Total of RMB 7.8m of Intangible Assets • Transfer of 2 fully operational, revenue-generating stores from QZMBH to ZMBH • Quanzhou Quanxiu and Quanzhou Tumen • amounts to more than half of consideration • Company justifies goodwill by citing long established vicinity of stores • Seems more like an item to ‘markup to RMB 10m’ to effectively pay QZMBH directors 4.9m goodwill • Determined by ‘independent valuer’4.0m lease contract • Implied valuation multiple: 7.5x Price-to-Book 1.2m PP&E Chronological order in which transaction consideration was made seems suspicious as an ‘up to RMB 10m” amount was pre-determined. Also, if QZMBH directors acted in best interests for ZMBH, this transaction would be kept lean with little intangible assets. Could be paying themselves 1
  • 23.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 1. Questionable Asset Transfer from QZMBH to ZMBH 23 Problem #2 Profit Contribution: Stores Financials Raise Questions on Future Viability • Transfer of 2 fully operational, revenue-generating stores from QZMBH to ZMBH • Quanzhou Quanxiu and Quanzhou Tumen The ease of arranging such an asset transfer to ZMBH could suggest an equal possibility for ZMBH to transfer loss-making assets to QZMBH to potentially boost financial performance and cover up losses in the event of a downturn Management estimates of store profit is RMB 5m. At ZMBH’s 1% profit margin, each store generates RMB 500m. Translates to an improbable asset turnover of 417x of RMB 1.2m of PP&E Store transfers helped boost FY2014 profit by 3 times. This raises the question if ZMBH can sustain growth on it’s own 1
  • 24.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 1. Questionable Asset Transfer from QZMBH to ZMBH 24 Problem #3: Asiasons as an Underwriter • Transfer of 2 fully operational, revenue-generating stores from QZMBH to ZMBH • Quanzhou Quanxiu and Quanzhou Tumen Additional warning sign was that the independent financial advisor for the asset transfers is Asiasons Capital, the company that was caught up in the penny stock scandal along with Liongold and Blumont, leaving the professionalism of their advice in doubt 1
  • 25.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 2. Lease Agreements with Hui’an Hongyi benefitting QZMBH 25 • ZMBH from Hui’an Hongy, which is 49% owned QZMBH • Quanzhou Hui’an Huixing Store • Related party lease agreement between ZMBH and Hui’an Hongyi owned by QZMBH and Fujian Hongyi Real Estate Group • This lease transaction is problematic as Hui’an is 49% owned by QZMBH • Each lease payment of RMB 10m effectively pays RMB 4.9m of back to the Directors of QZMBH Hui’an Hongyi is ZMBH’s lessor and is 49% owned by Quanzhou ZMBH 2
  • 26.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion 3. Joint Venture Logistics Centre with Citi-Base 26 • Prospectus outlined a plan to setup a logistics centre to store seasonal merchandise and deliver merchandise to ZMBH’s department store • Setting up a related logistics centre allows ZMBH to potentially shift inventory and transfer expenses to the JV yet recognize profit earned from the sale of the good as can be witnessed from the steady increase in the Logistics Centre’s assets • Adjusting for these assets reverts ZMBH’s inventory turnover to its initial turnover before the setup of the logistics centre, suggesting assets are indeed shifted to the logistics centre Logistics Centre Summary Financials 2011 2012 2013 2014 Total Assets 15.11 28.06 55.94 82.54 % growth 86% 99% 48% Total Liabilities (0.002) (0.006) (0.017) (0.007) Revenue - - - - Other comprehensive income (0.5) (1.9) (1.7) (1.7) Inventory Turnover 2010 2011 2012 2013 2014 Group Inventory 11.4 22.5 48.3 136.7 116.3 % growth 98% 115% 183% -15% Direct sales 39.04 136.02 163.59 671.15 645.47 Inventory turnover 3.44 6.05 3.39 4.91 5.55 inventory incl Citi-Base Inventory - 37.61 76.36 192.64 198.84 Adj Inventory turnover - 3.62 2.14 3.48 3.25 3.44 6.05 3.39 4.91 5.55 3.44 3.62 2.14 3.48 3.25 2010 2011 2012 2013 2014 Inventory turnover Adj Inventory turnover Logistics Centre setup in 2011 Problem #2 Profit Contribution: Stores Financials do not Reflect in Group Figures Inventory Turnover upon adjusting for JV assets 3
  • 27.
    Insight: • Revenue increasewas not due to ‘a slew of new stores’ but 4 stores of which 2 were new and 2 were transferred-in from Quanzhou ZMBH. • There was no mention Quanzhou ZMBH in the article. Insight: • Mr. Lim Kok Tong own 11% of TSO and seems to play a significant role. Besides being a shareholder in ZMBH, it was disclosed in the prospectus that Mr. Lim also holds shares in a related party companies to ZMBH, Singapore Hancai and the former Quanxin (S) Pte Ltd • While there is no proof of a direct link, Mr. Lim Kok Tong may have assisted in engaging CIMB to underwrite and place ZMBH’s shares. As a stockbroker, Mr. Lim would have connections through whom he can raise money from and assist in the placement of ZMBH’s shares Company Overview Stock Price Too Good to be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Additional Insights from Media Sources 27 Interview with The Edge Singapore on 18 February 2015 Under the section titled “Strong Growth”, the article stated that the revenue which increased 207% was due to a slew of new store openings and cutting 1,000 jobs. Under the section titled “An unusual S-Chip”, it was revealed that one of the substantial shareholders Mr. Lim Kok Tong, is a stockbroker at CIMB who helped restructure the company in 2009 and bought over the shares of another Singaporean shareholder who wanted to sell his positions.
