Initial Coverage on Cogobuy Group (SEHK:400)

More than a decade of fraud

Posted on 2017 May 22


Summary

We are here to introduce another Hong Kong-listed company sponsored by UBS, the renowned investment bank famous for sponsoring fraudulent companies includes China Forestry, China Metal Recycling, Boshiwa and Tianhe Chemicals. Cogobuy Group (“Cogobuy”) is listed in 2014 July with UBS acting as sole sponsor, claiming itself to be the “largest E-commerce IC platform in China”. Our investigation shows that not only did Cogobuy fabricate its revenue and net profit since listing in Hong Kong, its online platform Cogobuy.com and the “largest intelligent hardware innovation business platform” IngDan is a complete scam. This report will present our evidences, including independent online traffic data and SAIC filings, to support our belief that Cogobuy is just a fraud.

1. An Outdated Online Platform that has been down for a week and without any traffics

From April 18 to April 26, Cogobuy.com has been down for a week without any maintenance. Independent online competitive intelligence providers show that both Cogobuy.com and IngDan has a minimal amount of traffics compared to its peers. Cogobuy.com almost has no update since 2014, and with numerous bugs and errors. IngDan, the claimed entrepreneur IoT platform, is full of fake projects that are likely to be fabricated by a mainland China employee. We believe the claimed GMV of RMB 21.65 bn of Cogobuy is mostly fake.

2. Significant Discrepancy between Reported Figures and SAIC Filings

We retrieved Cogobuy’s SAIC filings and discovered a significant deviation between its revenue figures on SAIC filings and the reported figures on annual reports. Even after making generous assumption, the revenue implied by SAIC filings is only around 40% of the reported figures. Moreover, its tax figures on SAIC filings is only around 30% of the disclosed PRC tax expense, further corroborating our finding.

3. Unparalleled Financial Performance compared to its Peer

The return of equity on Cogobuy is around 20% for four years already, significantly higher than its peer and many other industries. Its growth rate in revenue and net income is also unparalleled compared to its peers, stating the reason of high growth rate as “driven by the one-step services from the online platform”, which we have already shown to be mostly fake.

4. RMB 1.9 billion of Difference between Net Income and Cash Flow

Although having a spectacular net income, the operating cash flow is mostly negative and much smaller than the reported net income. From 2011 to 2016, Cogobuy reported a total net income of RMB 1.23 bn, but its adjusted net cash flow from operations is negative RMB 0.67 bn, with a difference of RMB 1.90 bn. Most of it goes to trade and other receivables and inventories, which are growing much faster than the revenue. Cogo Group, the former entity of Cogobuy, also has a similar story. As expected, no dividend has been declared by Cogobuy or Cogo Group for twelve years.

5. Suspicious Share Repurchase with shares mostly coming from a few accounts

Share repurchase at a high share price is frequently quoted by Cogobuy as a way of returning profit to shareholders. However, our analysis on CCASS shows that most of the share repurchased actually come from few accounts and it is highly suspicious if these account holders have any relationship with the controlling shareholder of Cogobuy. We suspect that the share repurchase is just a scheme to help friendly accounts of controlling shareholder sell shares at high price.

6. Infamous U.S. Listing History of its Former Entity, Cogo Group

Majority of today Cogobuy’s assets come from Cogo Group, which was listed in NASDAQ through reverse merger in 2004. The controlling shareholder has been reducing his shareholding from 72.6% to 32.4% when Cogo Group’s performance is growing rapidly. We found numerous suspicious transactions conducted by Cogo Group to funnel cash out. After several times of assets disposal, Cogo Group is now trading at the illiquid OTCBB, at a price of lower than USD 0.1, less than 1% of its historical high price.

7. A Share Placement that is Undersubscribed and has no Industry Investor

Cogobuy has completed a placement in 2016 September. Although with the clause of guaranteed return and investors will only suffer loss if the controlling shareholder goes bankrupt, it was undersubscribed with no industry investor, showing the pessimistic view of industry players on Cogobuy.

In view of the above, we believe that Cogobuy is another fraudulent company brought to us by UBS and we value Cogobuy at HKD 0.53 per share, implying a 95% downside.

English Version: Download Full Report (PDF) View on Scribd
Chinese Version: Download Full Report (PDF) View on Scribd