Posted on 2017 June 22
Blazing Research is initiating coverage with a STRONG SELL rating on China Household Holdings Limited (“China Household”, SEHK:692). As we have promised, we do not only cover large market-cap companies. Not being included on the list of designated securities eligible for short selling or having a small market-cap does not prevent our investigation and coverage. We currently do not, and will not, have any long or short positions on China Household, and therefore we are unable to realize any gain by changes in share price of China Household. We have tried various ways to contact Mr. Li Zhixiong, other board members and substantial shareholders of China Household since this Monday (19 Jun) for their response on our initial coverage report. Until now, we received no feedback from any of them.
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In this research report, we present concrete evidences showing that the majority of the revenue and net income of China Household since its backdoor listing is fabricated. We found material discrepancy between the financial figures disclosed by China Household and SAIC & Tax filings. Our physical inspection shows that its major business, sales of household furniture, has ceased operation long ago. We conclude that the only possible fate of China Household is to be delisted from the market.
1. Acquisitions that can never meet profit guarantee
China Household has been acquiring numerous companies with almost no tangible net asset at a high premium. Although these acquisitions came with profit guarantees and China Household disclosed that these profit guarantees are mostly met, all three separate sources, i.e. SAIC fillings, local tax filings and public overdue tax records, show that the actual net income of these acquired targets are all minimal. Nearly RMB 400 million of net income was fabricated from 2013 to 2016 from these acquired companies.
2. Material discrepancy with SAIC and tax filings
We compared the revenue and total tax amount filed in SAIC and tax filings of all subsidiaries with the disclosed revenue and PRC tax expense of China Household, and found that at least nearly 60% of the reported revenue was fabricated from 2013 to 2016. Actual tax paid is at most 13% of the tax expense reported in annual report.
3. Physical inspection shows no point of sales
Our investigators visited China Household’s head office and its retail shops in Zhongshan, and found that one of the two retail shops it owns has already been closed, and the another one does not sell any furniture anymore. Moreover, China Household’s employees confirmed to us that China Household do not sell furniture anymore, and its head office has already been occupied by another company. We further inspected other selling channels of China Household, including its distributors and online stores, and found that China Household almost has no sales in furniture.
4. Numerous red flags on fabricated cash
Although China Household reported it has around HK$ 400 million cash in 2015, its interest income is as low as HK$ 0.2 million. The interest rate of China Household on its cash is as low as 0.06%. Moreover, it has been issuing numerous convertible bonds even with a large pile of cash. It has not paid any dividend since its backdoor listing in 2013. We believe it is highly possible that the cash balance is fabricated.
5. Stock price manipulation with over 90 brokerage accounts
We have obtained the internal documents of China Household and found that the controlling shareholder has over 90 brokerage accounts to hold his shares and manipulate stock price. The controlling shareholder actually holds more than 60% of the shareholding while disclosing only 13%, to prevent the trigger of mandatory general offer and reverse takeover. We found that almost half of the turnover of China Household’s market comes from brokerage accounts controlled by the controlling shareholder, and we observed the phenomenon of wash trade between these accounts.
6. The aerospace project that can never materialize
China Household has been emphasizing on an aerospace project recently. We analyzed the feasibility of such a project, and concluded that the project is highly infeasible. We found that the lands purchased by China Household for the development of the project to have no commercial value, and the project has already been abandoned for five years before the recent emphasize by management.
7. Notorious auditor
The auditor of China Household, Elite Partners, is notorious in Hong Kong market. It has replaced 17 resigned auditors of Hong Kong listed companies since 2016, and more than half of these companies have certain issues revealed by the former auditors.
In conclusion, given the extraordinary extent of fraud of China Household and the large amount of evidences we collected, we believe that the only fate of China Household is to be prosecuted by SFC and delisted from the market, just like China Metal Recycling. A valuation is unnecessary, since its intrinsic value is zero in our opinion. We also recommend all investors to avoid trading of China Household, since the active market is just a delusion.