  • 28.
    Company Overview Stock Price Too Goodto be True Weak Disclosures & Erratic Performance Questionable Corporate Structure Conclusion Conclusion 28 Stock Price too good to be true Weak disclosures and erratic financial performance Questionable corporate governance INVESTOR CAUTION 1 2 3 • Stock price rallied over 270% in 1 year upon listing • Stock price does not react to market swings, industry forces or fundamental performance • Lack of disclosure of key retail metrics • Temporary revenue spike with asset transfer • Sales contribution of new stores seem unreasonable • Asset transfer from ‘Sister company’, Quanzhou ZMBH at overpriced terms • Lease agreement which effectively pays CEO, Deputy CEO and director If the Group only raised RMB 9m, why access the capital markets to IPO in the first place? To triple their book value of equity by cornering the shares and selling off? Some IPO investors have done that In the meantime while looking for an opportune moment to monetize their shares, management is potentially tunneling to QZMBH
  • 29.
    Appendix 1 Appendix 1:Supplemental Case Study 1: Mid-Continent 29 Mid-Continent Equipment Group – July 1998 Listing on SESDAQ @ $0.15 p/shr Total shares issued 18,000,000 Placement tranche 16,200,000 Employee tranche 1,300,000 Public tranche 500,000 Mr. Tan Hong Pheng & Mr. Gwee Yow Pin knew that there were 5 private placees holding over 80% and will not sell their shares Cornered stock by buying most or all of the available stock on the market $0.15 $0.85 after 8 trading days • Trading Suspended by SES • OCBC buys jdhback shares from minority shareholders at $0.59 Mid-Continent Equipment Group launched an IPO on July 1998, placing 18 million shares at 15 cents each. Set up in 1978, the Company is owned by managing director Mr Ong Eng Kee and mainboard- listed Ipco International. The public tranche which issued 500,000 shares to the public, was over- subscribed 19 times. Knowing that more than 80% of the shares were subscribed by shareholders who will not sell, Mr Tan Hong Pheng and Mr Gwee Yow Pin purchased almost or all stocks available in the market, causing the stock price to rally to 85 cents in 8 trading days. A trading suspension was imposed by the Singapore Exchange. The IPO manager, OCBC Bank repurchased shares from minority shareholders at 59 cents per share. Even as Mr. Tan and Mr. Gwee tried to appeal, they were fined $30,000 (instead of the maximum of $50,000 and 7 years in jail) for conspiring to create a misleading appearance in the market
  • 30.
    Appendix 1 Appendix 1:Supplemental Case Study 2: Links Island 30 Links Island: February 2000 Links Island listed on 28 February 2000 with 190 million shares on issue, offered at 28 cents. At its IPO, Links Island had 6,588 public shareholders and a free float of more than 23%. Following the IPO, the counter traded within a range of 20.5 to 35 cents, closing at 33 cents on 19 June 2000, reflecting an 18% increase over the IPO price in four months. On 20 June 2000, Links Island shares gained 6 cents to close at 39 cents and continued to rise to a peak of $1.43 on 3 August 2000, closing at $1.14 on that day. The counter closed at $1.29 on 14 August 2000, a surge of 231% from its closing price of 39 cents on 20 June 2000. Before the suspension of trading on 16 August 2000, the counter traded at $1.10 and the free float of Links Island shares had declined to less than 8% of the total number of shares outstanding. The SGX investigation also revealed large off-market married deals and co-ordinated buying or selling of Links Island shares at the same time. Such co-ordinated purchases accounted for a significant portion of the market volume on certain days. Upon investigation, SGX announced that its investigations had revealed that a corner situation had arisen in Links shares. In accordance with the SGX Rules, the SGX Settlement Committee decided that all outstanding market trades in Links shares done during 14 - 16 Aug 2000 will be settled by way of cash instead of delivery, at the fair settlement price of $1.21.
  • 31.
