Hall of Shame

Consumer Staples

China Minzhong (MINZ SP)

Year: 2013

China Minzhong Food Corporation Limited was an integrated vegetable processor. The Company’s products were processed vegetables and fresh vegetables produce. The Company also produced other processed vegetable products including fruit and vegetable juices, instant vermicelli, water-boiled vegetables and other local products, which were produced in six processing facilities namely Fujian Province, Yunnan Province, Sichuan Province, Inner Mongolia and Shanghai. It offered approximately 100 types of processed vegetables that were processed using methods such as air drying, freeze-drying, fresh-packing and brining. The Company’s products were distributed across four continents spanning 26 different countries and regions including the Americas, Asia and Europe.

It listed on the Singapore Exchange (SGX) in April 2010; raising SG$236.81M in its IPO. Two additional share offerings raised SG$67.60M in May 2001 and SG$105.50M in March 2013.

In February 2013, PT Indofood Sukses Makmur Tbk (Indofood) became the single largest shareholder of China Minzhong, with a 29.3% stake. Indofood had launched a number of bids to acquire a majority stake in the company.

August 25, 2013, Glaucus Research published a Strong Sell Recommendation report. It believed that Minzhong had so significantly deceived regulators and investors about the scale of its business and its financial performance that it expected trading in its shares to be halted and its shares to be worthless. The arguments Glaucus put forward for its recommendation were:

  • Fabricated Sales. Publicly available filings indicated that Minzhong had fabricated sales figures for its top two customers. 
    • Top Customer was incorporated in November 2009; after the IPO track record period of 2007 to 2009,
    • SAIC filings for second largest customer had zero revenues and zero COGS in 2009; which purportedly accounted for RMB 142 million in sales in 2009.
    • Minzhong reported in its Prospectus that its top customers were independent third parties. Minzhong’s second largest customer was not only co-founded by Company Chairman Lin Guo Rong but that Lin Guo Ping simultaneously served as the supervisor of the Minzhong customer.
  • SAIC filings showed that Minzhong’s largest supplier during the pre-IPO track record period, which purportedly accounted for 18% of the Company’s total purchases in 1Q2010 and was the Company’s primary source of mushroom spores (reportedly its best selling product), was deregistered and stripped of its business license for violating PRC law in February 2010, a mere two months before Minzhong’s April 2010 IPO. In Glaucus' opinion, the implication of this deregistration was that the supplier was not a major operating business and that Minzhong fabricated payments to its largest supplier.
  • After a wave of accounting scandals and de-listings among other S-Chips in early 2011, it appeared that Minzhong doctored the historical financials of certain subsidiaries in their respective SAIC filings to make them appear consistent with Minzhong’s Singapore-filed financials. Prior to the apparent cover up, SAIC filings suggested that Minzhong’s assets and earnings were a small fraction of what the Company claimed in its Singapore-filed financials.
  • In FYs 2011 and 2012, Minzhong claimed to have spent around RMB 1.2 billion on the construction of a new industrial park in Putian. Yet SAIC filings showed an increase of only RMB 203 million in PP&E during the same period. More suspiciously, the industrial park was not pledged as collateral for the Company’s bank loans; instead, Minzhong’s creditors sought personal, unsecured guarantees from the Company’s Chairman and its suppliers. Glaucus believed that this was further evidence that Minzhong vastly overstated its capital expenditures.
  • The Company’s business model was as old as agriculture itself, yet it so vastly outperforms other fresh produce growers that its reported financial performance defied credibility. 
    • Minzhong’s reported EBITDA margins on fresh produce, its most profitable segment, averaged an absurd 66% during the past five years.
    • The Company’s receivables had skyrocketed of late, despite the fact that its credit terms had not changed. Glaucus believed that the persistent and unexplained growth in receivables was caused by the need to account for fake income on the balance sheet.
    • Since its IPO, Minzhong had generated negative free cash flow of RMB 1 billion. Much like other S-Chips which had been delisted under suspicion of impropriety, the Company relied on debt or equity financing as its primary source of cash generation.
  • As of March 31, 2013, Minzhong had approximately RMB 1.1 billion of onshore liabilities outstanding, including bank loans and trade payables due to unsecured onshore creditors in the PRC. In a liquidation scenario, the holders of onshore liabilities have historically taken priority over offshore equity holders. Because Glaucus believed that the Company had significantly overstated its sales and its capital expenditures, it doubted the authenticity of its reported receivables, cash balance and PP&E. Given the limited offshore assets available for seizure (cash denominated in US$, SG$, or Euro was limited to RMB 8 million as of 6/30/2012) and the difficulty recovering onshore assets (property and equipment) from alleged fraudsters under China’s byzantine judicial system, Glaucus put a price target on Minzhong’s shares of SG$ 0.00.

September 1, 2013 China Minzhong responded to Glaucus report. It refuted all the allegations. It commented on the fact that the company accounts had been audited without qualification by their external auditors and that Glaucus had a complete lack of understanding of the way it conducted its business as well as the operating environment in China.

September 2, 2013 Indofood launched a mandatory cash offer for the remaining shares of China Minzhong, at a price of $1.12 per share. The share price a day prior to the offer was $0.53. By December 2013, Indofood had acquired 82.88% of China Minzhong’s issued shares.

January 16, 2015, Indofood decided that it would sell 347 million of its shares in China Minzhong at $1.20 per share to China Minzhong Holding Ltd, an investment vehicle that is controlled by the food processing company’s senior executives, including the chief executive. This sale was expected to be completed by June 2015, which would raise US$314 (S$416.4) million for Indofood and reduce their original stake of 82.88% to 29.94%.  However, over the following months the deal had been put on hold due to funding issues.

September 7, 2016 Marvellous Glory Holdings, an investment vehicle incorporated in the British Virgin Islands, has offered to acquire all of its shares.  83% of China Minzhong's shares were already owned by Indofood Sukses Makmur, an Indonesian food company controlled by Anthoni's Salim Group conglomerate. The offer is aimed at buying out independent investors and delisting China Minzhong from the Singapore Exchange. Salim owns 92.99% of Marvellous Glory.

December 9, 2016, China Minzhong sought a trading halt as public float fell below 10%.  Marvellous Glory Holdings, a special vehicle led by Indonesian tycoon Anthoni Salim, had offered to take China Minzhong Food private. Mr Salim had been the majority shareholder in the Chinese company through Jakarta-listed Indofood. Marvellous Glory offered S$1.20 for each share in China Minzhong Food, in a deal that valued the Chinese company at S$786 million.

February 28, 2017 The Company was delisted from the SGX and the company went private.

Glaucus Research: China Minzhong Food Corp., 25 Aug 2013
China Minzhong: Company Response, 1 Sep 2013
Mak Yuen Teen: Corp. Gov. Case. Studies - Vol 4  China Minzhong, Oct.2015
The Business Times: Indonesia's Indofood to cut controlling stake in China Minzhong, 16 Jan 2015
Nikkei Asian Review: Indonesian tycoon Salim makes bid for China Minzhong Food, 7 Sep 2016
China Minzhong: Annual Report YE - June 2015
China Minzhong: Annual Report YE - June 2013
China Minzhong: Annual Report YE - June 2012