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Short Sellers Were Right, Tech Pro Sales Down 50%, Bleeding Cash

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After numerous negative reports on Tech Pro, 3823 hk, the company finally proved them right.  After giving a vague profit warning on August 5, its newly-released first half financials showed another big loss.  On the balance sheet, its cash dropped by 46.8 million rmb taking it down to 81.7 million rmb.

tech pro first half

 

On the surface, the revenue drop is marginal. Digging deeper, from the segment breakdown, the predictions of the downsizing of the LED business are proven true with a drop of 50%. Despite the drop in sales, there is an outsize increase in administration costs. The company attributed this primarily to an 81 million rmb increase in pro-team expenses. (The team, Sochaux-Montbéliard SA, (FCSM), was acquired in July 0f 2015. It has a listed asset value of 132.9 million rmb against liabilities of 53.3 million rmb. It was acquired for 7 million euros or about 52.5 million rmb.)

tech pro segments

The company gives little explanation for the marked decline in LED sales.  It hopes to improve that segment by attending exhibitions in Europe.

Rental JV Uncertainty

As Glaucus reported in August, the company’s 50% JV interest in Shanghai Fuchao represented a sub-lessor in a building in Shanghai called Universal Mansion.  The building was owned by the Logistics Department of the Chinese People’s Armed Police Force.  In the first half report, Tech Pro stated:

On 30 May 2016, the Group announced that the Central Military Commission (“CMC”) of the PRC issued a notice (the “Notice”) on 27 March 2016 on the stopping of all paid services of the People’s Liberation Army (“PLA”) and the People’s Armed Police Force (“APF”) (關於軍隊和武警部隊全面停止有償 服務活動的通知), pursuant to which, the PLA and the APF are set to stop providing all paid services, which is expected to be completed in three years. The Group has been carrying out study on the impact of the Notice on the business and operations of the sub-leasing services business. The Group has consulted its PRC legal advisers and was advised that since the CMC has not yet specified on how to deal with existing contracts regarding real estates of the military, there are uncertainties as to when and how the rental arrangement under the leasing agreements would be affected by the Notice.

The Group expects that the property market in the PRC remains favorable. As the location of the premise that the Group operates the sub-leasing business is at the prime area in Shanghai, the vacancy rate is low and the rent is stable. It has less sensitive to the volatility in the PRC economic situation.

It’s interesting to note that the company was informed in May in 2016, but has continued its proposed the buyout of the other 50% of the JV despite this glaring uncertainty.

To recap the bellwethers of Tech Pro’s Fall:

 3/11/2016

The Wall Street Journal noted the strange trading movement at end of day plus the tripling in stock value in 2 years despite repeated, declining losses.

6/1/2016

GeoInvesting

  • The LED business is deteriorating with poor margins
  • Revenue growth in the LED business is suspect
  • The soccer team will need big investments
  • It will continue to need debt or equity financing to fund its operations

7/28/2016

Glaucus

Strong sell, no value

Accused of fraudulently over-reporting transactions and income.  Stock dropped over 90% in one day on that announcement; dropped all the way to .14 but has since recovered to .25. (Was 2.27 before the fall).

 

 

 

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Penny Dreadful Tech Pro’s Last Gasp

 

Tech Pro Stock

Tech Pro. 3823 HK, drops another 6.7%, to .28 hkd (that’s 4 cents, US).  Here’s why there is room to fall further.

Just 10 days after its stock collapsed, Techpro 3823  hk directors reached for a self-made life preserver.  Unfortunately, the life preserver won’t inflate.

Techpro closed down 86% on July 28th following a devastating report by Glaucus Research. The report by the short seller was long on details which showed multiple frauds including massive under-reporting of “earnings”, and intentional misrepresentation of acquisition costs.  Glaucus gave the stock a 0 value. Techpro denied the allegations, but the stock continued to drop, falling to .14 hkD on 6/29 but rising back up to .30 by the end of trading 8/5/16. On that day trading was at an inexplicable 1.3 billion shares versus the average 223 million.

In addition to the stock plunge, the report triggered an avalanche of events, including a violation of listing rules when the plunge forced margin sales by the directors during the 30 day pre-earnings release black-out period. This dropped their combined ownership interests by over 50%.  Their ownership will drop further if proposed new share issues happen.

techpro 1

 

Source: HK filings

Given the drop in price, the trigger was understandable.  Had they been able to hold their shares, they would have lost a combined $480 million US. The sale was subsequently reviewed by the directors and declared to be okay, given the exceptional circumstances. Rules were meant to be broken.

techpro 2

Source: HK Filings

In addition to the stock sale violation, the circular with the details for the remaining 50% purchase of the property management firm, Shanghai Fuchao Mgt, were delayed.  The Glaucus report stated that the original 50% purchase was overstated in Hong Kong filings. From the same SAIC filings, the property management company’s earnings were also over-stated based on local area rents and Fuchao’s position as a sub-leasing agent, not owner.  This was critical in terms of assets and income since it was the only business that consistently reported a profit.

More Fun to Come

After the bell on Friday, August 5, the company declared an undefined net loss for the 1st half of 2016.  The loss was blamed on lower LED sales and higher operating expenses.

 

Last Gasp Efforts

About 2 hours before the loss announcement, the company presented two new share issue schemes: one under General Mandate, GM and the other under Special Mandate, SM.  If successful, it would issue 2.6 million new shares , at .25 per share for net proceeds of 616 Million rmb, about 79.4 Million $US.  Both would be to a minimum of 6 investors and subject to a 6 month lock-up.  Per the filing, the GM shares wouldn’t require shareholder approval while the SM would.  The price is a 16.7% discount to August 5 closing and a 7.3% premium to the prior 5 day average. The two are not inter conditional. As shown below, the full issuance would decrease public share ownership by 28.5%.  Proceeds for both were for working capital, soccer team funding and future business development.

techpro 4

 

Source: HK Filing.  Note 1: Chairman & Director, Note 2: Directors

Potential problems were noted long before the Glaucus report in March when the Wall Street Journal questioned unusual trading activity in a small-cap, minimally profitable company with a potential for day to day returns of a whopping 791%. Even the French soccer team it bought, Sochaux-Montbéliard SA (“FCSM”), was skeptical as to how the Chairman of Techpro, Li Wing Sang, (aka Amos Li Wing Sang), could hang out in France every week in France while running a company.  They were also worried about the company’s ability to finance their needs.

It is doubtful the share issuance will be approved.  After the recent events, the odds are in favor of Glaucus. Looks like light’s out for Techpro.

(Disclosure: I have no interests in Techpro.)