HF - Hanfeng Evergreen

[doc75]

Q2 results were released yesterday and they were disappointing, similar to Q1. http://finance.yahoo.com/news/Hanfeng-Announces-Second-ccn-1605679790.html?x=0&.v=1

 

The good:

1.) appears supply issues with CPU are almost behind them. On the conference call CEO said provincial has been received; awaiting national approval (easier approval) and should happen in next month.

2.) most of the issues look to be short term in nature and solvable (i.e. they are working through surprise issues from Q1 release although it is taking time).

3.) will likely continue buying back shares as they have the cash and the authorization in place.

 

The bad:

1.) Q1 results were worse than extected: sold a chunk of product to Beidahuang at a big discount which impacted margins.

2.) large 'surprise' issues happening 2 quarters in a row... bad luck or a trend?

 

I like the potential of this company and the solid financial footing they have in place. The next two quarters (fertilizer selling season) will be interesting to follow: do they start delivering or do the issues continue...  Execution will be more important than ever!

 

Viking:  Thanks for the notes.  I'm having trouble accessing the taped CC.  Did they give any rationale for the big discount on the sales to Beidahuang?  The press release blamed it on them "taking delivery earlier than expected" and "having to further process the material".  Is this a one-time issue or will Beidahuang always be getting deep discounts?

 

Thanks!

[finetrader]

The shrinking margin is testing an investor's patience

[Pick52]

Hanfeng announced the resignation of the CFO today

 

http://www.marketwire.com/press-release/Hanfeng-Evergreen-Announces-Resignation-of-Chief-Financial-Officer-TSX-HF-1394257.htm

[cwericb]

As someone once said, "Cheer up, things could be worse."

So I cheered up. And sure enough, things got worse.

[doc75]

As someone once said, "Cheer up, things could be worse."

So I cheered up. And sure enough, things got worse.

 

No kidding.

 

Interesting move, particularly since the initial CC announcement claimed it would only be the Canadian CFO on the call, and the later CC announcement claimed it would be both him and the Chinese CEO.  Then, on the CC, we hear that the CFO is "unavailable" (which is strange enough) and he is replaced with a fellow from a media relations firm.  And now, the day after a weak Q report, we are told that he has resigned.

 

If there's *not* something fishy going on here from an operational standpoint, then this company has certainly figured out a great recipe for scaring investors and tanking the share price!

 

It seemed to me that the now-resigned CFO (Paul Begin) was pretty out of touch with company operations.  He seemed generally incapable of answering questions on last Q's CC.  I can't cite specific examples -- just going from memory.  At the time it concerned me that the Canadian CFO really didn't know much about day-to-day ops of the Chinese company.  I'd love to believe this was his "fault" and they're letting him go to get someone better.  But I don't.

 

Every one of my (few) Chinese holdings has had strange developments very much like this over the past number of months... numbers or situations that require explanation yet are brushed under the rug.  I'm glad I was skeptical to begin with and didn't invest large money, but I'm annoyed my skepticism didn't keep me out completely.

 

 

[txlaw]

I own some Hanfeng and thought that the worst was over.  Now I'm not so sure. 

 

I never really understood why they picked that guy as the CFO anyway.  It didn't seem like he was a good fit for the company.

[Aberhound]

I found the comments about the CFO helpful because they reveal that management probably did the right this to replace him. I have been following Bronte Capital talking about another Chinese fertilizer company which appears to have lied about production. It was interesting to follow Bronte's attempts to get someone to find the plant and see if it could produce the claimed output. He seems to have found the plant location but there is no factory, just a small office.

 

Hanfeng seems to be entirely different. I like the industry, management seems to have a good track record so I expect they will fix the problems which appear to be mostly transient. I like to buy on bad news so I established a small position. I don't expect Chinese management to follow western ideas about company PR relations with investors as they might prefer other approaches such as set out in The Book of Five Rings.

[Viking]

doc75, regarding your question regarding discounts for Beidahuang, my notes are "Beginning January, no further product is being sold at discount to Beidahuang".

 

Given the poor level of communication we have seen and the number of surprises the resignation of the CFO certainly does not help.

 

At this point, 'trust in management' is the key. If management is in the process of swindling the company then current shareholders have more grief ahead of them. If management is honest and working on behalf of shareholders then currrent shareholders will see some nice upside from the current share price. I have not been following HF long enough to have a feel for this. That this topic is even being discussed is not good. Fortunately HF has always been in my speculative bucket and my position is small.

