Shedding Light on Tech Pro Technology (03823.HK)

2016 Sohn Conference Hong Kong

Shedding Light on Tech Pro Technology(03823.HK)


DisclaimerNothing contained in this presentation is an offer to sell or a solicitation of an offer to buy any security, nor shall GeoInvesting offer, sell or buy any security to or from any person through this presentation. GeoInvesting, LLC is not registered as an investment advisor in any jurisdiction. The content and materials contained in this presentation are provided for information purposes only and nothing contained therein is investment advice nor should it be construed as such. Prior to making any investment or hiring any investment manager you should consult with professional financial, legal and tax advisors to assist in due diligence as may be appropriate and determining the appropriateness of the risk associated with a particular investment.

An investment in the covered Company is subject to substantial risks and suitable only for experienced and sophisticated investors and requires the financial ability and willingness to accept the high degree of risk inherent in an investment in the Company, which could include a complete loss.

GeoInvesting is not providing investment advice, acting as a fiduciary or endorsing any company, products, or services. The information and data contained here is not intended for trading purposes or for any purpose other than informational use. GeoInvesting does not warrant or guarantee the accuracy or timeliness of any such information or data and shall have no liability for investment or other decisions based upon this information. GeoInvesting specifically disclaims any and all liability or loss arising out of any action taken in reliance on this information, including but not limited to market value loss on the sale or purchase of securities or other instruments or obligations.

Our research and reports express solely our opinions, which we have based upon generally available information, field research, inferences and deductions through our due diligence and analytical process. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. However, such information is presented “as is,” without warranty of any kind, whether express or implied. GeoInvesting makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and GeoInvesting does not undertake to update or supplement any reports or any of the information, analysis and opinion contained in them.

You agree that use of GeoInvesting’s research is at your own risk. In no event will you hold GeoInvesting or any affiliated party liable for any direct or indirect trading losses caused by any information in this presentation. You further agree to do your own research and due diligence before making any investment decision with respect to securities covered herein. You represent to GeoInvesting that you have sufficient investment sophistication to critically assess the information, analysis and opinion in this presentation.

You should assume that as of the publication date of our reports and research, GeoInvesting (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our clients and/or investors and/or their clients and/or investors has an investment position in all stocks (and/or options, swaps, and other derivatives related to the stock) and bonds covered therein (either long or short depending on our investment opinion), and therefore stands to realize significant gains in the event that the price of changes in conjunction with our investment opinion. We intend to continue transacting in the security of the issuer covered in this presentation for an indefinite period hereafter, and we may be long, short, or neutral at any time hereafter regardless of our initial investment opinion. As of the time of this presentation, GeoInvesting held a short position in 03823.HK.


Additional Disclaimer


Our “Short” Take on Tech Pro

• Tech Pro is a company that seems to be suffering from an identity crisis

• We believe the stock price is detached from the reality of our on the ground due diligence and the company’s financials

• Our due diligence raises questions that we believe should be brought to the attention of both the company’s auditor and regulators

• We believe the company will require continued dilutive equity financing to sustain operations

• We are currently short Tech Pro (03823.HK)


Introduction to Tech-Pro• Stock Price: HK$2.33 • Shares outstanding: 6.5 Billion• Market cap: HK$15.2 Billion (US$2.0B)• Listed: in 2007• Main business: LED Lighting• Recent acquisitions:– 50% equity interest of a Shanghai building in 2013– Second tier French football club in July 2015


Revenue by Business Segment

Note 1: The company reported no revenue from its property sub-leasing segmentNote 2: Revenue from “Other Business” segment reported over the course of a half year (July – Dec. 2015)


5 Year Stock Price Chart

Note: stock price is adjusted for forward stock splits in 2014 and 2015


Wind Solar New Energy

U-Young

Lan Tian Wei Guang (LTWG)

Chongzheng Electronics

LEDUS (Sales & Marketing)

Timeline of LED Business Acquisitions


Due Diligence: Wind Solar New Energy

• Manufactures solar energy LED street lamps

• Company’s website lists 300 employees

• Company lists factory space at 13,000 square meters

• They do indeed manufacture LED street lamps

• Through interviews with company employees, our investigators were told that the facility employs 30 – 50 people, an over 83% difference in staff

• Investigators were told that the company at one time occupied five floors in two buildings, but downsized to one story in one building, an 80% difference in space.

Company Claims Due Diligence Findings

Photos from GeoInvesting 2016 visit


Due Diligence: LTWG

• LTWG manufactures LED street lamps

• Company claims 200 employees• Company website claims building is

30,000 square meters in size

• They do indeed manufacture LED street lamps

• Our due diligence indicates less than 50 employees, an over 75% workforce difference

• Our investigators found other companies also occupying this facility




Due Diligence: U-Young Technology

• U-Young manufactures LED lamps• Company’s website lists 200

employees • Company lists factory space at

15,000 square meters

• They do indeed manufacture LED lamps• Investigators were told by several on-site

sources that there are now 40 or less employees, an 80% workforce difference

• Our investigators were told that other companies, including U-Young Appliance, now share U-Young Technology’s facility and workspace, a sign that the Company may have downsized




Due Diligence: Chongzheng Electronics

• Manufactures LED metal core printed circuit boards

• Company’s claims 200 employees • Company’s building is 6,000 square

meters in size

• They do indeed manufacture LED metal core printed circuit boards

• Investigators were told the company had 150 employees, a 25% workforce difference

• Another company shares the facility with Chongzheng Electronics




Due Diligence Summary

• All findings from our due diligence tell us that the company

has downsized nearly all of its LED segments, despite the company somehow being able to grow revenue

• The company recently stated at an extraordinary meeting of shareholders...

