{ "docId": "019dd923-622c-750b-8b96-835a69513742", "docSlug": "c47ae4d76596", "documentTitle": "China Huishan Dairy Holdings (6863 HK)", "authorId": "51_Muddy_Waters", "authorName": "Carson C. Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2016-12-16 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 18, "pageCount": 47, "prevPage": 17, "nextPage": 19, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 8, "notes": "The text uses investigative research to highlight a discrepancy between public filings and actual construction costs.", "elementsJson": [ "paragraph", "footnote" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-835a69513742/18", "deckHref": "/decks/019dd923-622c-750b-8b96-835a69513742", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-835a69513742.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-835a69513742#slide-18", "components": [ { "bbox": null, "kind": "callout", "text": "The expected construction costs are about half of our estimate of Huishan's reported average spend of RMB 89 million.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-2b64-7193-87f6-8026dcab7a41", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "construction cost: RMB 89 million", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd953-2b64-7193-87f6-894c5eb016be", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.78, "x": 0.11, "y": 0.54 }, "kind": "paragraph", "text": "Bidding documents for two post-IPO Huishan farms support our estimates of actual farm construction costs. From time to time Huishan posts invitations for contractors to bid on their new construction projects. The posting from 2014 below is for a 3,000-head dairy farm for Liaoning Shiling Farming Co. Ltd., a subsidiary of Huishan. It is to have a construction area of 61,000 m2 on a farm of approximately 273,000 m2 (410 mu) which would make it among Huishan's largest farms. The reported construction cost estimate is just RMB 30 million.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "271ef195-1683-4c21-bd97-64cc9889f15b", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.78, "x": 0.11, "y": 0.09 }, "kind": "paragraph", "text": "If we add about RMB 5.76 million for a pre-paid land lease, the total increases to RMB 45.76 million, almost identical to the average cost implied in the IPO prospectus's Use of Proceeds. However, this figure is still less than half of the RMB 96.2 million reported total investment for the project reported to the Liaoning Environmental Protection Bureau, and about half our estimate for Huishan's reported average spend.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "2cb43cdb-0784-4645-91be-b6e42deb4b21", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.78, "x": 0.11, "y": 0.7 }, "kind": "paragraph", "text": "The bidding documents include mention of the exterior walls, the brick, steel, and alloy steel, building materials, fire walls, plumbing and waste water drainage systems, ventilation, A/C, lighting, fences, cow bed construction, a sedimentation pond, anaerobic reactor, as well as cold storage, feeding equipment, disease prevention testing equipment. The bidding announcement also includes a note that, “Due to a wide range of equipment and materials required for the project, the requirements are not all listed one by one, and the specifics for the project may vary.”", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "3d28383c-4239-44a3-b2da-9088459c3340", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.25, "w": 0.78, "x": 0.11, "y": 0.25 }, "kind": "paragraph", "text": "Construction workers at a farm in the early stages of construction on the outskirts of Shenyang corroborate our estimates of actual construction costs. The workers confirmed that the site was to be a Huishan farm on about 200 mu designed to hold 3,000 cows. It would contain the office, dormitory, cow sheds, production facilities, etc. and from their description would be composed of concrete and steel buildings following the post-IPO “standard” design. Based on their project knowledge, the construction cost excluding land and the milking equipment would run about RMB 30 million. Even if adding another RMB 20 million or more for additional dairy production related equipment, the total is still close to just half of the typical build costs publicly announced in their environmental impact statements. The expected construction costs are about half of our estimate of Huishan's reported average spend of RMB 89 million.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "e26de560-1dcf-4e33-8091-efe9c0547c66", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "“Due to a wide range of equipment and materials required for the project, the requirements are not all listed one by one, and the specifics for the project may vary.” — Bidding announcement", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd953-2b64-7193-87f6-84930fe6afa5", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.1, "w": 0.78, "x": 0.11, "y": 0.85 }, "kind": "source-note", "text": "33 The Prospectus estimated that the land for the 45 dairy farms would require 12.8% of the 34% of the total proceeds, equating to RMB 259.4 million for 45 farms, or RMB 5.76 million per farm. Based a 15-year lease, 250 mu of land (larger than most of the new farms), RMB 5.76mm equates to RMB 1,533/mu/yr. This figure appears to be quite high, we used it as-is in the estimate. 34 http://www.syepb.gov.cn/data/2015_12_15/201512159249.html 35 Huishan FY15 AR, p. 111 36 http://p.tgnet.com/LNSLZY/", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "44803e86-aac1-4dea-8c2d-d3da3aed17ea", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.2, "x": 0.11, "y": 0.51 }, "kind": "title", "text": "Bidding Documents", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "e6b468e0-ce66-43db-a0d1-0abd84b219de", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 20, "from": 6, "beatId": "2bac2cc3-a51c-491f-82ab-fd7af7c67a46", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "The Struggle", "beatSlug": "overcoming-monster-the-struggle", "evidence": "The report presents various contradictions in Huishan's financial reporting and operations", "position": 1, "confidence": 0.8, "parentBeatName": "Development", "parentBeatSlug": "development" } ], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }