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Zack Buckley
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Zack Buckley is the founder and President of Buckley Capital Partners, a value-focused long/short equity hedge fund. BCP employs a fundamental approach that is research intensive and concentrated, generally with 10-15 core positions focused primarily in small cap equities. While BCP is... More
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  • Interview with Michelle Zhu CFO of CSGJ

    Interview with Michelle Zhu CFO of CSGJ


    ·       Can you give me some background for the company?


    China Shuangji (OTC:CSGJ) is based in Shandong province with 3 plants in operation and 1 new plant in construction, 54 million in sales, and 4.4 million net income in 2009.  It became public in the USA in 2008. The company was taken over by the management team in March 2002 (previously a state owned enterprise). Currently we have 1.5 million tons capacity per year, 500,000 tons each for 3 plants.  With the completion of the Zhaoyuan facilities, we should have 2.5 million tons of production.  The new plant will cause a 79% increase in revenue and 71% increase in net income.  Given full 2011 revenues and expected margins, CSGJ has a forward pe of 2.1. 


    ·        I see the company is dual listed, how does that affect the shareholders and what percentage does the US listed OTCBB company comprise of the company?

    The total shares outstanding is not affected by the dual listing.  It is listed on the lowest grade exchange in Germany, which is like the pink sheets. This enables European or other international investors to buy and sell in that time zone, but as I understand it, if it is traded over there, Euroclear will buy or sell an equal number of shares on the OTCBB.  Basically, the only shares outstanding are the ones issued by the China Shuangji Cement, Ltd. (CSGJ OTCBB). 

    ·        So what will you do with the 3.7 million un-secured non-convertible loan?

    We are using the money to acquire the final pieces of equipment and doing the finish work to complete our new 1 million ton capacity plant in Zhaoyuan.

    ·        When will you start production on the new plant?

    3-4 months to finish the plant

    ·        When will you reach full capacity?

    1st 1-2 months is 60% capacity, after 2-3 months it will be at full capacity

    Where do you see the company in 5-10 years? What type of growth do you foresee?


    Currently we want to get this plant online.  In a year we will upgrade another plant at Longkou. Longer term plans are contingent upon the ability to grow organically.  If we see other opportunities to buy at good prices, we will look to do that.  We don’t plan to grow at any cost.  Mr. Song the Chairman had offers from investors to buy stock at cheap prices, but he rejected them because the shares were priced too low.


    ·       Do you have plans to raise capital in the future?

    Right now there are no plans to raise capital,  we need to get the plant online and that is what we are focusing on.  If at a later date the stock price is at a good price, we might consider raising money, but with the main goal being to increase EPS.


    ·       What are your various segments?

    3 operating facilities and 1 under construction

    2 in Hainan - a large island/province in the south.  Hainan is very fast growing. 

    The other plant is in Longkou, a 45 minute drive from Zhaoyuan, own 51%.  In another 3-4 months, the Zhaoyuan facility will be open. 

    The 3 operating facilities make 500,000 tons, which is about 20 mm USD.  The Zhaoyuan facility will have about a million metric tons, which is about another 40 mm USD in additional sales. 


    Who are your main competitors?

    Cement is localized so it cost money to import it.  There are other cement producers in Shandong province, but it is a fragmented industry.  The shipping cost adds to the expense. It is not like a computer that is low cost shipping.


    The government is behind the facility. Local contractors want to use it.  Local cement is always cheaper than anything


    How do you know the factory will continue to do well?

    Government officials are all friends and the government favors the Chairman, the Chinese government doesn’t want overcapacity in these areas. 

    Older cement plants pollute more, are less energy efficient, and also the government wants fewer cement plants instead of smaller ones.  5,000 cement plants in china and they want to reduce to 3,000. 


    ·       What size is your auditor?

    Bernstein and Pinchuk (BP Accountants) is under the BDO alliance, which means they adhere to BDO standards. they have about 40 US- listed Chinese companies.  They are well known and respected among almost all investors in the US listed China space.  I have never heard an investor say anything bad about them.  In this space, they are the cream of crop, without the high price.  Their audit prices range 115,000-150,000 including K’s and Q’S (full year).  We specifically chose them for the low cost and the high quality.  They have offices in Guangzhou and Beijing, with about 40 people on the ground in China.  They usually spend 4-6 weeks for the audit with a four person team.  They visit all the factories and do inventory counts.



