Posted on 2017 Nov 14
Blazing Research is initiating coverage with a NOT SUITABLE FOR LISTING rating on Flying Mining (SEHK: 1625). We have sent our investigation result regarding Flying Mining to Hong Kong Exchange and SFC in the afternoon of Oct 30, one day prior to the expected listing date of Flying Mining.
We are glad that Hong Kong Exchange and SFC acted promptly to suspend the IPO of Flying Ming. To avoid Hong Kong Exchange and SFC being blamed for the cancellation and to allow investors to understand more about Flying Mining, we are now publishing this research report. Due to time constraints, we have just completed all our investigation on Oct 29 and therefore the version we sent to regulators on Oct 30 only contains Part 1 to 5. We have been further polishing this report in last two weeks. Please refer to this finalized version when responding.
1. Suspicious Framework Sales Contracts
We found that out of the five Flying Mining’s customers, four of them have a revenue far smaller than their promised purchase amount from Flying Mining. These customers have a minimal operating scale that cannot possibly support the disclosed purchase amount from Flying Mining. Marble is not a rare commodity and the relevant purchase amount is not large, and there is no commercial rationale to promise purchasing marble from Flying Mining in next two years. These irregular transactions account for 82.0% and 82.5% of Flying Mining’s expected revenue in 2017 and 2018 respectively.
2. Suspicious Largest Customer’s Identity and Source of Wealth
The largest customer of Flying Mining, Xiamen Hefeng, was just incorporated at the end of 2016. The two shareholders of Xiamen Hefeng do not have any other operating businesses and their source of wealth is doubtful. This largest customer promised to purchase a large amount of marble from Flying Mining shortly after incorporation, and the commercial rationale of such action is doubtful. We believe that Xiamen Hefeng is effectively controlled by Mr. Lin Hui and Mr. Huang Zhongyi instead, and its sole purpose is to fabricate revenue for Flying Mining.
3. Physical Inspection of Xiamen Hefeng’s Registered Address Shows Evidence of Deceiving Sponsor
We have visited Xiamen Hefeng’s registered address twice in the week of Oct 16 and Oct 23 respectively. When we visited the office the first time, we found that Xiamen Hefeng seems to have a normal operation. But when we visited again in second time, we found that the door plate of the office has already been changed to another company called Xiamen Jinzhiyu Trading Company and no one is at the office. Xiamen Jinzhiyu Trading Company has no relationships with Xiamen Hefeng, showing that Xiamen Hefeng just borrowed office from other to deceive sponsor.
4. Physical Inspection of Mr. Huang Jinyuan’s Residential Address Shows a Poor Economic Condition
We found that the residential address of Xiamen Hefeng’s controlling shareholder, Mr. Huang Jinyuan, to be No. *, Fengchuigu, Longfeng Cun, Shuitou Zhen from Huji System. We appointed third-party inspectors to visit the place and found that the house is in an extremely poor condition with broken parts everywhere and the stair to second floor is blocked. It indicates that the economic condition of Mr. Huang Jinyuan is poor and cannot possibly own a company that makes over a hundred million of purchases.
5. Xiamen Hefeng Is Effectively Controlled by Mr. Lin Hui, Mr. Huang Zhongyi and Mr. Huang Jianfu
We further found out that Xiamen Hefeng is actually an empty company and the effective manufacturing factory is Fujian Nanan City Zhongtai Stone Limited, which is owned by Mr. Huang Jianfu. Mr. Huang Jianfu has countless relationships with Mr. Huang Zhongyi and they hold Fujian Panxing Group Limited together. We further confirmed that Mr. Hunag Jinyuan is not the effective controller of Xiamen Hefeng and Xiamen Hefeng is just an empty company established by Mr. Lin Hui and Mr. Huang Zhongyi to deceive Hong Kong Exchange.
6. Minimal Amount of Cash and Bank Balance
Flying Mining’s amount of cash and bank balance is minimal every year. The cash and bank balance of it is merely RMB 140,000, RMB 39,000 and RMB 753,000 respectively at the end of 2014-2016. It is hard to believe a company with such scale can be listed on Hong Kong Main Board.
7. Valuation Increased Over 12 Times in Just One Year
Mr. Lin Hui transferred 5% shares of Flying Mining to his friend at a consideration of mere RMB 2.5 mn at the end of 2016, indicating the valuation of Flying Mining to be merely RMB 50 mn at that time, which is similar to Flying Mining’s total investment in Leishoushan Marble Mine. If Flying Mining is successfully listed, its valuation will be as high as HKD 0.78 bn. We cannot understand the rationale of Flying Mining’s valuation to increase over 12 times in just one year, and believe the aim of above transfer is to circumvent the lock-up period of controlling shareholder.
Our report shows that most Flying Mining’s expected sales is highly suspicious, and the operation scale of its disclosed customers cannot possibly support the promised purchase amount from Flying Mining. Moreover, our physical inspection shows that Flying Mining deceived sponsor deliberately and Mr. Huang Jinyuan to have a poor financial condition. The identity and source of wealth of its largest customer is extremely doubtful. The aim of share transfer prior to IPO appears to be circumventing the lock-up period only. Due to these numerous issues, we believe that regulators should start investigation in Flying Mining and reconsider Flying Mining’s suitability of listing.