Duoyuan Printing: Poor Corporate Governance Meets Inflated Revenues

| About: Duoyuan Printing, (DYP)

Following comprehensive analysis of public information and extensive on-the-ground due diligence, our research team recommends that investors steer clear of Duoyuan Printing (NYSE:DYP) due to poor corporate governance and suspect revenue data.

• Corporate governance: The company dismissed Deloitte as its auditor in response to queries over what on the surface seems to be a relatively small accounting issue . The CEO, CFO and three independent directors subsequently resigned. (See details here.)

• Suspect revenue data: The company’s products do not appear to be well-known, but based on reported revenues alone (see here), it should be the second-largest market player in China.

Duoyuan Printing and its subsidiaries design, develop and manufacture offset printing equipment and solutions in mainland China. It derives the vast majority of its revenue from the sale of single and multicolor offset press printing machines in single format and large format. The company, founded in 2001, is headquartered in Beijing, China.

Reported overall sales revenue has been growing at a rate of 20-50% since 2005. For fiscal year 2009, revenues were booked at $106.6 million, 20% up year-on-year, while net income stood at $32.6 million, up 23% year-on-year. The gross margin in fiscal year 2008 and 2009 was 50% and 53%, respectively. (See here.)

There are two areas of concern:

1. Corporate governance

Duoyuan dismissed Deloitte as its independent registered public accountant on September 6, 2010. This came a month after Deloitte sought clarification on $4 million in expenses related to advertising and trade show costs. The auditor was following up on information it received regarding certain distributors and vendors that appeared inconsistent with material provided by Duoyuan. The company refused to comply with Deloitte’s request.

The expenses represent a small fraction of Duoyuan’s cash balance and, in the absence of a proper explanation from management, Deloitte could have reclassified the cost as a non tax-deductable expense. But this didn’t happen, which prompts fears that the money might have been used for another purpose -- one that Duoyuan management was unable to justify to Deloitte.

On September 21, 2010, a securities class action complaint (see here) was filed against Duoyuan on behalf of shareholders, alleging the information in the initial public offering was false and misleading. Duoyuan management has since appointed Baker & McKenzie, an international law firm, to investigate the issues raised by Deloitte (see here). But it has made no public statement to rectify the situation and restore investor confidence.

2. Suspect revenue data

Duoyuan describes itself as a leading offset printing equipment supplier in China. But after talking with several of its competitors and industry professionals, the company doesn’t appear to be as popular or reputable as it makes out (Click here for details of whom we spoke to). No one that our research team spoke to regarded Duoyuan as a major player in the domestic market.

Based on reported 2009 sales revenue of $106 million, Duoyuan should be the second-largest offset printing equipment manufacturer in China. Yet Duoyuan doesn’t feature in the top 10 list published by the Printing Equipment Industries Association of China (PEIAC), the only authoritative information platform for the segment. A PEIAC spokeswoman said that Duoyuan refused to join the association or reveal any information.

Furthermore, Duoyuan’s stated revenues from multicolor large-format printing presses go against the grain of a segment that is by all accounts dominated by international companies. According to the company’s annual reports, sales of large-format multicolor presses accounted for 46.7%, 52% and 51.2% of total revenue in 2007, 2008 and 2009, respectively. The Beijing-based marketing manager (name to be disclosed here) at Heidelberg (HEI.FWB), one of Duoyuan’s major international competitors, noted that her company sold around 30 large-format multicolor presses globally each year, each at a price of about $1 million. On this basis, the $55 million in revenue Duoyuan claims to have generated from this segment is hard to believe.

Our research team tried to contact Sun Baiyun, CFO of Duoyuan, but was told she was on sick leave and it was unclear when she would return. The investor relations department refused to comment on the expenses issue. A detailed analysis and relevant proofs can be found here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. China Economic Review has no interest or investments in the stocks it covers, and has strict rules for staff with regard to holdings and trading to ensure their impartiality.