The following post has 2 parts to it. Due to a short overseas trip, I did not have the chance to update my transactions immediately. As such, I have decided to combine both my purchase and the latest occurrences regarding China Minzhong.
On 20th August 2013, I accumulated more shares of China Minzhong at $1.04. With this purchase, my portfolio is heavily weighted towards CMZ. The company will be releasing its 4th quarter earnings report on 29th August. At the current share price, the company is trading at a PE of 3.67, which gives me an earnings yield of 27.2% a year. This valuation is hardly expensive. I strongly believe that China’s 12th 5-year plan will benefit China Minzhong greatly. The 5-year plan is illustrated below.
China Minzhong’s farms have an above average yield, utilises modern technology to cultivate its crops, and its business model of leasing the farmland from the farmers and paying them for part time work helps to improve their living standards. As such, I remain convicted that the stock is deeply undervalued.
Latest Update: On 26th August 2013, an American short-seller, Glaucus Research has accused China Minzhong of fabricating its sales to two of its top customers and doctoring its books. In addition, they casted doubts over CMZ’s high margins, and capital expenditures. The company has successfully brought down other S-chips like China Metal Recycling. This report has caused massive selling in the stock, resulting in a free-fall from an opening price of $1.01 to $0.53, a sharp drop of 48%. The company has requested for a trading halt pending a material announcement. Investment brokerages, like CIMB, who were once bullish on the stock have all turned bearish, and ceased coverage of the company.
Do I believe that the company is fraudalent? I have read the report by Glaucus and their claims do seem credible, but I would like to hear from the company itself as well. China Minzhong will release its earnings report tomorrow, and I will be awaiting the company’s response to the alleged accusations.
So, what are my plans? Even though I believe that the company has a right to defend itself, I will be liquidating all my holdings in the company once trading resumes. The reason why I am liquidating my holdings is not because I think that the company has committed fraud, but because this saga has made me realize how little I know about the company, its products, its customers and its management.
As my portfolio was heavily weighted towards China Minzhong, I am staring at sizeable losses. I have been pondering and recovering from the shock over the last 3 days. This incident has made me think twice of my investment strategy and the other companies I have invested in. Truly, this lesson has taught me invaluable lessons in investing, in which I hope to share once I am ready.