In this report, we elaborate on why investors in Cogo Group, Inc. (“COGO” or “the company”), as well as its auditor and the SEC, should be especially cautious.
- Declining quality of earnings
- A history of making acquisitions with a lack of transparency and a low proportion of tangible assets
- A record of apparently exaggerated claims
- An egregious transfer of wealth out of the pockets of shareholders and into the hands of an unnamed executive
Previous articles on Seeking Alpha, including the ones here and here, have done an excellent job documenting COGO’s suspicious related party transactions, unusual accounting, and questionable acquisition history.
In this report, we’ll shed light on dubious claims made by management regarding a website they’ve portrayed in press releases as a central component of the company’s new online strategy: www.cogozon.com. The red flags in this case are clear, and most investors should have an easy time understanding them.
Historically, COGO's business model has been described as the provision of “customized module design solutions for a diverse set of applications and end markets, serving as a gateway for [the company’s] technology component suppliers to access leading electronics manufacturers in the PRC.” It’s not very clear what is exactly meant by this and a visit to the company’s main Comtech subsidiary website at www.comtech.com.cn appears to describe a simple re-selling business. Comtech’s “products” section is little more than hundreds of links to other manufacturers’ websites. We'd add that a number of those links are broken.
“Today, I am announcing our new online strategy, called "COGO 3.0", which will launch later this quarter. COGO 3.0, which will be divided into two distinct but intertwined subgroups, focuses on applications and products. It will utilize the Internet to enhance our push into the SME market by accelerating our SME customer growth and significantly lowering our SME acquisition costs. We will launch a number of websites, blogs and social networking sites aimed specifically at leveraging our already powerful position within the massive and influential China engineer community, numbering in the range of 50-100 million.”
COGO's CEO further promoted the company's new online strategy in the most recent conference call, a transcript of which is available here. In addition to comparing his sites to the widely known Alibaba.com, the CEO called COGO the "clear leader" in "transaction based online B2B platform[s] of technical solutions". Here is an excerpt discussing the company's online presence [excerpt added]:
“Cogo Group, Inc. (Nasdaq:COGO) is the leading online platform of Core Technologies for the 42 Million Small and Medium Enterprises ("SME") in China. Cogozon.com, currently serving Cogo's 1,500 SME and 100 Blue-Chip customers, is an e-commerce platform for customers in tech manufacturing sectors (Smart Meters, Alternative Energy, Autos, Healthcare, Tablets and HDTV), offering designs, product, applications and technical support. Cogo's transaction-based online revenue model centers on its Application Store, offering design solutions and embedded software, and its Product Store, which sells standardized Electronic products. Cogo operates Cogopedia.com, a unique web-based business networking platform to engage with 50,000 electronic and software engineers, collecting one million data inputs daily. Cogo offers technology from 400 suppliers, including 50 global players like Broadcom (BRCM), Xilinx (XLNX), Freescale (FSL), Microsoft (MSFT) and Atmel (ATML). Cogo has 600 employees, with 300 in engineering and 200 in direct sales and 15 service centers across China.”
"Now, I would like to further discuss our exciting new business initiative. I believe this is the most exciting new strategy that we have announced in the history of Cogo and it will be the basis for our next phase of growth in the next five years. We have both planned to create a transaction based online B2B platform of technical solutions that have no peer in China marketplace. We are the clear leader. A key point to understand then is that other companies like Alibaba have created the B2B e-commerce platform in China, however, those revenue models are based on membership. Our model is based on transactions."
As a first point, the site itself looks generic and low-budget and did not appear to us to have the robust functionality one would expect from a leading business-to-business electronics platform.
Alexa tells us that cogozon.com experiences so few hits that Alexa does not even “have enough data to display the traffic metrics for cogozon.com.” Alexa typically has a substantial amount of data on Chinese websites, as can be seen by its listing of the top 500 Chinese companies by web traffic here. And Alexa typically has data on smaller sites, as can be seen by Alexa’s information and ranking of our website, www.presciencefunds.com:
Next, let’s look at the number of results that come up when we searched for cogozon.com on China’s leading search engine, Baidu (BIDU). Given that COGO is “the leading online platform” for its wide suite of electronics products, and that cogozon.com is the first site the company mentions in its business description, we’d expect a substantial number of references to cogozon on Baidu. Instead, we find only three pages of results. See the following screenshot:
Next, given that cogozon.com is supposed to be a leading online business-to-business sales platform, we would expect to be able to purchase products through the site. Instead, our attempts to purchase products were unsuccessful. When we attempted to put an item in our cart and check out, we were taken to a contact information window that stated "our business staff will contact you as soon as possible". See the screenshot here. Despite COGO’s claims to have a leading electronics website, we could not complete our orders online. The walrusvalue.blogspost.com video which I link to above does an excellent job demonstrating that goods could not be purchased online during repeated attempts.
Also, when customers attempt to download instruction manuals for certain products, a number of the links are broken. I’ve tabulated a list of broken links in this chart.