Monday, 30 April 2012

China Taisan - sitting on a huge cash pile?

China Taisan presents an interesting case study. 

Based on the results that were announced, as of 31 Dec 2011, the cash on hand stands at approximately S$142.7m. (sourced from Capital IQ). The NAV per share is worth approximately Singapore 24 cents but looked at the trading price, it is languishing at Singapore 9 cents. At 9 Singapore cents, the market capitalization is about S$100m. 

If you are the owner of the firm or a private equity firm today, what would you do when you see that the cash you have in your bank is more than your market cap? You will get very upset and will either use the cash to buy back your shares or you will get some private equity firm to privatize your firm at current share price. In fact, if i am the owner, what i will do is to borrow S$100m from a bank (maybe less since i already own some shares), use it to takeover the company and get hold of the S$142m cash and pay off my $100m loan. I am then in the money with $42m cash and a company that is making profit every year!

If you are the shareholder of the Company, this should be the exact question which you should pose to the board of directors of the Company. Why are you sitting on a pile of cash and doing nothing about it? 

I have the opportunity to speak to one of my friends from the forensic department in a big 4 accounting firm. She has spent her last 10 years doing forensic audit on Chinese firms in China.  She told me that nowadays, as part of the audit, they need to send a staff down to the bank personally and physically to do bank confirmation. One of her junior staff was recently 'detained' by the bank for 4 hours in the course of doing this. The reason why auditors can no longer rely on faxed bank confirmations is due to wide spread collusion between the bank manager and the company. As such, auditors can no longer rely on bank confirmations or statements sent to them by the bank. In addition, when the auditors visit to the bank, instead of looking for a particular person as instructed by the company, the auditor is actually suppose to look for a random person sitting at the bank counter to ensure there is no collusion!  What a waste of resources but a harsh reflection of how rampant the situation has become.  Imagine auditors having to go down personally to the bank to "sight" the cash?!

A check with the annual report of China Taisan shows that the auditor is not a big 4 auditor but a firm called Mazars LLP. According to Wikipedia, it is ranked 14th in the world. According to a 2012 transparency report it has issued, it is the auditor of China Auto Corporation, Harry's Holdings, Rokko Holdings, China Enersave, Fujian Zhenyun Plastics, Sunmoon Food, Luzhou Bio-Chem, Sun East Group, Sky One and Metax Engineering. In my view, not exactly the most comforting list of listed companies with some of them in the 'troubled' list. 

Now, if you are a shareholder of this company, it might be a good idea to ask politely to the Independent board members to find out more about how and what the auditors have done to ensure the authenticity of the cash balances. Is it really S$142.7m at the end of the financial year? You may also check whether the Board plans to distribute the cash as dividends or buy back its shares? 

A Company that has never pay its shareholders any dividend despite its huge cash pile usually sends a strong signal as to whether the cash is there in the first place unless the company intends to utilize its cash pile for some major acquisition. (or unless you are Apple during Steve Jobs era?) Two examples i can think off my head will be China Hong Xing and China Gaoxian that despite its huge çash balance, keep raising money from the market.

For its own interest and that of its shareholders, China Taisan may do well to start utilizing its huge cash pile and if it cannot find a better use for its cash, to start paying dividends to its shareholders or buy back the shares.
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