[Viking]

Here is another perspective on HF: http://pettycash.wordpress.com/2011/02/20/how-the-mighty-have-fallen-hanfeng-evergreen/

 

As well, one Board Director has just resigned and two more have been appointed. More questions.

[doc75]

The resignation of Beutel (or, rather, it's timing) is a bit of concern.  He has a lot of experience in the fertilizer business and has been lead director of Hanfeng for years.  He is getting near 80, so perhaps he's trimming down his responsibilities.  (He's also on the board of Cathay Forest Products (CFZ), so maybe he only has patience for one troubled Chinese operation at a time!)  But his resignation is a concern for me nonetheless.

[omagh]

doc,

You're thinking of Austin Beutel rather than his son Robert.  With Robert leaving, it raises a flag for me.  I've invested in a few companies that the Beutel's have been involved with at the board level.  They are people of integrity.

 

-O

The resignation of Beutel (or, rather, it's timing) is a bit of concern.  He has a lot of experience in the fertilizer business and has been lead director of Hanfeng for years.  He is getting near 80, so perhaps he's trimming down his responsibilities.  (He's also on the board of Cathay Forest Products (CFZ), so maybe he only has patience for one troubled Chinese operation at a time!)  But his resignation is a concern for me nonetheless.

[doc75]

doc,

You're thinking of Austin Beutel rather than his son Robert.  With Robert leaving, it raises a flag for me.  I've invested in a few companies that the Beutel's have been involved with at the board level.  They are people of integrity.

 

-O

The resignation of Beutel (or, rather, it's timing) is a bit of concern.  He has a lot of experience in the fertilizer business and has been lead director of Hanfeng for years.  He is getting near 80, so perhaps he's trimming down his responsibilities.  (He's also on the board of Cathay Forest Products (CFZ), so maybe he only has patience for one troubled Chinese operation at a time!)  But his resignation is a concern for me nonetheless.

 

Thanks.  I always thought Robert was one of the sons, but his profile on businessweek quoted his age as 78 so I figured he must be the patriarch and I had the names mixed up. 

 

I think there are two other sons -- Eric & David -- who are also involved in Oakwest and various public companies.  The Beutel interest in Liquidation World was one of the reasons I initially had some faith.

[doc75]

Apparently the CEO of Hanfeng isn't too concerned about the future:  He purchased 100,000 shares on the open market last week.

[cwericb]

And another 50,000+ in the following couple of days

[cwericb]

As well as the 150,000+ shares recently purchased by the CEO I see that both the new members of the board have also acquired shares in HF over the past few days. It is nice to know that these people have a significant stake in what happens to the share price.

 

Here is a brief bio of the new board members. They seem reputable and well qualified. I doubt that either of these guys would lend their names to HF unless everything was above board in HF’s dealings in China. I like the BAM background and I wonder if there could be any significance attached to Nordholm’s background in M&A, especially considering Agrium owns 20% of HF?

 

“Mr. Owen brings a wealth of international business and board experience to Hanfeng. He is the co-founder of McLean Watson Capital, a leading Canadian venture capital firm with extensive interests in Asia, and offices in Shanghai and Singapore. Prior to establishing McLean Watson Capital, Mr. Owen was a Director and for one year co-Chief Operating Officer of Softimage Inc., a world leader in high-end 3D animation, in its growth from 4 to 250 employees, its IPO on Nasdaq in 1992 and the sale to Microsoft Inc. in 1994. Prior to that, Mr. Owen practiced corporate/commercial and securities law with a major Canadian law firm. He subsequently founded a corporate law firm that specialized in representing growth companies. He holds a BA from the University of Toronto, an LLB from Osgoode Hall Law School, Toronto and an MBA from INSEAD in Fontainebleau, France. Mr. Owen serves on several public and private boards.”

 

“Mr. Nordholm is a former senior executive with Brookfield Asset Management Inc. and presently counsel with the firm of Davis LLP. Mr. Nordholm has extensive experience in corporate restructurings, corporate finance and mergers and acquisition transactions. Mr. Nordholm has advised a variety of clients with respect to public and private financings, cross-border acquisitions and divestitures, auction transactions, going-private and issuer bid transactions, debt acquisitions, bridge lending transactions and other merchant banking transactions. Mr. Nordholm holds an LLB from Osgoode Hall Law School. “

[finetrader]

I started this tread so i feel i should declare that i sold all my position in HF because business model has changed in the past year and now one customer account for 84% of all the sales. This is not the condition i wanna be put in. You basically lose your pricing power and decision power.

