Edited: Thanks to Vseeker, there was a slight mistake in my calculation. The share transfer to CFO Siek’s CDP account is entirely based on his (CFO) own shares and have no relation to CEO Lin Guo Rong’s shares. Nonetheless, the discrepancy does not change my underlying conclusion much – except the added question of the rationale behind CFO’s Siek CDP shares transfer.
Update: In addition to the information posted on this post, CEO Lin Guo Rong had initiated his 3rd open market purchases of another additional 100,000 shares at a unit cost of S$0.57 – making a cash cost investment of S$2.5 million in total.
China Minzhong (CMZ) had again caught my attention a week prior to its 3Q FY12 result release. Its below-expectation earnings result has led to a strong plummeting of its stock price – down from last Friday’s closed price of S$0.82 to today closed of S$0.58. A 30% drop in less than a week and it has hit an all-time low since its IPO in April 2010. I can’t say for sure whether there is ‘value’ in the current stock price or has it been oversold. Given the strong selling, there can be a slight technical rebound but by how much and for how long, that I’m uncertain. Given the current global condition, how fear had plagued Europe and how sentiments have yet to recover for China, the act of catching falling knives can be a feat not advisable for the faint-hearted. In the meantime, it will be advisable to dig deeper into the due diligence’s process, mainly:
- Understanding the business structure of CMZ & China agricultural industry thoroughly
- Identify the reasons behind CMZ’s poor performance – was it a sudden deterioration in 3Q or were there already hints left behind in the early quarters
- How much is CMZ exactly worth? Not exactly the intrinsic value but at least the potential target/exit price (range) with the anticipated catalyst(s)
For now, I am still reading up on the business, alongside other stock counter and will occasionally post updates once I am done.
As for this post, we will dwell a little into CMZ’s management share structure. Have management already cashed out their investment way before CMZ’s IPO or have they largely held on to their shares? Either way, it speaks volume about the management’s perspective of their business.
China Minzhong Holding Limited (“Minzhong (BVI)”)
If one had been reading up on CMZ, you will have noticed its management holds shares in a rather unconventional manner. At the point of its IPO listing, none of the 4 key personnel (CEO Lin Guo Rong, COO Wang Dazhang, CTO Huang Bing Hui & CFO Siek Wei Ting) has any direct stake in the company. Instead, they held shares via an investment holding company called “China Minzhong (BVI)”. Under its IPO Prospectus, it was stated that,
“Minzhong (BVI) is solely owned by the CFO, Siek Wei Ting (100%) of which Siek Wei Ting is holding an aggregate of 100% of the Shares in Minzhong (BVI) on trust for the CEO (33.3%), COO (22.2%) & CTO (22.2%)”
In layman term, CFO is sort of the trust holder of the shares that belonged to the CEO, COO & CTO. I reckoned such a move was to deter any incentive of a fraud possibility. With 4 personnel, it will be harder to collude. Also bear in mind that CFO is a Singaporean (which means he is subjected to Singapore law) and he holds the remaining 22.2% stake. In other words, the structure of Minzhong (BVI) follows as such:
On July 2011,
CEO Lin Guo Rong then made a corporate announcement that he will be transferring 8,530,703 shares into CFO Siek Wei Ting’s CDP account. In other words, CFO is now holding part of CEO stakes directly. CFO Siek Wei Ting transferred his entire share stake under Minzhong (BVI) to its own CDP account. The rationale behind it is unknown. Either CFO wants to have better transparency regarding the Minzhong (BVI) investment holding company, or it could have been done to facilitate his ESOS shares exercise. Nontheless, on September 2011, the new shareholding structure for Minzhong (BVI) stands as such:
Employee Share Option Scheme (ESOS)
During FY2011, under the ESOS, CMZ’s key management team also exercised all their share option available at an exercise price of US$0.358 (= S$0.432). At a total of 15,668,000 share options being exercised, it meant that the management had forked out a certain cash cost of S$6.7 million.
Such share options, once exercised, should be accounted as a direct (and not deemed) holding under each of the respective individuals. Also, taking note that CFO having received the transfer of shares from the CEO, he should have 12,334,703 shares under his direct holding.
Divestment of shares?
Now, to understand if the management team had sold their stake ever since, we will have to take a closer look at the shareholding structure under its FY11 Annual Report. Any lesser in differences will have meant that they had sold their stake in the period between the exercising of its options and 14 September 2011.
From the above, it seemed that no shares had been sold from the investment holding company. CEO and COO had not sold their shares from their exercised options as well. However, CTO had divested his ESOS-exercised shares completely while CFO had sold a partial stake. Observing the closed prices of the entire FY11 full year time frame, FY11 52-weeks average closed price was S$1.47 while its FY11 52-weeks high was S$1.85. This meant that CTO could have reaped a profit of S$3.5 to S$4.7 million while CFO had a profit of between S$2.7 to S$3.7 million.
However, on the contrary, both CEO and COO had stuck on with their stakes. In fact, CEO Lin Guo Rong continued with more open market purchase. On 20 Sept 2011, CEO bought 200,000 shares at a unit cost of S$1.032. On 17 May 2011, he bought another 100,000 shares at a unit cost of S$0.585. Both open market purchases bring a total consideration of S$264,886. Putting that into perspective, CEO’s remuneration based on FY11, is ranged between S$500K to S$800K – which means he had wagered 25% of his annual income.
From the above, several inferences can be cautiously made. However, it is also important to take note that all of such are still “guesstimate” and nothing can be 100% certain.
- It is less likely that CMZ is a fraud. Management has yet to cash out significantly from this investment. No vendor sales were made during its IPO listing and so far, only CTO & CFO had sold their stake for a total of only S$8 million max. Supposedly that all 4 of them are crooks, net S$8 million from the remaining cost of ESOS exercise will yield a net net profit of only S$4 million – which means each will have S$1 million. I don’t know about you but if I am to commit any fraud such as this, S$1 million is too little an incentive for me.
- Moreover, CMZ’s no dividend policy is after all a double-edged sword. This means that dividend payment as a cash out method for any probable fraud attempt is invalid. Now, not that CMZ is certainly fraud-proof. Management can still cash out via overstating their capital expenditure – i.e. state a $1 million CAPEX when PP&E is worth $500K.
- The core founders of CMZ – CEO Lin Guo Rong and COO Wang Dazhang had both held on to their shares. Take note that COO’s spouse Huang Shu Fen had a 400,000 shares investment likely to be bought during the 1st year of CMZ’s IPO. That, to my knowledge, had not been sold yet.
- CEO had also committed 2 open market purchases amounting to 25% of his annual income. I understand the argument that 25% is still little but the amount was measured against the maximum of his remuneration band – i.e. S$800K. The stake can be as high as 40% (against the band low of S$500K). Put in the same shoes, will we waste 25-40% of our annual income into a business which we feel has dying prospect? Of course, being a business owner, something pouring in more capital can be a matter of saving ‘face’ or being in self-denial of their business failure. To better judge that, we will then have to take a look at CMZ’s business operations and why had it failed to meet analysts’ expectations.
Next post on CMZ: Key features to take note of CMZ business operation and its industry structure.
If interested, I had written an early research article on CMZ, sometime late 2011