JY8 - Joyou AG

[kab60]

I won't recommend this to anyone but thought I'd bring up a company/special situation which is somewhat of a black box - in China. If anyone else has taken a look at the specific company or have some general inputs please chip in.

 

Joyou AG is a Germany listed company active in China where it is the number 1 supplier of labelled bathroom fixtures etc. It is part of Grohe Group, one of the biggest bathroom fixture manufactures, which was bought by Japanese company Lixil in autumn 2013. This means that most of Joyous float is controlled by Lixil as well as the founder of Joyou, a Chinese business man and until a couple of weeks ago, the CEO and chairman as well - Mr. Jianshe Cai (not sure how much he owns though).

 

Now, apparently Mr. Cai has misstatedmanipulated the company records (at least the AR2014) and thus he and his son who was also with the company as well were suspended on 27th April and external auditors have been called in to go through the records. Since the announcement the stock has tanked (down around 80 percent) and as of right now the company is trading at a market cap slightly below 100m euro (34m net income in 2014 according to AR but obviously this isn't the true number).

 

Since the first company announcement Joyou has sent out a more specific note (which isn't exactly pleasent reading for stockholders but doesn't give the impression the Company is heading for bankruptcy either)

 

The current audit at subsidiaries of Joyou AG (the Company) showed as an interim result that substantial deviations from revenue figures, the amount of indebtedness and the amount of available cash compared to the relevant amounts reported by the Company in its financial reports 2014 must be assumed. Such deviations may possibly lead to the net assets, financial and profit situation of the Company having been presented too positively in the financial reports 2014 of the Company. The extent of the deviations is currently being investigated as part of the special audit conducted by auditors and legal counsel.

 

So, how do you handicap this It's basically a black box - in China - yet I still decided to invest (call it speculative). According to the AR 2014 (which we know we can't count on) Joyou is trading below its NCAV (NCAV is 160m, the company has 194m cash).

 

Link to morningstar httpfinancials.morningstar.combalance-sheetbs.htmlt=XDUSJY8&region=deu&culture=en-US

 

It is selling at around 20 percent of book value (ROE around 8,6 percent), has been growing revenues at 11,5 percent (over three years) and with low debt levels for a PE around 3.

 

The only thing we know for sure is that the numbers I just quoted aren't true - that's why the CEO was suspended and external auditors called in.

 

Why do I still believe there might be a lot of value here They're selling bathroom fixtures, not financial services, and even though Chinese construction is slowing down (which is why I passed when I stumbled across Joyou before the financial shenanigans came to surface) I'm pretty sure this company has sold a lot of goods - they're the exclusive dealer of Grohe and have their own brand, Joyou, which they've started to sell internationally as well (UK among others).

 

Other than that, and more importantly, Fixil (along with the development bank of Japan) owns most of the Company (72,3 percent) and even though their due dilligence when buying Grohe Group obviously hasn't been good enough (since they didn't notice the issues at Joyou) I don't think it's all just a big scam. Joyou was also able to secure 300m in financing at libor+2,5 percent in July 2014 with a consortium of Japanese banks and even though banks aren't exactly failproof it gives me confidence that the company isn't heading for bankcuptcy. On the other hand, it's difficult to judge a company from a balance sheet you know you can't count on.

 

That being said, even if the suspended CEO loaded a truck with 40-80m euro and drove into the sunset there'd still be a lot of value left at these prices - unless, that is, the company has been bleeding instead of making money for the last five years.

 

Disclosure 1: I'm long (at least for a while) Joyou AG

Disclosure 2: My trackrecord in investing still isn't very long

[kab60]

This was fast: Company investigating whether it has to file for insolvency, stock down 85 percent. Ugh. Seems like Mr. Jianshe Cai has been more naughty than I thought.

 

"It must be assumed that a loss of more than half of the registered share capital of the Company has occurred. This loss is mainly due to an expected extraordinary write-down on the shareholding in Hong Kong Zhongyu Sanitary Technology Ltd."

[innerscorecard]

Thank you for sharing your thought process, research, and for standing by your post and not deleting it even after the adverse event.

[Jurgis]

That's the problem with Chinese companies that may be engaged in fraud. You never know how bad it is.

[kab60]

Seems like it. I took a gamble that Lixil had at least done a decent amount of due dilligence before buying the company but it seems like that wasn't the case. They design, produce and sell faucets and other sanitary products so I figured it didn't exactly take a forensic accountant to figure out if it things were straight. It's not like there's a long way from Japan to China, but it seems like the cheaped out and saved the plane tickets to go have a look. Oh well. Thanks for the comments. It's not my proudest moment but I have a feeling these Lixil guys feel even worse (they put up guarantees for Joyou subsidiaries): http://v4.eir-parts.net/v4Contents/View.aspx?template=announcement&sid=23709&code=5938

 

If Joyou file for bankruptcy I'd think the remains are only valuable to Grohe/Lixil, so if the equity holders are wiped out (including Grohe/Lixil) I suppose they'll have to buy what's left of the company back from the creditors. Interesting way to take a company private. They could've just asked politely for me to tender my shares. If any Lixil executives are reading COBF it's not too late; you can still hit me a PM and we'll arrange something (with a bit of a premium to todays close). :)

[yadayada]

Sometimes these funds are in on it too. They buy stock with investor's money, and get part of it back under the table from the frauds.

 

I think a good rule of thumb is to only invest in chinese companies if there is a history of paying out dividends (at least 20-30% of earnings if they have been growing). And for at least several years.

 

In the west: trust but verify

 

In the east: trust but verify, and then verify some more.

 

Kind of a bummer to buy stock, and have 85% of it dissapear literally two days later, gl with it if your holding .