[ourkid8]

HF is in the process of expanding into different markets with 1 joint venture in Indonesia along with looking at expanding into further markets in SE asia for a risk mitigation / diversification process.  (Thank god!)  They are actually looking at the following countries in SE Asia: Malaysia, Viet Nam, Cambodia, Laos, Philippines and Thailand as they all have similar characteristics as the Chinese market. 

 

I am hoping that the company is fully maximizing it's NCIB at the current stock price which is sitting at 3,581,713 shares or approximately 10% of Hanfeng's current public float. 

 

Let's hope the company is not a scam, the reason why I believe it is not is the follows:

 

-Agrium's owns 19.7% of HF

-Management and Directors own 20.5%

-Agrium has 2 Board seats (which will hopefully keep them honest)

-KPMG LLP auditors (but you still never know if they are truly

 

I am still debating if I should double my position in this stock as it's selling below book...hmmmmmmmmmmm...

 

Thanks,

 

S

 

I started this tread so i feel i should declare that i sold all my position in HF because business model has changed in the past year and now one customer account for 84% of all the sales. This is not the condition i wanna be put in. You basically lose your pricing power and decision power.

[tengen]

I don't think the company is a scam but the operational issues they had last year and the way the news came out made me think that management didn't have enough of a clue. Will there be more plant shut downs and asset write downs?

[cwericb]

It is unfortunate that HF has been pulled down along with the furor that Carson Block has caused. There may be a lot of fraud in China and their business practices may not follow along the same lines as ours, but that doesn't mean that there is no value in a lot of these companies. If this company was not legitimate, it wouldn't make much sense for Agrium and HF management to own nearly half the company.

 

Management may be have been a bit clumsy, but they are in a very vital industry and seem to be well positioned. I just find it annoying that one individual can cause so much to be lost in the value of companies like HF when nothing has been proven yet in the Sino Forest situation and not a thing has been said about HF. Unfortunately this all came about just when it seemed that the price of HF had bottomed out and was starting to improve.

 

I think that we are not going to see much improvement until the Sino situation is resolved, but the price is looking pretty attractive and I am tempted to pick up a few more shares. If major fraud is found at Sino, HF will have to come up with some quick moves that will restore confidence.

 

Sino is being very closely examined in a legitimate audit. If all that is found is that there has been some sloppy accounting, then Block will be discredited.  If HF was to agressively buy back shares it would do a lot to restore confidence.

[Viking]

I think alot of companies in the past benefitted from being associated with China and their stock price reflected this. Now the opposite is happening and stocks are getting beat up. The pendulum looks to be swinging.

[cwericb]

"The pendulum looks to be swinging."

 

How very true. As with many things, people tend to over react to one side and then over react to the other and this is what makes opportunities. Is this the case with say, RIM and Sino Forest?

 

I remember a few years ago when a broker was trying to convince me that HF was buy at $14.00. A couple of years later I got in at $7.00 expecting a move to $8.00 in short order. Now if that pendulum would start to swing back...

 

I have an uneasy feeling about the Sino Forest affair. I think that the fraud claims are probably exaggerated, but there may well be some substance there. If that is the case, it will provide headlines that will continue to be a burden to all Chinese stocks because the media will jump all over it. However if it comes up reasonably clean, not much will be said.

[ourkid8]

Is anyone still holding HF?  It's an extremely small position in my portfolio but the stock is getting absolutely crushed and is selling for significantly under book.  I really hope this company is not a fraud and I would expect management to be buying back their own stock hand over fist!!! 

 

Mr. Chou has been selling his position in HF quite dramatically as it is only .8% of his Chou Asia fund.  From Chou Funds semi-annual report:

 

"During the first six months, the Fund sold 399,900 shares of Hanfeng Evergreen. Currently, the

Fund holds 95,850 shares of Hanfeng Evergreen, which represents 0.8% of the Fund’s assets. "

 

Thanks,

S

[ourkid8]

I sold out of my small position yesterday at $2.55 for a permanent capital loss... (The stock closed today at $2.40 so thank god I got out yesterday)  I definitely learned my lesson to stay away from Chinese companies.

 

Thanks,

 

S