Valiant Varriors said Vitasoy misrepresented profits in China and Australia, reported capital expenditure that did not match that reported by the Commerce and Industry Bureau, and that the cost structure was abnormal. After excluding its own made-up Chinese growth myth, the company was only small and mediocre.

Futu News, January 16 news, short selling agency Valiant Varriors issued a report sniping Vitasoy International, describing its growth in China as "the king's new clothes", giving only Vitasoy International a target price of 10 yuan, a potential drop of 63.9% from the previous day's closing price of 27.7 yuan. As of press time, Vitasoy International fell 0.54% to HK $27.55.

The agency pointed out that Vitasoy claimed to have grabbed a lot of market share in the mainland in recent years and attracted the attention of investors, and its share price soared from 3.5 yuan in 2009 to 46.5 yuan in 2019, a 13-fold increase in market value. However, the agency believes that there is a lot of water in it, and the group management conceals a lot of facts.

Vitasoy misrepresented profits in China and Australia, reported capital expenditure at odds with the Commerce and Industry Bureau, abnormal cost structure, and stripped of its own made-up Chinese growth myth, the company was small and mediocre.

The main bearish views are as follows:

1. Vitasoy misstates the profits of China and Australia.

How does Vitasoy maintain a high profit margin when its competitors are still struggling? Is it because of a magic bean drink recipe? Or is there Superman on the management team? As the simple effective principle of Occam's razor theory says, in this case, the problem with the vitamin milk company is looming, and its profits on Chinese mainland are fraudulent.

The Valiant Varriors comparison found that the profit figures disclosed to investors by Vitasoy in its financial statements were very different from those submitted by the Bureau of Industry and Commerce, with the company reporting an average operating profit of 451 million yuan over the past three years, more than 40 per cent higher than the 321 million yuan it reported in the Bureau of Industry and Commerce.

Valiant Varriors also said it had studied Vitasoy Australia Products Pte Ltd, the only Australian subsidiary of Vitasoy. After the financial report, the company found that the way the company reported profits in Australia was the same as in China.

2. The reported capital expenditure is not in line with the declaration of the Trade and Industry Bureau.

According to Vitasoy's financial report, the company added 214 million yuan in capital expenditure in 2017 and 689 million yuan in 2018. According to the Bureau of Industry and Commerce, the company's expenditure in 2017 and 2018 was only 45.9 million yuan and 175 million yuan respectively.

Valiant Varriors said that there are good reasons to believe that the capital expenditure in Vitasoy's financial report is much lower than the actual expenditure, and that there is a huge gap between the financial report and the information submitted by the group to the State Administration for Industry and Commerce, which fully proves that Vitasoy's cash flow is poor and that financial fraud is the only way to defraud Volkswagen of inflated profits. A bold inference: vitamin Milk continues to falsify the books and mislead audit companies, investors and the government to maintain its fabricated Chinese growth myth.

3. Abnormal cost structure

Valiant Varriors said it was completely counterintuitive that Vitasoy could maintain or even continue to raise gross margins under multiple cost pressures.

Like Master Kang and Uni-President, Vitasoy's products are packaged with Tetra Pak. The unit cost of Tetra Pak packaging has risen by about 66% due to rising raw material costs and the government's recycling policy. It can be seen in the financial statements of Master Kang and Uni-President that the gross profit margins of the two companies have been obviously squeezed, but Vitasoy's has not been affected at all.

In addition, the number of employees of vitamin milk has been growing at an average rate of 5% a year, while wages are growing at a rate of about 10% a year. The drainage fee for Vitasoy, including marketing and distribution costs, has increased by as much as 20% to 30% a year. Once again, however, the gross profit margin of Vitasoy was not affected at all.

4. While sales slow down, competition intensifies day by day.

The company had set a target of 20 per cent growth in Chinese mainland sales in 2019, but the first half of 2019 showed that Vitasoy sales grew by just 8 per cent.

The agency also questioned that the inventory turnover of Vitasoy had risen from 15 days to 60 days; although it had a strong sales network in the south of the mainland, it was flat in the north; and it was difficult to launch new products. It has always relied on only two types of soy milk and tea drinks that have been on the market for decades, and the market share of vitamin milk is declining as competition in the beverage industry becomes increasingly fierce.

The agency believes that Vitasoy said in December that the slowdown in mainland sales was only the tip of the iceberg and that the actual situation was much worse; it firmly believed that even if Vitasoy's share price plummeted in the past three months, its market capitalization should still be much lower than it is now.

Institutional valuation

According to the data of Vitasoy in the Bureau of Industry and Commerce, it is estimated that the real growth rate of operating profit is only 2.9%, which is 1/10 of the 34.2% announced in the financial reports of listed companies. Coupled with the company's bleak outlook, it is clear that its valuation should be much lower than that of its competitors.

Valiant Varriors said it believed its share price was worth only HK $10 a share, about 65 per cent lower than its current price.

（附：Original report on short selling）