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Xuhua Zhou  

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  • Joy Global: When Will We See The $1 Billion Write-Down? [View article]
    I agree with your assessment of the situation. I think JOY most likely will bring light to the situation.

    As a side note, Chinese media reported the completion of acquisition of the two SOEs in late 2005..the formation of those entities seem to have occurred in 06.

    The thesis has been supported by the market I would argue. I'm not claiming anything definitive here. The point of the article is to point out the linkage given CAT's disclosure last Friday. I think the stock price here has reasonably priced in the risks, down over 700mil in mkt cap this week. Of course, if a write-down is really forthcoming, there would be a lot of sentiment issues surrounding the stock and we could easily see it head lower to the 50s.
    Jan 25, 2013. 01:35 PM | 1 Like Like |Link to Comment
  • Joy Global: When Will We See The $1 Billion Write-Down? [View article]
    Thank you for posting the insightful response. I wish I were in a position to paint a clearer picture which may answer your questions, but I could simply speculate based on what I think is reasonable.

    1) I think the point of contention here is whether Li&Williams had additional interest in IMM through resolute funds. I think the disclosures in the prospectus reveal important information but it's not 100% reliable either. For example, one thing that's noticeably omitted is Li&Williams original stake in IMM Mauritus. According to Chinese disclosures at the time of the SOE acuqisitons, Li&Williams held significant stake in the entity rather than the HK prospectus disclosure stating them as involved in the original formation (language is vague...)

    2) Something doesn't add up. If you agree with me that Li&Williams had 40% stake at the formation, it becomes impossible to argue that they got completely washed out after rounds of structuring in preparation of IMM going public, not to mention they are directors and insiders here. I can't see where their 40% original economic interests went...Therefore, to me, it really matters less what the disclosure says and I'm guessing the smart lawyers simply buried their names under the layers. It's just impossible to argue that Li&Williams 40% stake vaporized into thin air....Also there are five parallel resolute funds that have stakes in TJCC holdings...I think some of them are for Jordan and some of them are for Williams&Li...That's an opinion not a fact, but I think we'll find out in the future.

    Thanks for digging up all the information. I think I'm going to leave the further due diligence to JOY's mgmt. They have far wider access to information and afterall, they are the ones who spent 1.4 bil acquiring IMM. The article simply pointed out the missing links and on many levels, the mkt has already responded..JOY's off almost 10% since the posting (of course other news had been in the mix)..We will see what happens eventually, but the risk appears to have been priced into the stock.
    Jan 25, 2013. 11:35 AM | Likes Like |Link to Comment
  • Joy Global: When Will We See The $1 Billion Write-Down? [View article]
    My calculation comes from assuming Li&Williams held steady the 40% interest in IMM since its original formation. They could have been diluted in subsequent acquisitions but I do not know. The 40% I referenced came from the case study I linked and other Chinese media reports regarding the Jixi and Jiamusi acqusition. I have a reasonable level of confidence in the veracity of the articles. Feel free to read the article with google translator if you do not read Chinese.

    The 45% comes from 0.4*0.91+0.09=0.45...I'm not saying this is the right number, I'm saying they could be owning this much. While its equally likely they have been diluted in subsequent transactions , at least I don't have any information on that front. I'm not trying to highlight the 45% number; I'm trying to highlight the fact Li&Williams are unlikely to be the 9% passive minority stakeholders as portrayed in the HK filings.

    http://bit.ly/14aUi0i

    I've attached the referenced case study for you here as well.
    Jan 24, 2013. 07:26 PM | Likes Like |Link to Comment
  • Joy Global: When Will We See The $1 Billion Write-Down? [View article]
    http://on.ft.com/W36FZC

