Chaoda's new fund-raising plan prompts investors to dump stock

PUBLISHED : Thursday, 28 April, 2011, 12:00am
UPDATED : Thursday, 28 April, 2011, 12:00am


Shares in Chaoda Modern Agriculture (Holdings) fell 3.93 per cent yesterday after the Fuzhou farming company announced yet another fund-raising plan, this time to sell US$200 million in bonds.

If successful, the agricultural giant, which has been criticised by analysts for paying too much money for farmland that remains idle, will have raised US$771 million in share and bond sales during the past two years.

Chaoda, which did not respond to emailed questions, said in mail to potential investors it would spend the proceeds from its planned bond sale on expanding its production base and infrastructure.

The company's shares closed at HK$4.89 - a bargain-basement price of 4.5 times forecast earnings.

On March 31, before Chaoda announced its latest fund-raising, analysts at Macquarie accused the company of spending the money it made from its agricultural operations on an 'enormous and growing land bank that does not produce revenues'.

Macquarie analysts Jake Lynch and Jamie Zhou said the cash Chaoda had raised from regular stock and bond sales 'continues to sit on the balance sheet'.

In its last set of annual accounts, Chaoda said it had more than 2 billion yuan (HK$2.38 billion) in net cash.

Macquarie estimated Chaoda used only 24 per cent of its land for growing fruit, vegetables or grains, adding the company had never explained in its annual reports what it did with the rest.

There was 'no transparency on 76 per cent of the land on the balance sheet', it said.

'The raw fact is that this land generates no revenues now and management cannot tell us when they expect the revenues to commence.'

Chaoda, which was founded in 1997 by Kwok Ho, has regularly been mired in controversy since its Hong Kong flotation in 2000.

The company says it is China's largest vegetable grower. But some investors and analysts say this is impossible to prove because the mainland has no formal registry for agricultural land.

In 2002, big four auditor PricewaterhouseCoopers said it could not endorse Chaoda's annual results, and resigned.

The farming firm replaced PwC with the much-smaller CCIF and Baker Tilly, which both stepped down in 2007. It is now audited by mid-sized BDO.

Since 2002, Kwok has gradually reduced his ownership of the company by arranging regular issues of new shares.

The company's chief financial officer, Andy Chan Chi-po, has now sold all his stock, according to Macquarie.

Other analysts have also queried Chaoda's business model.

Last month, Nomura analyst Emma Liu criticised the company for spending what she called an unjustifiable amount of money on new equipment, such as irrigation systems and greenhouses.

In the past five years, Chaoda has reported consistent operating profit margins of 49 to 53 per cent.

Rich pickings

Chaoda?s fund-raisings (US$m)

Planned: 200 (bonds)

August 2010: 347 (bonds and shares)

June 2009: 224 (share placement)

Total: 771