Posted on 2017 Aug 22
Blazing Research is initiating coverage with a IPO FAILURE rating on Imperial Sierra Group Holdings Limited (“Imperial Sierra”). Following our coverage on China Household this June, we are now initiating coverage on Imperial Sierra, a company that has filed its listing application but not yet listed, which again demonstrate our non-profit seeking nature. We noticed that some companies try to earn the “shell” price of Hong Kong listed companies through fraudulent IPO in recent years, and therefore we hope that this report can warn these companies that we may pay close attention to them as well.
In this report, we will present concrete evidences showing that majority of the customers of Imperial Sierra do not have sufficient operating scale to support the disclosed revenue of Imperial Sierra. We also found that the founder and president of Imperial Sierra to be the son of Mr. Yip Kim Po, who has been jailed for seven years for defrauding listed companies in the past. We believe Imperial Sierra is just another fraud planned by Mr. Yip Kum Po. We conclude that the application proof of Imperial Sierra should be rejected or even returned.
1. Majority of Top Customers have Minimal Operating Scale
We found that majority of top 5 customers disclosed by Imperial Sierra to have minimal operating scale, few employees, minimal or zero amount of revenue and tax paid, making us hard to believe these companies can generate large amount of revenue for Imperial Sierra. Suspicious transactions from these companies account for 92.2%, 46.2% and 52.6% of revenue in 2014, 2015 and 2016 respectively.
2. Physical Inspection shows Customers Have No Operations
We have visited the registered address of the major customers, and found that majority of the customers of Imperial Sierra to have no any operations, and we cannot find their offices in the registered address. This further confirms our conclusion in Part 1 that the operation of these customers cannot support the disclosed revenue of Imperial Sierra.
3. Effective Controller – Mr. Yip Kim Po
Large amount of evidences shows that the president of Imperial Sierra, Mr. Yip Wik, is the son of Mr. Yip Kim Po, who has been imprisoned for 7 years for frauds in listed companies. The mere two year of work experiences makes us hard to believe that Mr. Yip Wik is able to found Imperial Sierra at the age of 24. As Mr. Yip Kim Po has criminal record and cannot be the director of listed company, we believe Mr. Yip Wik is only a shadow shareholder and director.
4. Net Income in SAIC & Tax Filings Far Smaller than Application Proof’s Disclosure
We calculated the implied net income of Imperial Sierra’s PRC subsidiary through PRC Enterprise Income Tax expense disclosed by Imperial Sierra, and found that the net income of Yufeng (Guangdong) Asset Management Co., Ltd. (“Yufeng Guangdong”), the only PRC subsidiary of Imperial Sierra, to be much lower than the implied figures. The difference is as high as 75.6% and 86.8% in 2014 and 2015 respectively.
5. Significant Discrepancy in Revenue and Potential Legal Risk
We found that the revenue disclosed on SAIC & Tax filings of Yufeng Guangdong to be much lower than the revenue disclosed by Imperial Sierra. Although part of the difference may be explained by third-party payment, we believe that this may be considered as tax evasion and may violate relevant PRC laws and regulations.
6. Abnormal Growth of Figures in 2016 SAIC & Tax Filings
The figures reported in 2016 SAIC & Tax filings of Yufeng Guangdong has an abnormal growth rate compared to 2014 and 2015, and there are as much as 24 edit records for its 2016 SAIC filing. We seriously doubt the authenticity of its reported figures in 2016 SAIC & Tax filings.
7. HKD 80 million of Disappeared Cash
Although Imperial Sierra recorded a positive net income in each of the last three financial years, its free cash flow is far smaller than the net income. The total difference exceeds HKD 80 million, which is mostly arising from (i) Amount due from shareholder and (ii) Trade and other receivables. At the same time, the cash and bank balance of Imperial Sierra is extremely low. Its cash and bank balance is merely HKD 4,000 at the end of 2015. Its interest rate on cash and bank balance is as low as 0.03%.
In view of the above, we believe Imperial Sierra to have no operation with commercial substance. We recommend relevant regulators to start investigate Imperial Sierra and reconsider its suitability of listing in Hong Kong market.