Tibet 5100 is a bottled water company that sources water from Tibet (5100 meters above sea level), bottles it and sells it as a premium bottled water. Pretty simple business. The company IPO'd in Hong Kong on 30th June, up 23% on the first day with a market cap of US$1.2bn or HK$9.2bn. After taking a quick flip through the prospectus, here are some initial thoughts -
Company structure/history: The history and corporate structure section in the prospectus was a colorful read. Some notes: (1) the founders of the company, Mr. Wang and Mr. Yu, needed to increase registered capital by US$12.8mm in 2004. The founders didn't have the cash, but found Sichuan Hengsheng to inject the capital in September 2004 for 91% of equity. Eight months later, in June 2005, the founders found US$12.8mm to buyback the shares from Sichuan Hengsheng. Odd. (2) then in 2005, the company faced significant uncertainties (shortly after the founders have put in US$12.8mm?), and Mr. Wang decided to place his entire shareholdings with a Ms. Zhou (a trusted friend Mr. Wang has known since 1987?) in June 2005 in a trust arrangement. Who is Ms. Zhou and how does this solve the "significant uncertainties"? Bizarre. (3) in April 2009, Wilmar acquired a 25% stake for RMB175mm, but sold the shares back to the company a year later in April 2010. The company cited a divergence in business strategies between Wilmar and themselves. How could the strategy be that much different after only one year? (4) by middle of 2010, the company began discussions with several pre-IPO investors, a "second put option" was granted to the pre-IPO investors which allows them to put their investment back to the company if the company does not make HK$350mm in profit after tax for the year 2011. This is contentious, but I am always skeptical of a company willing and able to provide a profit guarantee (especially a profit projection that is multiples higher then what they've historically achieved). That's just not how a real business is run.
Short history with unbelievable margins: The company started its first production line in 2006 and within 4 years is ranked first by volume (beating out Danone and Nestle) in China's premium bottled water segment with a net income margin of 32% with almost no marketing expenditure. Is it that easy to build a branded consumer products company and become the leader in 4 years time? I doubt it, not in a highly competitive market like China. Unless...
Relationship with Ministry of Railways ("MOR"): 80.5% of revenue (and growing) comes from a lucrative contract with CRE (procurement agent of MOR) to supply bottled water on trains in China. As a reminder, former minister for the MOR, Liu Zhijun, was dismissed recently for accepting a large amount of bribes in connection with various railway procurement contracts. While the company states it has no relationship with Liu Zhijun, as part of the risk factor, it states that recent investigations on Liu Zhijun could have a negative effect on their relationship with CRE and the contract with CRE may not continue in the future.
US$1.2bn market cap in 4 years out of water (they pay RMB9,500/year for the rights to the water) with an equity investment of US$14mm. Is creating a business that easy in China?
No comments:
Post a Comment