Asian Bamboo [AB5]: Fair Value Valuation of biological assets

Asian Bamboo AG (AB) is a holding company listed in Germany. Its assets are located in China, operations consist of bamboo farms. The farms produce:

• Bamboo Trees
• Spring shoots (sold fresh or canned)
• Winter shoots 

As AB is a company listed on a European Stock market it has to report for its group accounts according to IFRS. For biological assets, being the main purpose of the group, IAS 41 is applicable.
IAS 41 is a full fair value standard, it requires assets being valued at Fair Value less cost to sell (FVLTCS).

I compiled all the information given about the valuation process in their annual reports from 2007-2012 in the following table:

As it can be seen (yellow) an important changed happened in 2010. AB5 restated a lot of figures, most importantly the way they account for biol. assets:

• Now they included more comprehensive costs (land lease, recultivation)
• For the first time the fair value of biol. assets decreases (by around 30 Mil. Due to IAS 8 this doesn't show up in the p/l, only mentioned in notes)
• At the same time they increase the count of trees/ha by around 4 times. Potentially decreasing the loss connected with increased costs.
• Furthermore in the corresponding section of the notes there is no mention of their "independent" valuer anymore. Also later the display of the auditor is only a side notice outside the core report.

As we saw the effect of the restatement was balanced by an increase in (assumed) output of trees per ha. However if we take a look on the historical output on the following table 2 this assumption seems questionable:

Bamboo trees per ha sold in 2012 was 115 compared to 2.369 according to the FVLCTS calculation.
That is about 25 times actual//planned.
Apart from bamboo trees however the estimations of 2012 for spring/winter shoots seem more realistic.
This leads to the following conclusion:

1. Inputs (allmost all lvl 3 FVs, btw.) used seem overly (grotesque?) optimistic.
2. Inputs are realistic, however demand for trees is so low that the produced amount of trees cannot be sold.
3. inputs are realistic, demand is out there however AB has troubles with harvesting all the mature bamboo trees.
4. Mix of 1., 2. and/or 3.

The Management Report 2012 (p. 46) states negative impact on housing and construction. Also p. 63 stats AB think they can sell all shoots they harvest, that also means they can not do the with the trees.
However it seems mainly the reduced sells to Zhongzhu, a bamboo fiber manufacturer, a responsible for the shortfall. AB sees demand for fiber as key driver for tree sells (p. 63.
The business relations are like this:

•  Zhongzhu as OEM manufacturer buys bamboo trees from AB
• AB then purchases processed bamboo fibers back from  Zhongzhu . 
•  Zhongzhu is "strategic partner" since 2009 (loan from AB, non-interest bearing: 2,1 Mil. EUR)
•  Zhongzhu only need younger, low quality trees (=lower price?) 
•  Zhongzhu seems extremly sensitive to changes in business  environment ("minimal production volumes" in 2012)  

A similar investment (40% stake) in Xinlifeng (plywood) already failed, stake sold in 2013 at "about book value".
To me the theme seems recurring. Invest in "strategic partner" via equity/non interest bearing debt injection. First 1/2 years high tree sale volume, then decrease and exit.

It appears there is barely demand for bamboo tree based products. Initiatives to increase demand from AB are short-lived and initialized by capital injections.
Massive decrease of biological assets due to revaluation can be expected.
On the positive side estimations and sales for shoots seem fair (in 2012). However as of Q3.13 sales of shoots also fell drastically (more than - 60%).

Might make a follow-up on this with my own DCF valuation of biological assets, so i can compare it when the annual report 2013 gets released (no date of release yet).

Powerland AG [1PL]: Fraud or opportunity?

Powerland AG is a holding company based in Germany for leather goods manufacturing companies based in China.

After a long period of postponing of the Annual Report 2012, they issued a statement on the 02.07.2013 saying they auditor ( BDO AG WpG) denied the testate and issued a negative auditors opinion.

Today Monday 15.07.2013  at 18:01 after market-close they issued yet another statement explaining the reasons given by the auditor for not accepting the report.

One of the reasons is that the auditors were not allowed by PL to confirm the bank account statements with the headquarters of the banks involved. The auditors could only visit the local branches of the bank.

I know from a partner of EY who was posted for 3 years in China told me it is indeed normal to go into the banks and talk directly with bank representatives.
In Germany standard procedure is to simply accept an official statement coming from the bank. Not so in China, where risk of forgery is immanent. However I do not know whether it is also standard procedure to talk to the HQs of the banks. From my point of view it does make sense, esp. if PL is a important client or if there is personal interest.
PL justifies the denial with the statement that such a process is very unusual for Chinese audit procedures.Furthermore no business association exists to HQ, therefore they could not asks HQs to provide such documents.