“Save for the Acquisition, the Company has not entered or has not proposed to enter into any agreement, arrangement, understanding or undertaking, whether formal or informal and whether express or implied, and negotiation (whether concluded or not) with an intention to dispose of or downsize the existing business of the Group, and/or acquire other companies/businesses.”

(Source: Notice of General Meeting, June 13 2015) http://www.hkexnews.hk/listedco/listconews/SEHK/2015/0614/LTN20150614007.pdf)


Management’s Comments on LED Business and Heavy Competition

• “Further, the managements expect that the selling prices of the LED lighting products will keep on decreasing as most of the LED lighting manufacturers will intend to capture more of their market share by reducing the selling prices.” - (2015 annual report)

– Gross profit margin of the company’s LED business was approximately 13.0% in 2015 compared to approximately 24.5% in 2014.

• According to the company, its impairment charges a result of “(i) selling prices of the LED lighting products have been decreased as there was keen competition in these particular LED lighting products and accessories sectors; (ii) the costs of production were kept on rising such as the labour cost, utilities cost; and (iii) the increased costs of production and operation cannot be shifted to the customers.”


Gross Margin Comparison

*For companies that operate in more than one segment, we specifically used margins from their LED segments


Comparable ValuationsTech Pro is egregiously overvalued on both EV/S and P/B


LED Business Financials

• Even after generously adjusting for both impairment items and amortization, the loss would be RMB 44.9 million (~US$6.9M), as compared to loss of RMB 33.0 million (~US$5.1M) in 2014.

• Company listed reportable segment results of a RMB 301.0 million (~US$46.2M) loss for the LED Lighting business in 2015.


Funding Operations with Equity While Burning Cash

• Tech Pro’s free cash flow in 2015 was negative RMB 101 million, while receiving cash inflows of RMB 148.6 million from equity financing

• The company’s share count ballooned from 4.9 billion to 6.5 billion in 4 years

• Based on recent cash flow trends, the only way it appears the company can survive is through equity or debt financing and potential dilution of shareholders


Q: What do we think management’s answer is to supplement its low margin, cash burning LED business?


Second Tier French Football!

(fans wanted)


Cash Burning Football Business

Tech Pro owns FCSM – Football Club Sochaux-Montbeliard

Currently playing in the second tier of French football, after being relegated two seasons ago


Cash Burning Football Business• FCSM was acquired in July 2015 for €7M.

• Tech-Pro booked a €9M (RMB 62M) “gain on bargain purchase” on this deal.

• FCSM lost €3.4M and €13.2M in its 2013 & 2014 fiscal year ended June 30.

• Team was relegated from Ligue 1, the top tier of French football, to Ligue 2 after the 2013-2014 season

• Finished this season ranked #15 in French Ligue 2, facing potential relegation

• We believe the company must make a substantial investment in the club in order to bring it back to top tier football.

• It has been reported that the company is looking to invest up to €100M – (Source: L’Equipe Magazine)

FCSM Financials

*from 2015 Tech Pro Annual Report


• Although the reportable segment results from FCSM were a profit of RMB 22.7M (~US$3.5M) for 2015, without the “Gain on bargain purchase”, the results would have been a loss of RMB 39.3M (~US$6.0M).

• The company has consolidated FCSM’s financials since July 2015 after the completion of its acquisition, meaning for only a half a year in 2015, Tech Pro lost RMB 39.3M in this segment.

• This makes us wonder: how bad would these ½ year numbers look if extrapolated out over the course of a full year?


FCSM Last Five Seasons Standing

Ligue 1 14th place

Ligue 1 15th place

Ligue 1 18th place

Ligue 2 10th place

Ligue 2 15th place


Tech Pro’s Only Profitable Business: Real Estate

Tech-Pro’s share of Profit in 2015: RMB 17.2M (~US$2.6M)Tech-Pro’s share of Net Assets in 2015: RMB 366.6M (~US$56.2M)

Image source: 2015 Annual Report


Painting the Tape?

Chart and quoted text source: Wall Street Journal, Abheek Bhattacharya

“Lastly, there’s the puzzling rise in Tech Pro’s share price toward the end of trading sessions. Over the past year through March 9, Tech Pro’s stock returned 43%. But if an investor had bought shares an hour before trading closed, sold them at the end of Hong Kong’s trading session, and then reinvested the proceeds the next day in the same manner, the return would be a remarkably high 791%.”

This appears to be an exercise in propping up the price of 03823.HK in order to substantiate the execution of equity raises on terms favorable to the company.


Tech Pro Reality Check• Tech Pro’s LED business is deteriorating with poor margins

• We question the company’s financials showing revenue growth in its LED business while our due diligence suggests otherwise

• FCSM requires heavy investment to maintain its current position to avoid yet another relegation

• We believe Tech Pro will continue to require debt or equity financing to fund operations

• Stock price movement and company valuation both seem completely detached from the reality on the ground


Our Recommendations• Our on the ground due diligence differs materially from the

company’s stated financials

• We believe BDO, the company’s auditor, should carefully consider our observations

• Based on irregularities in trading described by the Wall Street Journal, we believe the SFC should commence an investigation into the trading of this security

Thank you
