Guest Post: Wonder Auto’s Wonderless Acquisition
Submitted by Chinese Company Analyst
Wonder Auto’s Wonderless Acquisition
The report examines a $15 million acquisition that the company made
in July 2010, and raises serious questions about whether the
acquisition was legitimate.
In its second quarter 10Q, the company announced it acquired Vital
Glee Development Limited (“Vital Glee”) for $15 million on June 24,
2010. Vital Glee was an “investment holding company and through its
subsidiary engaging in automotive shock absorber manufacturing
business”. Click here for the relevant disclosure. I’ve re-pasted it below:
“On June 24, 2010, [WATG's subsidiary] agreed to acquire 100%
equity interest in Vital Glee Development Limited (“Vital Glee”), for a
total consideration of $15 million of which $8.7 million was settled
in June 2010. The remaining consideration will be divided into 2 equal
installments and will be settled by December 31, 2010 and June 30,
2011 respectively. The Company obtained control over Vital Glee on
July 1, 2010 by appointing the sole director to Vital Glee. Vital Glee
is an investment holding company and through its subsidiary engaging
in automotive shock absorber manufacturing business.”
Little additional disclosure was given, in the 10Q or any subsequent SEC filings.
OLP investigated the acquisition further. From speaking with
management, OLP determined that Vital Glee’s operating entity was
Jinzhou Lide Shock Absorber Co., Ltd. This is further confirmed by a
Roth Capital report on September 30, 2010.
After some investigation, OLP found serious issues with the acquisition, which I will summarize below:
1. Jinzhou Lide was formed in April 2010
According to the AIC records for Jinzhou Lide, which are included in
the OLP research report, Jinzhou Lide was established on April 26,
2010. You can also see this on the Jinzhou AIC website here (use Google Chrome’s translation functionality if you cannot read chinese).
I’m doubtful that a business that has been operational for 2 months can be worth $15 million.
Management told OLP that Jinzhou Lide was formed from a
reorganization of an older company, which engaged in the same auto shock
absorber business in Jinzhou. Management, however, declined to
provide the name of Jinzhou Lide’s predecessor company, and I discuss
below my skepticism around management’s claim.
2. Jinzhou Lide was established at the same address as another facility owned by WATG
According to AIC records (see page 4 of OLP report or the website I show above), Jinzhou Lide was established and located at:
Bohai Street, Jinzhou Economy & Technology Development Zone, Jinzhou, Laoning
This is the same address of Jinzhou Wanyou Mechanical Parts Co.,
Ltd., a subsidiary of the company. OLP learned this by calling the
company, but you can look on this site, this site, or this site
to verify that Jinzhou Wanyou is located at Bohai Street, Jinzhou
Economy & Technology Development Zone, Jinzhou, Laoning. Or simply
search for the chinese characters of the address and the chinese
characters of Jinzhou Wanyou Mechanical Parts Co., Ltd., which are found
on pages 3 and 10 of the OLP report, respectively, in Google Chrome.
Not surprisingly, we also see this address show up in this 8k from April 4, 2007, where Jinzhou Wonder Auto Suspension System Co., Ltd. sells a stake in Jinzhou Wanyou Mechanical Parts Co., Ltd. to WATG. Click here
for the relevant page showing the address. Jinzhou Wonder Auto
Suspension System Co., Ltd. is shown as a related party throughout
several historical SEC filings, such as its 2007 10K.
We now see that WATG paid $15 million for a subsidiary that was two
months old and established at the same address as one of WATG’s current
3. Jinzhou Lide had
a registered capital of only $1.2 million, and yet was sold for $15
million two months after being established
Jinzhou Lide’s registered capital is only $1.2 million, which implies
that its shareholders only put in $1.2 million in April 2010 to
establish the business. Yet it was sold to WATG for $15 million in July
2010. I’m doubtful that Jinzhou Lide’s value rose 1,200% in its two
months of operations.
4. Management has not disclosed the identity of Vital Glee’s seller
In the vast majority of M&A transactions, investors are aware of
the identities of both the buyer and seller. In this case, WATG
management has not disclosed the identity of the seller, and investors
cannot determine the identity of the seller through any other means.
Vital Glee is registered in the British Virgin Islands (BVI), and the
BVI registered agent will only release the director and shareholder
information if Vital Glee management consents. Upon OLP’s request, the
BVI registered agent sought permission on multiple occasions from Vital
Glee management, but has yet to receive approval to release Vital
Glee’s shareholder information.
OLP also asked WATG management to identify the name of the seller.
According to OLP, the WATG CFO stated that he does not know the identity
of the seller.
The question therefore remains: who owned Vital Glee and who received the claim to $15 million upon its sale?
WATG should publicly disclose the identity of Vital Glee’s sellers,
and enable investors to independently access the relevant information
from the BVI registered agent.
sources in the auto parts industry were unable to identify Jinzhou
Lide’s predecessor, and weren’t aware of M&A involving any $15
million shock absorber businesses in Jinzhou
OLP identified 14 companies in the auto shock absorber business
located in Jinzhou that have effective AIC registrations. They are
OLP spoke to “numerous” members of this list in an effort to identify
Jinzhou Lide’s predecessor and none of them were able to identify a
company that could have been Jinzhou Lide’s predecessor.
Additionally, none of the sources were aware of a $15 million acquisition in the auto shock absorber sector in Jinzhou.
We have seen corporate governance issues and questionable financial
and management practices at other Chinese RTOs structured and financed
similarly to Wonder Auto. Like others, Wonder Auto has not chosen a
top-4 auditor, instead choosing to go with PKF Hong Kong, a firm that boasts only 4 partners. Like others, Wonder Auto has eye-popping financial figures,
claiming 40% to 50% revenue growth annually since 2005 and 20%+
operating income growth during that same time period, which imply
extraordinarily high returns on capital on its capital expenditures and
acquisitions. During the global downturn of 2008 and 2009, which
impacted China just like the rest of the world, WATG doubled both
revenue and gross profit, and increased EPS by 40%. The company has
raised substantial amounts of dilutive equity at low valuations, such as
$69 million in November 2009 at a valuation of less than 15x PE.
The facts behind the Jinzhou Lide acquisition are damning. WATG
appears to have paid $15 million for a 2-month-old company established
at the same site as one of WATG’s other subsidiaries. WATG has yet to
disclose the seller of Jinzhou Lide, and its general disclosure of the
acquisition is noticeably sparse. Numerous local competitors are
unaware of a shock absorber business in Jinzhou that could have been
the predecessor to Jinzhou Lide. They also have not heard of a $15
million acquisition in the sector. The shock absorber business
community in Jinzhou is small enough that such a predecessor and
acquisition would not go unnoticed.
If management wants to prevent further allegations of fraud, it
should release an 8K elaborating on the details of the Jinzhou Lide
acquisition. It should provide predecessor financial statements of
Jinzhou Lide; the identity and backgrounds of its sellers; an
explanation of why its initially registered address is the same as one
of its subsidiary’s; a list of customers; and additional information
that would allow independent analysts to verify Jinzhou Lide’s