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AIM listed China tech stock Geong (LSE:GNG) is at 5.875p valued at just £2.13 million and according to its AGM statement it has net cash of £2.2 million and it recorded a small profit last year (to March 31st 2012) of £400,000 ( down from £2.6 million) on sales of £9.7 million (£11.3 million). So it is cheap as chips? No. Its numbers look very odd indeed to me and I would not wish to own this stock at all.
The AGM statement of today said that:
The Company’s aim this year is to consolidate its revenue base at levels achieved in the previous year with an improved mix and the Board remains confident of achieving that objective.
But it conceded that
“The growth rate of the Chinese economy is decreasing and the Board expects that the Company’s clients will, consequently, experience some level of slowdown which cannot be quantified at this stage”
China is not seeing a modest slowdown its economy is tanking. Geong is dreaming if it thinks otherwise. You can read up more on that HERE.
But this is not the issue for me. I will, if you do not mind, ignore the P&L and turn to the cashflow statement for 2011 first. The cash generated from operations (pre working capital) was £1.251 million (down from £2.915 million) but post working capital that goes to MINUS £2.098 million (MINUS £0.438 million). In other words folks do not seem keen to pay Geong’s bills. The company perennially seems to have to buy intangible assets (like what?) and that blew another £919,000 in 2011 (£367,000 in 2010) and then there are financing costs, tax etc. In other words, whatever blather Geong serves up on profits it just does not generate cash.
So then let’s look at the balance sheet. I am immediately drawn to trade receivables which went up in 2011 even though revenue fell. In fact they zoomed ahead from £16.161 million to £18.937 million. You will no doubt have compared this number to turnover and are already thinking this looks a bit odd. Trade receivables are in fact broken down into actual trade debtors (invoiced issued) of £4.191 million (£4.763 million) and accrued income of £14.746 million (£11.398 million). Now I can just about wear the trade debtors number although at 5 months of sales it looks a bit high to me. I would fear a bad debt or two in there.
It is the accruals number that bites me on the bum. The company states:
The accrued income above represents amounts not yet invoiced, but for which specific milestones have been met, which is in accordance with common practice in PRC.
So let me get this straight. An amount equivalent to 18 months turnover has been booked through the P&L even though not a single invoice has been raised. Forgive me for being an ignorant Westerner but is it really normal to do business in the PRC where you work for 18 months without invoicing for a jelly bean?
I am prepared to bet you my entire collection of Walnuts (worth thousands of dollars as a speculative investment in the PRC since this is also normal practice there) that far from all of this money will ever be translated into hard cash. As such I regard the nominal assert backing of this firm (£18.8 million at the year end) as not something to bet the bank on. Or even a walnut on.
So what would I do with Geong? Based on its normal cashburn rates for last year ( but assuming that they get worse as the Chinese economy falls off a cliff) the net cash position will erode within a year. I would certainly not buy the stock at any price but it is probably impossible to short.
If you are looking for a China short which has a total train wreck of a balance sheet and is losing money, I served up a stormer in the US last night which you can read about HERE
