CW Group Holdings Ltd 1322 S
June 11, 2016 - 11:32pm EST by
2016 2017
Price: 1.94 EPS 0 0
Shares Out. (in M): 72 P/E 0 0
Market Cap (in $M): 1,390 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0
Borrow Cost: Tight 15-50% cost

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CW Group (The Company) is listed in HK and headquartered in Singapore. The company claims to be a leading one-stop precision engineering solution provider serving a wide range of clients worldwide. Its core businesses include supplying precision engineering solutions, selling cement production equipment and components, selling CNC (Computer Number Control) machine centers, components and parts, and providing maintenance and after-sales technical support. In our opinion, the company essentially assembles production lines in a way the customers want and then provide some repair and maintenance services.
The company claims that it adds value by designing and building the manufacturing process more efficiently than the customers could have done by themselves. There are definitely some bulk purchase discounts if the company pool orders from different clients together. But it is not obvious to us that the company can design manufacturing process
better than most of its customers, especially when those customers are in a wide range of different industries.
The company’s financial results seem to confirm the value add. From 2010 to 2014, sales increased from 470 million HKD to 1.65 billion HKD, a CAGR of 37%.
In year 2013 and 2014, the company achieved total sales of $970M and $1,650M. One particular Chinese company, Wuxi Best Precision Machinery accounted for 31% of sales ($301M) in 2013 and 19% in 2014 (314M). So combined the company sold $614M worth of products and services to Wuxi Best in 2013 and 2014. It so happens that Wuxi Best is waiting to be listed on the Chinese Shenzhen stock exchange so its financial information can be found in its IPO prospectus. We went through it but couldn’t find CW’s sales.
Wuxi Best gives a detailed breakdown of its cash flow. In 2013, the total cash outflow for “purchasing fixed assets, intangible assets, and other long term assets” was $74M RMB, which is about $87M HKD. For the first six months in 2014, the total cash outflow for “purchasing fixed assets, intangible assets, and other long term assets” was $42M RMB,
or about $50M HKD. Unfortunately Wuxi Best did not give cash outflow numbers for the second half of 2014, but we can still see that $137M HKD (87+50) is quite different from the $614M claimed by CW Group.
Another data point, Wuxi Best indicated in its filings that the total “construction and projects in progress” at the end of June 2014 was $9.4M HKD.
We can see the same problem by looking at Wuxi Best’s balance sheet. Wuxi Best disclosed that at 12/31/2012, 12/31/2013, and 06/30/2014 the book value for its machines and equipment were $170M, $165M, and $160M, all in RMB. Nowhere can we find the $614M worth of sales from CW Group.
Wuxi Best also disclosed a detailed plant expansion schedule. Its plant No.1 was built in 2002, plant No. 2 was completed in 2011. Wuxi Best started building plant No. 3 in summer of 2014 and complete it on May
28th, 2015. The total investment for plant No. 3 was $354M HKD and at least part of this $354M was spent on basic constructions and equipment from other vendors than CW Group.
All in all, we simply can’t find CW Group’s $614M worth of sales in Wuxi Best’s financials.
We talked to a few contacts in Wuxi Best, it turned out that Wuxi Best designed and build the new factory on its own and did not outsource to third party. The contacts we talked to haven't even heard of CW Group.
We also talked to CW Group’s own sales division in China. Sales people in the division told us that they are only aware of two machines being sold to Wuxi Best, for the total amount of about $1M RMB.
Questions raised from CW’s own financial statements:
In 2014 the company paid a total salary of $9.65M RMB to the top five executives, including $4.86M paid to Huang brothers who are the majority holders of the company. In the same period, the company paid a total of $4.61M HKD to the other 110 employees in the company, an average of $42,000 HKD per person per year. How much on average did
these employees contribute to the company’s top line? $22.32M HKD per person. $42,000 HKD per year is really low, the reception at our HK office makes $15,000 HKD per month, not year.
There is a huge difference between net income and cash flow, and receivables have been going up dramatically. Between 2013 and 2015, the company had total net income of $713M HKD, but the net operating cash flow in the same period was -$401M HKD. For the past four years, account receivables and other receivables (include repaid purchases and receivables for related parties) increased drastically, reaching $1.4B HKD at the end of 2015, which is 87% of its total revenue, 82% of its total assets and 6.4x of yearly net income.
So the company is not making any real money, but it insists on paying out a dividend. $48M HKD in total for the last three years. Where did it get the money? By selling shares and raising debt. On 08/16/2015, the company raised $340M HKD from Zhejiang Hua Hang Investment Co. by selling 93.8 million shares at $3.63 per share. We looked into this in some details. It turns out Zhejiang Hua Hang Investment Co. borrowed from retail investors and used a two tier (2x leverage for the bottom layer) structure to buy shares from the company. It is very speculative but common in China for funds to participate offering this way. Anyway, Zhejiang Hua Hang has a paper loss of 40% right now and it has to pay the retail investors back by Nov 2016. There are couple of possibilities from here: Zhejiang Hua Hang Investment give up and sell the shares by deadline and repay retail investors who are holding the top trench, Zhejiang Hua Hang pressure the management to pop up the stock by some fake good news then sell, or Zhejiang Hua Hang find some new money to repay the old one and stay in the game. I think the first possibility is more likely to happen, especially if we take the right actions and expose CW Group.
Risks and actions to take
There are various risks shorting CW Group directly: it is a small cap with insiders control over 60% of shares; the company still has $445M HKD on its balance sheet; though we can’t verify it, it is possible that the owner of CW Group knows the owner of Wuxi Best personally therefore can ask Wuxi Best to issue supporting statement if necessary.
For the short to work, CW Group’s ways to raise capital externally has to be cut. By making the public aware of CW Group’s false claims about its largest customer and its financial statements, hopefully we can stop new debt being issued and capital raised. Once the external financing is cut, the company will continue to lose money operationally, dividend cuts may follow. The upcoming maturity of Zhejiang Hua Hang Investment trust will serve as catalyst.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


The upcoming maturity of Zhejiang Hua Hang Investment trust will serve as catalyst.

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