China Yurun (1068 HK)

All figures in HKD
China Yurun has been one of the market darlings for a while but a recent spade of negative developments have exposed the firm's vulnerability to market cycles. Further, there have also been observations that led me to think that this firm may not be what it seems.

Observations

1. Their Hog farms do not have any livestocks at all (Bloomberg)
2. 3 of 5 exec directors exercised and sold their options at $17-18 nish per share
• CEO and ED sold 2.45 and 2.5 mm shares post exercise during 24-26 August
• While CEO still holds, his stake has been steadily declining while the ED holds zilch now
3. Subsidies received from government to the tune of $0.7bn when profit/sales is  $2.7bn/ $21.4bn
4. There has been heavy capex and firm continues to report low utilization (1H 2011 spent $1.6bn, which is substantially all of its profits in 1H 2011) and spent $3bn+ in 2010 when profits were $2.7bn. Net assets doubled from $8.4 to 14.4bn 
5. China had a total 15.09mm hogs volume in 2010 while the firm had a slaughtering capacity of 35.6mm hogs? They preparing to take over the world?
6. Lease prepayments are a whopping $2.7bn while PPE stands at $9.7bn and total assets at $13.6bn. And the prepayments are so regularly paid ($0.6-0.8bn p.a) while not regularly disbursed/paid down and the sum accumulates. Adding prepayment for PPE, its a regular $0.9bn p.a outflow
7. Ownership certificates for $2.1bn worth of land is not obtained despite being paid for (suspected to be related to lease prepayments)
8. Company land pledged to support loans of the Chairman's personal property development venture
9. Negative goodwill recognized as income to the tune of $0.18bn and also occured for past years. This means the company has purchased consistently firms at a price below their recorded book values. The surplus is then accorded to Yurun as profits.
10. Further, companies bought were revalued at aggressive levels of 80-1000x earnings as hinted by "Long Term Value Researcher" in Seeking Alpha 
11. Despite sales growing from $13.8 to 21.4bn, trade receivables was stagnant at $0.58bn in 2010. Over receivables grew due to enlarged VAT tax recoverable and derivatives
12. The firm has $5.9bn in cash and $3.6bn in total loans
13. Contracted commitments were $1.6bn and authorised commitments not contracted were $1.2bn, totalling $2.8bn for 2010 versus $0.38bn in 2009
14. Placed 90mm shares ($23.88) in April 2010 and 47mm ($30.00) in November 2010 to end with total shares currently of 1810 mm

The Defense of Yurun

1. They are in slaughtering and processing, not in hog farming. Hog farming is the private business of Chairman. (Still does not explain the absence of live stocks)
2. Chairman and executive director Zhu Yi cai owns 25.94% or 470.7mm shares (15 July 2011)
3. Assuming price of carcass meat is US$1.50-2 per pound and market weight of a hog to be 250 pounds, thats US$375 -500 per hog. With 15mm total livestocks, that works to be US$ 5.6 - 7.5bn of value or RMB35 - 47 bn at USD RMB of 6.384. So that ties in with the 60% market share Yurun claims
4. KPMG are the auditors