    E&Y and Deloitte both looked into the books of ERA....makes E&Y's IMM audit a bit less credible I'd have to say..
    Jan 24, 2013. 03:16 PM | 1 Like Like |Link to Comment
  • Joy Global: When Will We See The $1 Billion Write-Down? [View article]
    1. Again, don't feed words into my mouth. I never gave a definitive number on what williams&li hold. But it's my view they do hold a significant stake through the TJCC entity.
    2. I'm using the related party transaction in the prospectus to highlight prior RELATIONSHIPS. They are important and perfectly valid.
    3. I disagree fundamentally on the level of involvement you or the prospectus claim. I think over the next few days, media will shed more light on Mr.Li's true role in IMM's operations.
    4. Again, your logic is completely flawed here. If Siwei could go public, why would IMM want to acquire it and have TJCC hold a fraud? Diversifying your fraudulent companies makes perfect sense here as well. Or Jordan simply disagree to put its own money in a lesser quality company? All of those are possibilities.

    Finally, I concede the points raised here are largely circumstantial. But over the years, the insiders who are involved in a known frauds are highly likely to be involved in a potential fraud. Time will tell whether my view on the situation is correct or not.
    Jan 24, 2013. 01:38 PM | 1 Like Like |Link to Comment
  • Joy Global: When Will We See The $1 Billion Write-Down? [View article]
    Based on your response, I'm guessing you are either involved in the deal or have extensive knowledge of the dealing in IMM's IPO and its prior related party transactions. I thank you for raising the key points in the related party transactions but your answers do not address a couple of key concerns here.

    1. The ownership structure of TJCC holdings is unclear. It's hidden behind layers of offshore funds and my guess is Mr.Li and Williams have a stake in TJCC. I wonder if you have proof that can show otherwise. (While it's a speculation, it is based on disclosed documents and reporting from the SOE acquisition. Williams&Li at 40%, Jordan at 60%). I never stated definitively about Mr. Williams and Li's stake in IMM, it's mere speculation from the information I've seen. I would love to see the ownership structure of TJCC if you have any insight to share.

    2. While I don't see Mr. Williams involvement in IMM except for the initial acquisition. It is indisputable that Mr.Li had extensive involvements in IMM's day to day operation. (See the links I attached in prior posting). Your claim that Mr.Li was merely a consultant and director who is not involved in day-to-day operation simply is inconsistent with the IMM's own disclosure. (Mr.Li was the vice chairman of the company prior to it going public)

    3.I'm not sure what you are disputing in the related party transaction aspect. I agree with you that all related party transactions have been settled prior to it going public (otherwise HK public investors probably won't like buying into the deal). That being said, those prior related party transactions indicate the connections between IMM and Mr.Li and Williams. The connection is the only thing I'm highlighting here, not alleging any impropriety whatsoever.

    4. The fact IMM passed on ERA can only indicate IMM's a lot smarter in making acquisitions than CAT; I don't think it says anything about the likelihood of itself being fraudulent.

    5. I think it's moot points to talk about IMM's gone through many more layers of screening than ERA. Again, I agree IMM is likely a higher quality company just because it had through IPO, audit and PE investing. But by the same argument, I can argue ERA had gone through CAT's screening therefore it cannot be a fraud (WE'VE ALL SEEN HOW THAT PLAYED OUT)

    While your comments are lengthy and clearly show you have considerable insights in both IMM deal and ERA, I'm not convinced by the validity of your arguments and the evidence you cited.
    Jan 24, 2013. 07:58 AM | 1 Like Like |Link to Comment
  • Joy Global: When Will We See The $1 Billion Write-Down? [View article]
    As a side note, Piper Jaffray's research analyst came out yesterday making a number of statements supporting the IMM acquisition. I would like to express my view points on a few of them.

