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Buyer Beware

Analysing companies' finances and value from their financial statements using ratios and formulae
Pendrainllwyn
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Buyer Beware

#236528

Postby Pendrainllwyn » July 14th, 2019, 3:57 am

Only if you are short of things to do ...

I have been trawling my way through small caps in the HK market looking for something investible. It's a minefield. This one caught my attention. Kantone Holdings (1059). Kantone is categorized under the Information Technology - Software & Services Sector.

At 2015 YE the company had shareholders funds of 3.4BN HKD (GBP 340M) not much below its market cap of 3.9BN. Profits were 0.01BN so a very high PE ratio of 340. Assets were mainly development costs for systems and networks (1.2BN) and trade and other receivables (1.9BN). The chairman in his outlook stated "In light of continuing global challenges and the unclear prospects of Mainland China's economy, we are cautious in our business approach in the coming year. We will deploy resources to build on our competitive strengths, and continue a prudent approach in investing in complementary businesses that have growth prospects".

In the 2016 annual report Kantone's focus was "to take advantage of China's national policy to foster its culture industry and the rising interest in collectibles around the world to develop a range of related internet-based solutions and services". The Chairman stated "We aim to focus on selecting exquisite and rare artworks which have great appreciation potential. In line with that strategy, we will adjust our inventory to capture the appreciation potential." At 2016 YE Kantone had invested (no doubt cautiously and prudently) in inventories of 3.4BN of cultural products "which are ready for trading". An investment equivalent to the entire net worth of the company. No doubt excellent timing as Kantone impaired 0.6BN of development costs (18% of assets) which offset all their annual profit. Fortunately and encouragingly the Chairman stated "The directors are cautiously optimistic about the Group's prospects in the coming year".

In the 2017 financial calendar year the Chairman resigned but fortunately confirmed "he has no disagreement with the Board and there are no other matters relating to his resignation that need to be brought to the attention of the shareholders of the Company". Big sigh of relief. 4 days later an Executive Director and a Non Executive Directors resigned but a new Chairman announced. Other resignations followed. Fortunately each had no disagreement with the Board.

In the 2017 annual report faithful shareholders will have missed their hitherto reassuring Chairman's Statement and noted that the new Chairman chose not to write one. A loss of 1.8BN, more than 50% of Kantone's net assets) may have caused some reluctance. The cultural products inventory (including precious stones and antiques) were written down by 1.7BN after cultural product/jewellery experts and an independent valuer had been engaged to perform an inspection of the inventory. Despite these products being "ready for trading" management now noted that "it might not be surprising to estimate that it might take years to sell all the inventories". The auditors also raised alarm by stating in a qualified audit opinion that they were unable to satisfy ourselves that the carrying amount of the cultural products was free from material misstatements. Fortunately shareholders were advised by management that "There are quite a number of artifacts and Shoushan Tianhuang Stones and Changhua Tianhuang in the Group’s inventory. Tianhuang Stones are generally conceived as the “King of Stones” in China. These jewelry stones from Fujian and Zhejiang provinces were said to be worth its weight in gold, which has long been reflected in the market price that the current price is higher than the value of gold. The management attaches great importance to these valuable assets, while the Group believes that by virtue of the advantages of this resource, the realisation plan for these artifacts can be implemented."

In the 2018 financial calendar year the new Chairman resigned and there were yet more Director resignations.

In the 2018 Annual report the new Chairman (#3) bravely put out a statement but made no mention of the loss of 1.6BN which reduced Kantone's net assets to 0.1BN. The inventory of cultural products was written down by a further 1.6BN. What had been worth 3.4BN two years ago was now worth 0.004BN or next to nothing. The financial statements confirm that there was no revenue from the sale of cultural products in either 2017 or 2018 so there had been a quite remarkable 99.9% writedown in the value of the cultural products inventory over two years. Fortunately the Chairman advised loyal shareholders that "2018 is a year to retire the old and launch the new" and "... has successfully developed our business with promising prospects". So with a market cap of now only HKD 0.1BN (GBP 8M) a chance to invest in a business with promising prospects and a management team that must surely be older and wiser?

I wonder if Kantone are glad they took a cautious and prudent approach to the new cultural products business segment. I wonder whether Kantone should have hired jewellery experts before investing the entire net assets of the company in cultural products. I wonder who Kantone purchased these assets from. I wonder if Kantone's former Chairman and Non Executive Directors are OK. I wonder if you think me mad for continuing to look for investible securities in the HK small cap space.

Pendrainllwyn

Itsallaguess
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Re: Buyer Beware

#236529

Postby Itsallaguess » July 14th, 2019, 6:01 am

Pendrainllwyn wrote:
I wonder whether Kantone should have hired jewellery experts before investing the entire net assets of the company in cultural products. I wonder who Kantone purchased these assets from.....


There was a similar UK story a few years ago, around 2009 -

An enormous precious stone listed on a now bankrupt company's books for the value of 11 million pounds ($17.4 million) is probably not worth more than 100 pounds, British media reported Friday.

The "Gem of Tanzania," once believed to be a huge uncut ruby that one of its owners declared as cursed, was listed on the balance sheet of now bankrupt UK company Wrekin Construction as its most valuable asset and had been keeping the firm alive for years.

But now the rock is believed to be just a large lump of anyolite, a low-grade form of ruby.

"A two kilo lump of anyolite is probably worth about 100 pounds. A valuation of 11 million pounds would be utterly bonkers," Marcus McCallum, a jewel dealer from Hatton Garden in London, told the Financial Times.


https://www.cnbc.com/id/33137448

Cheers,

Itsallaguess

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Re: Buyer Beware

#236552

Postby XFool » July 14th, 2019, 10:13 am

Wrekin's '£11m' Gem of Tanzania ruby sold for £8k

BBC News


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