As a last point they announce a share purchase of up to 1,5 Mio shares beginning from the 25.07.2013.
Shares outstanding is 15 Mio, accordingly 10% of all shares could be bought back.
The buyback price shall not exceed 8 EUR.

Chances:
+8 EUR provides effectively a floor to share price (given the liquidity of course)
+The buyback was approved during AGM 2012

Risks:
-Chinese bank accounts are indeed bogus resulting in insufficient capital for buyback
-German holding only had 0,48 Mio cash as of 31.12.2011 (Bundesanzeiger.de, latest HGB statement)
-No directors dealings during the period of extremely depressed share prices


/Edit: There also seems to be heavy insider trading before the announcement +26,58% on XETRA until 17:36:09. Date of announcement: 18:01.
Also higher trading volume, however not very strong.
Still: Its always leaking somewhere. EMH..

/Edit2: New CFO. Seems competent, reputation to loose, might help share price further.

/Update 16.10.2012: No news so far. Powerland release unaudited statements for Q2.13 and furthermore appointed EY / Ernst & Young as auditor. I'm surprised they took on such a high risk mandate, especially with their Sino Forest experience...
Out the buyback there is no information available at all, often companies have information on their webpage, not in this case.

Deloitte advertisting: Asian Bamboo and Chinese - German IPOs

Recently i stumbled across this German advertising document by Deloitte. It is about German holding companies with operations only in China that IPO on the German stock market.
It is in German, so I will translate the interesting parts.

At first I thought it must be an old brochure, however its from October 2012.

Lets see the interesting parts:

It is about the company Asian Bamboo (AB), which engages in bamboo forestation. The text describes AB as "showpiece security regarding financial development, public relations as well as share  performance."
Since I know AB a little, I thought this is a joke.
Here is the chart regarding the stock and and extract of the earnings per share

Regarding public relations: Deloitte took over the mandate from BDO 2010. Shortly after that they had to change the method of accounting for rented bamboo forests (before they activated the whole DCF they expected over all 20 years of leasing- through net income of course).

So not the best example to advertise with in my opinion, which leads us to the question: Are there better alternatives to showcase?

	Industry	IPO date	Performance since IPO	Volume Mio EUR
FIRSTEXTILE AG	Textilindu..	12.11.2012	2,00%	1,8
FAST CASUALWEAR AG	Bekleidung..	09.07.2012	-57,60%	5,3251
GOLDROOSTER AG	Bekleidung..	18.05.2012	-54,63%	23
HAIKUI SEAFOOD AG	Nahrungsmi..	15.05.2012	-28,00%	2,76
ULTRASONIC AG	Bekleidung..	09.12.2011	16,67%	6,3
YOUBISHENG GREEN PAPER AG	Papierindu..	13.07.2011	-19,39%	1,4151
CHINA SPECIALTY GLASS AG	Baumateria..	01.07.2011	-68,90%	23,85
UNITED POWER TECHNOLOGY..	Maschinenbau	10.06.2011	-58,24%	51,75
POWERLAND AG	Sonstige B..	11.04.2011	-59,09%	94,875
KINGHERO AG	Textilindu..	06.08.2010	-34,87%
JOYOU AG	Möbel und ..	30.03.2010	-38,62%	91
VTION WIRELESS TECHNOLO..	Telekommun..	01.10.2009	-60,55%
GREATER CHINA PRECISION..	Telekommun..	20.11.2007	-72,90%	28,5
ASIAN BAMBOO AG	Holzindust..	16.11.2007	-67,34%	82,586
ZHONGDE WASTE TECHNOLOG..	Entsorgung..	06.07.2007	-94,17%	94,6234

Median performance is -57,6%, arithm. middle -46,4%.  Except Ultrasonic and Firsttextile there is no positive performance, both have a short track record.
Firsttextile offered 4 Mio shares at range 10-14 EUR, sized down to 1,8 Mio shares sold at 10 EUR.
So situation is pretty bad, there is a lot of resentment towards Chinese stocks in the German market.



In the text from Deloitte above the last sentence about what makes Germany a good place to IPO is also interesting: "The expected good enterprise valuation together with relatively little requirements regarding the listing made the German location attractive"
Stupid German money meets little regulatory oversight....

At least the stupid money part should be gone now, although there are still some China shops trying to go public here the "success" speaks for itself (see above).
So the days of big business are over - sorry Deloitte Chinese Service Group.