    "1) IMM is comprised of four formerly state-owned companies, each with its own distinct history and product portfolio; given this, it would be surprising (and random) if all - or any- of these companies were somehow employing the same accounting tricks as a nonstate owned company located several provinces away;
    2) connections between Siwei and IMM shareholders are misunderstood: while Siwei's major shareholders did have a minority stake in IMM, they were not in charge of running IMM's daily operations.
    3) IMM sells road headers, shearers, and other types of
    mission-critical mining machines, while Siwei sells more commoditized roof supports. In the former case, the value-added nature of the products speaks for itself; in the latter case, there is arguably more incentive to exaggerate profitability;"

    I agree with the analyst that IMM is likely a better quality deal given the fact it's an IPO with a big four auditor. The tricky part here is that CAT also claimed that it has done proper and rigorous due diligence prior to acquisition which should equate if not exceed a regular big-four audit and the IPO process.

    Furthermore I cannot agree with the statement that since IMM is a combination of four SOEs, therefore, it's unlikely they all use the same accounting tricks. My view is that the problem may ultimately lie with IMM itself. After the integration, the numbers are presented as IMM's numbers, not the four prior SOEs' numbers. The fact those four companies are completely distinct and with different history and product offering should be more worrying than reassuring because it most likely adds much more complexity to exert proper internal control and creates more room for manipulation if one intended to commit a fraud.

    On the second point, the analyst is completely misguided and I believe Mr. Potter is the one who misunderstood the connections here. Rubo Li has been running IMM since 2007 and I have multiple links proving this fact.

    http://bit.ly/Vu9XTm
    (Mr.Li is the Vice Chairman and on a trip to negotiate a business deal with a coal mine in China)
    http://bit.ly/148afV9
    (Mr. Li on a trip promoting IMM's product offerings)
    http://bit.ly/Vu9XTu
    (Mr.Li went on a trip to enhance further cooperation with a customer)

    With such deep level of operational involvement, how could Mr. Potter claim there's no involvement??

    With respect to the third point, the analyst argued that Siwei had more incentives to exaggerate profitability. While this may be true, CAT's 8K disclosure also stated improper and unsupported revenue recognition among the problems identified.

    Obviously we'll see how the situation eventually plays out, but I think JOY's management should be careful in light of the concerning information that had been raised to the public domain.
    Jan 24, 2013. 05:10 AM | 1 Like Like |Link to Comment
  • Joy Global: When Will We See The $1 Billion Write-Down? [View article]
    I read the entire prospectus and didn't see anything about IMM terminating relationship with the two individuals involved. Mr.Williams resigned before it going public and Mr.Li stayed on as a director. I tend to agree that IMM seems to be a higher quality deal than ERA, but just because JOY did not catch it doesn't necessarily imply problems do not exist. Caterpillar has a much larger existing Chinese operation which requires integration while it's not necessarily the case for JOY. The mgmt of IMM is most likely left to keep doing what they had been doing in the past with little outside interference. Therefore, I'm not sure whether it would be safe to conclude all's well just because JOY hasn't done anything up until today.

    On a separate note, if you could read the prospectus and know ERA is a piece of crap and IMM is clean; I do not think ERA could have ever become a public listed company in HK. I read the IMM prospectus and I don't have a clue whether it's clean or not...I welcome you to highlight the "we are clean" part of the IMM prospectus and "we are a piece of crap" part of ERA's...
    Jan 24, 2013. 03:42 AM | 2 Likes Like |Link to Comment
  • Joy Global: When Will We See The $1 Billion Write-Down? [View article]
    GreensKeeper, thanks for the praise. I agree with you on the fundamental front. I'm not pitching the JOY short as an investment, I'm pitching it as a trade. I think you would agree that JOY will take a sizable hit when a significant goodwill impairment is recorded. The management loses considerable credibility after not discovering a fraud a year post its acquisition. I think the stock will trade to the mid 50s. The reason I don't think the stock is off more probably relates to the quality of articles published on SA in general, like the other SA article on JOY this morning. No mutual fund manager who owns joy would come to SA looking for investment advice, nonetheless, I think you will see impact in the market as information propagates.
    Jan 23, 2013. 09:59 AM | 4 Likes Like |Link to Comment
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