    Appendix 1 Appendix 1:Supplemental Case Study 3: Leong Hin 31 Enviro-Hub Holdings Ltd (former Leong Hin Holdings Ltd): 2002 – 2003 Leong Hin Holdings Ltd is a construction company was listed on the main board of the Singapore Exchange Limited on 5 October 1998 at an IPO price of $0.23. Mr. Chan Chwee Yong Bernard, the Managing Director and Mr. Chan Peng Kheng (his brother) was the Executive Chairman of Leong Hin. As at November 1999, both brothers held 8,853,225 million of Leong Hin shares each in their names and another 38 million shares were each held by two companies owned by them with their respective spouses. Out of the 8,853,225 million Leong Hin shares held in their individual names, Mr. Bernard Chan pledged 8 million shares to various financial institutions for margin trading while Mr. Chan’ Peng Kheng pledged 4 million shares. Out of the shares held by the investment companies, 14 million were pledged to various financial institutions for credit facilities and 15 million shares for the 2 personnel respectively. The brothers had a co-conspirator Ang Tian Kiat, who subscribed to $1 million shares during the initial public offering of the shares. 0 100 200 300 400 500 0 0.2 0.4 0.6 0.8 Millions
  • 32.
    Appendix 1 Appendix 1:Supplemental Case Study 3: Leong Hin (cont’d) 32 Enviro-Hub Holdings Ltd (former Leong Hin Holdings Ltd): 2002 – 2003 (cont’d) Between 1 June 2000 and 22 April 2003, it was found that the Chan brothers together with Ang conspired to create a false appearance with respect to the market for Leong Hin shares by dominating the market in those shares in the stock market. Some 74 accounts in the names of Ang and seven other nominees with eight stock-broking firms were used in the trading which helped create a false appearance of active trading. Bernard had the consent of two of the account holders to use their accounts for the trades. Leong Hin shares were bought and sold on almost every trading day to kick up the share price. These sales and purchases were ‘wash sales’, i.e. share transactions in which there was no change in the beneficial ownership. Out of 725 tradable days, the accounts were used to make 80% of purchases on 472 days and 80% of sales on 473 days and 30% purchases on 697 days and 30% per cent sales on 701 days. There were also days when the trades in the shares amongst the controlled accounts accounted for the entire market demand and supply. The price of Leong Hin shares rose from $0.455 on 1 June 2000 to $0.765 on 22 April 2003 outperforming the STI and the sector index for construction equities during this entire period. When the scheme came to an end, the share price plunged about 75% from $0.765 to close at $0.195 on 23 April 2003. It has been admitted that the orders for the Leong Hin trades in the accounts were given by Mr. Ang and Mr. Bernard Chan. It has also been admitted that all the trades conducted were financed by both accused persons. Mr. Bernard Chan was sentenced to a $20,000 fine and one month imprisonment while his brother Mr. Chan Peng Kheng were sentenced to 6 months imprisonment.
  • 33.
    Appendix 2 Appendix 2:Investment in Subsidiaries 33 Investment in Subsidiaries in RMB '000s 2009 2010 2011 2012 2013 2014 Investment in subsidiaries 11,278.1 30,005.1 55,702.5 71,628.6 80,023.1 80,023.1 Proportion of Ownership Interest Implied Capital Name and Country 2009 2010 2011 2012 2013 2014 Invested Xiamen Shi Zhongmin Baihui Commercial Co. Ltd (PRC) 100% 100% 100% 100% 100% 100% 30,005.1 Zhongmin Baihui Development Pte Ltd (Singapore) - - 100% 100% 100% 100% 20,811.8 Zhongmin Baihui (Nanjing) Commercial Co., Ltd (PRC) - - 100% 100% 100% 100% 20,811.8 Zhongmin Baihui (Quanzhou) Commercial Co., Ltd (PRC) - - - - 100% 100% 8,394.6 Looks okay.
  • 34.
    Appendix 3 Appendix 3:Amount due from Subsidiaries 34 Amount due from Subsidiaries Amount due from Subsidiaries Reported at a Company level and consolidated into Group financials figures in RMB 2010 2011 2012 2013 2014 Amount due from subsidiaries (non-trade) - 68,439 90,842 131,220 126,370 Amount due from Subsidiaries Reported at a Group level <-- IPO <-- Asset Transfer 2009 2010 2011 2012 2013 2014 Amount due from related parties trade 898,675 45,960 - 15,998 662,532 Amount due from related parties non-trade 7,909,930 25,159 - - 405,895 3,052,702 Amount due to related parties trade 315,283 74,973 540,128 1,357,249 853,885 Amount due to related parties non-trade 23,862,780 11,616,075 111,435 - 9,117,602 6,474,886 Asset Transfer Amt due to rp cos of acq (cur) 5,769,554 938,553 Amt due to rp cos of acq (non-cur) 2,117,000 0 Asset Transfer Agreement 7,886,554 938,553 1 2 Amount due to related parties decreased at IPO probably to settle accounts in good order before listing. Related parties would have gained some at this point 1 Amount increases in 2013 due to asset transfer agreement requiring ZMBH to pay considerations to QZMBH over next 2 years 2 Must be closely monitored
  • 35.
    Appendix 4 Appendix 4:Use of IPO Proceeds 35 Use of IPO Proceeds Seems to be in good order • Company frequently updates and discloses the use of IPO proceeds • Only change in use of IPO proceeds recorded was to establish the Nanjing store. The store has been unsuccessful though • IPO proceeds of SGD 9m will not be the main source of funds if company intends to do anything fraudulent • IPO proceeds have since been fully utilized