[Jurgis]

Yeah, I've had Chinese smallcaps during reverse merger listings in US (2009-2010 timeframe). Had a bunch of great gains for the ones I sold fast enough. Had big losses for some that I did not. Overall probably a wash.

 

I agree with yadayada about divvie rule of thumb, though personally I probably would not invest even if there was a divvie. YMMV of course.

 

Take care.

[innerscorecard]

In my experience, Japanese companies are often completely clueless about what is actually happening with their Chinese investments and even subsidiaries. They are just as likely to be the fools at the table in China as any Western company.

[HJ]

Here's something that was once called out to be a fraud in the US, but got MBO'ed, now re-listing domestically, through a reverse merger out of all routes! 

 

The Chinese companies play by very different rules.  Caviar Emptor.

 

Focus Media to List in China Through Reverse Merger

http://www.wsj.com/articles/focus-media-to-list-in-china-through-reverse-merger-1432211350?tesla=y

 

[Okta]

http://www.reuters.com/article/2015/05/22/idUSASM000A7F20150522

Joyou filed for bankruptcy. You have too look at the German AG and their balance sheet. The money is not in control of the German AG. I have to admit I lost money on this one, as I thougt the due diligence of Grohe&their PE backer, Lixil, banks would at least prevent a fraud of this size.

[kab60]

http://www.reuters.com/article/2015/05/22/idUSASM000A7F20150522

Joyou filed for bankruptcy. You have too look at the German AG and their balance sheet. The money is not in control of the German AG. I have to admit I lost money on this one, as I thougt the due diligence of Grohe&their PE backer, Lixil, banks would at least prevent a fraud of this size.

I wasn't too concerned about them not being able to move the money offshore without Chinese approval - that's business as usual in China from my understanding - but like you I didn't think they'd be able to go belly up considering their balance sheet (even though it was misstated). The big loan last year from a consortium of japanese banks at 2,5 percent+LIBOR and 73,5 percent ownership of Grohe/Lixil made me consider insolvency unlikely. Bloomberg did a piece yesterday on Japanese companies and their due dilligence overseas and they point out a lot of what the posters here have done as well - it's not exactly impressive: http://www.bloomberg.com/news/articles/2015-05-20/japan-global-m-a-brings-risks-as-funds-sell-lixil-convertibles

Oh well. We learn something new every day. Just have to figure out exactly what to learn from this. I haven't gambled in years, but this was a calculated gamble. In hindsight the odds might have been worse than I expected, but I'm not sure that's the case. Maybe, like in poker, one should focus more on the proces than the outcome.

[Jurgis]

We learn something new every day. Just have to figure out exactly what to learn from this.

 

My lesson from Chinese frauds was not to invest in Chinese companies pretty much at all.

Put them into too hard, outside circle of competence pile.

Of course I may lose opportunities this way, but I just don't see a way to do DD.

 

Other people might draw different lessons.  ;)

 

Take care

[kab60]

We learn something new every day. Just have to figure out exactly what to learn from this.

 

My lesson from Chinese frauds was not to invest in Chinese companies pretty much at all.

Put them into too hard, outside circle of competence pile.

Of course I may lose opportunities this way, but I just don't see a way to do DD.

 

Other people might draw different lessons.  ;)

 

Take care

I think that is a lesson learned for me as well. I only did because Grove/Lixil had the majority of the ownership but that underlines the importance of doing your own DD - and in this case it was impossible so it was a gamble. And I probably only gambled, which I usually never do, because my other stuff has worked out well, ie I got greedy/complacent/overconfident/accepted too much risk. Hopefully, but I doubt it, others might learn a bit from it as well.

[Haasje]

Idk, I might be trying to justify my own positions but I think it is not entirely crazy to look for value there. This is such a hardcore value investor forum and even here people put it in the too-hard bucket and have a dogmatic approach to investing there. There must be value! Sure, not investing insulates you from risk but that is true for every investment in every country. I can name quite a few widely respected high flying market darlings from the Netherlands that turned out to be cooking the books. Netherlands probably ranks pretty low on the corruption rankings. Sure, I too demand a significantly higher risk premium on Chinese stocks but many of them are just so cheap and if I can't find any bad press on them, should I really let them all go? I may have a lesson coming. 

[Guest Schwab711]

We learn something new every day. Just have to figure out exactly what to learn from this.

 

My lesson from Chinese frauds was not to invest in Chinese companies pretty much at all.

Put them into too hard, outside circle of competence pile.

Of course I may lose opportunities this way, but I just don't see a way to do DD.

 

Other people might draw different lessons.  ;)

 

Take care

I think that is a lesson learned for me as well. I only did because Grove/Lixil had the majority of the ownership but that underlines the importance of doing your own DD - and in this case it was impossible so it was a gamble. And I probably only gambled, which I usually never do, because my other stuff has worked out well, ie I got greedy/complacent/overconfident/accepted too much risk. Hopefully, but I doubt it, others might learn a bit from it as well.

 

I also got bit by RTO Chinese companies in 2010. I have taken the lesson to the extreme by starting a policy of only investing in Canada/US (nothing foreign - I might break this for large multi-national European companies but there's so many options in the US/CAN) for the reason you just experienced and because of FX risk, ect.  It's also difficult to determine the scope of these risks that it feels closer to speculation for myself (everyone has different circles of competence). A similar issue happened with a Starboard Value in China (I think Greenspan was chairman of the investment firm at the time). You're not alone in making this mistake at some point.

[innerscorecard]

I will invest in Chinese companies where I know from personal on-the-ground research and/or enquiries with many others on the ground that there is a real business, or there is cash coming my way so that it doesn't matter, such as in the case of a tender offer by the company for a substantial amount of the float. Cheapness doesn't matter if these criterion are not met. I also conduct Chinese language corporate filings research, of course. Not doing that is like buying US stocks without reading SEC filings.