On October 3rd we mentioned that that we shorted GLG Life Tech Corp. (GLGL), a Chinese supplier of stevia extract zero-calorie sweetener, based on weak on-the-ground due diligence field notes that our team had just received and noted that on our blog. We were in the middle of preparing the following details when just 3 days later, and to our surprise, GLG Tech came out with commentary discussing operational obstacles that have negatively affected the company’s business.
On the morning of October 6, 2011, GLGL issued a press release highlighting operational difficulties it claimed to have recently come face to face with. However, based on our preliminary findings we believe that situation could be even worse than what was portrayed in this press release. You will learn from the following bullets that we estimate that the facilities have only been in operation for about 3 months in all of 2011 thus far. Even after the October 6, 2011 sharp decline in stock price, we see little reason that the stock will stage a significant rebound.
Based on our due diligence we believe that there is a high probability that GLGL’s 2011 SEC financials may have been misrepresented and that GLGL has had significant undisclosed operational issues for most of 2011.
Investigator Observation and Information Gathering
GLGL has five facilities. Our investigator was able to visit each of these facilities to glean information related to production volumes and processing activities. We have reached the consensus that GLGL may be suffering from a shrinking business not able to sustain multiple facets of its operations. It has become evident through our observations of reduced employee counts and overall worker sentiment of substandard product and poor incentive to be a part of workforce that GLGL will have a going concern in the near future.
Bengbu: R&D and operation center
GLGL has a small R&D center at Bengbu, which includes a small three floor office building and a several mu (one mu is equal to 666 m2) stevia plantation garden. However, the stevia plantation garden occupies only one dozen square meters. All other areas in the garden contain several other plants. Local farmers told our investigator that the whole garden did plant stevia last year (2010) and they did not know why Bengbu’s current volume of stevia significantly lacked in comparable size to last year.
At the same time, Bengbu is also a purchasing agent of stevia for GLGL. As it is not a harvest season for stevia, there are no operational activities at Bengbu.
Chuzhou Runhao: processing stevia leaves
Chuzhou Runhao has impressive facilities. However, based on its employees, Chuzhou Runhao stopped production at the beginning of August 2011 and only produced from June to August (three months) in 2011. Local farmers and one former worker of GLGL said that this facility stopped production because of reduced sales. An abundance of purchased stevia leaves are still stocked in the facility without any production. These leaves became black and putrid (pictures coming soon). The harvest season of stevia starts from mid-May to August.
Local farmers also complained that GLGL did not purchase all harvested stevia from local farmers in 2011 and some farmers do not plan to plant stevia for GLGL next year even though bad weather in 2011 accounted for a shorter harvest period.
Dongtai Runyang: processing stevia leaves
Dongtai Runyang has impressive facilities and includes two production lines. Based on the information of its employees, only one production line produced from June to August in 2011. During ten months in 2010, one line operated at full capacity while the other line operated at part capacity. This company at one point had 200 workers and now only has around 150 workers, all of which still need to report to the company for paid basic salary (around RMB 1,500 per month).
Qingdao Runde: processing of stevia leaves into different grades of stevia extract products
This company has the smallest facilities compared to other subsidiaries of GLGL. Our investigator talked to one employee. This employee told our investigator that GLGL told them not to disclose any information to anyone or risk being fired. This worker was not concerned with being fired, explaining that GLGL was not a good place to work anyways. The employee said that this company used to have around 50-60 employees. By 2011, the business turned sour. Currently, it has less than 10 workers and there are not even enough products for a full day’s expected output in any given week.
Qingdao Runhao: processing of stevia leaves into different grades of stevia extract products
Qingdao Runhao has impressive facilities. Employees stated that in 2011 there was only periodic business activity. Furthermore, since Aug. 2011, this location’s production activities were halted for shortage of sales. In 2010, busy operations sustained around 120 workers. Now, this company only has 20 workers without substantial production activities.
AN0C project (Xiaogang) in Fengyang County and other relevant information gathered
In 2010, in Fengyang County, local farmers sold harvested stevia to GLGL for an acceptable price (RMB 5-8 per pound depending on different qualities). However, in 2011, even though the harvested amount of stevia decreased due to bad weather conditions, it is hard for local farmers to sell the stevia.
In the site of the AN0C project, there are nine different facilities and several others under construction. GLGL plans to establish five different product lines.
- The first is for low calorie sugar and is ready for production at the end of October.
- The second is for civil usage sugar and there is designed facility but no equipment and/or workers.
- The third one is for cereal and there is designed facility but no equipment and/or workers.
- The fourth one is for Ginkgo biloba liquid with only temporary production.
- The last one is for beverage. The worker told our investigator that the production line can produce 15,000 bottles hourly with 24 hour round-the-clock production. However, this information is contradictory to observations made by the employees who stated that the small number of delivery trucks per day is insufficient for the production line’s capacity. Furthermore, our investigator also contacted several sales agents for the beverage products sold by GLGL. The sales agent told our investigator that the sale volume of the beverage product was too low for several reasons:
- Poor beverage palatability
- High price compared to other famous brand beverages
- Low advertisement and endorsement for the beverage
- Newly introduced products without apparent advantages (The Chinese do not care about calorie content as much as Americans do.)
Relationship with Cargill
GLGL reported a strategic alliance with Cargill in its 2010 annual report. The key points of the relationship are as follows:
- "an agreement by Cargill to purchase a minimum of 80% of its global stevia extract requirements from us for the first five years of the agreement commencing October 1, 2008;"
- "our being Cargill's exclusive Chinese supplier of stevia extract for the term of the Strategic Alliance and Supply Agreement and Cargill's agent in China for any additional stevia extract sourcing opportunities that arise;"
We do not know Cargill’s stevia sales volume thus far in 2011. Based on the relationship between GLGL and Cargill, it is reasonable to believe that the sales of stevia extract made by Cargill substantially dropped in 2011, as compared to 2010.
Here is a link with the contact name of Cargill’s representative regarding the cooperation with GLGL.
It is reasonable to believe that GLGL may have experienced a significant drop in revenues in 2011 due to ceased production activities (stevia extraction) after August 2011 in all its relevant facilities. Regarding the new beverage business, the current market response for the beverage is not good. Again, even after the October 6, 2011 sharp decline in stock price, we see little reason that the stock will stage a significant rebound.
Disclosure: I am short GLGL.