    ·       If you were investing in China, how would you avoid fraud?

    Look at the audit firm, look at how the audit team does the audit, the audit teams need to look at the documentation, and make sure that is one of the biggest issues.  Documentation is vital in an audit, if there are no supporting documents, you should know that.  Companies must have a reputable auditor like Bernstein and Pinchuk. 

    ·       If you had to invest in a small cap US listed publicly traded Chinese company other than your own, what would it be?


    China green agriculture (NYSE:CGA) and  Yongye (NASDAQ:YONG)






    Disclosure: LONG CSGJ
    Tags: CSGJ
    Aug 13 1:05 AM | Link | 1 Comment
  • Interview with Marco Ku, CFO of CMFO

    I had the chance to sit down with Marco Ku, CFO of CMFO this morning. 

    Zack: What is Hi power? What is in it?

    Marco: Hi power is an algae extract. It is colorless, has no smell, and no taste.  We put other things into it into a can with the algae to make the Hi Power. 

    What were the total revenues and net income so far by quarter for Hi Power?

    In 2009,  Qiu  had 7.5 million for 2 quarters, about 4.5m in Q3 and 3.0m in Q4.  The reason for this drop in q4 was that q3 is, the summer, is peak selling time.  Q1 2010 revenue was 2.7 million, Q2 is currently over 7 million (latest update from sales team). The rest of 2010 will be about 10 million which should be able to achieve without doubts. The net margin is 20-25% for these products. 

    Explain Hi Power to me in terms of:

    Total number of cans sold?

    In 2010, we should sell approximately 60 million cans. 

    Price Per can?

    3.50 CNY per can in retail. 2.30 CNY is the wholesale price.  That is about $.34 USD for the wholesale price.

    How does the distribution work?

    We hired sales expertise from other beverage companies. They have good relationship with distributors in respective areas. We leverage their experience and relationship to spread out our products quickly through strong distributors with extensive network.

    How many retailers?

    In Fujian, over 10,000 retail points at this moment which include retail food stores, convenient stores and strong concentration on small “corner” stoes, bars, restaurants.

    I did a little math:

    10,000 retail points with 60,000,000 cans sold means 6,000 cans per retail point?  

    So in cans per day?

    16.5 cans per day per retail point.  It is also important to consider they can be sold in larger cases, such as 24 can cases. 


    Approximately 1.5 cans per hour

    We have consulted market players for their expertise.  Marketing plan is on the benefits of algae. 

    I am trying to look at the economics of the business on a per can basis.  Let's try an explain this to a 3rd grader

    COGS of the can?

    Packaging material is 60-70% of the total cost.  The rest comes from overhead, extract, and water.

     So if the wholesale of a can is $.34, this would be about $.20 per can in packaging material

    Raw material and packaging cost per can?


    Sales and marketing cost per can


    Fees paid to bottlers per can?

    About 0.2 RMB per can. We provide them with can, extract, flavor and packaging box. They do the bottling according to our formula and then pack into boxes.

    Net Profit margin per can?


    The Gross profit is 40%, the bottom line is 20%.  In between the SG&A will be 20%, most of it will come from sales and marketing. 

    Explain the bottlers? Who are your bottlers? Can I speak with them about the volume they have been producing?

    The bottlers are a private company, right now we have bottling facilities to work with us. We can arrange a visit when you are here. 

    Who are the auditors?

    ZYCPA.  We would allow you to consult them. They both come from Hong Kong and KPMG.   

    What is your response to ZYCPA being in a number of other frauds besides being an auditor for CMFO?

    I knew of this last year.  We are still waiting for the court to judge the guilty parties.  The auditors (ZYCPA) still claim to be innocent.  Our promise to investors is that we will switch to a different auditor.  New auditors will be used for the 2010 financial statements. Most likely a 2nd tier firm which would be a top 10 firm. 

    Why were your SAIC documents different from your SEC documents?

    It is tedious to file with the government.  They need to supply documents, ask for specific things, and it is very difficult.  Most companies try to use an agent firm to file these with the government.  I didn’t

    do it myself when I ran my personal business based in Beijing some years ago because it is too tedious to do all the filing.  If you pay an agent it can be done without headache in a few days.  CMFO used an agent, paid a fee and got the business license done.  In the process, the agent doesn't care whether you earn how much or whether you lose money.  They just care whether your company is in operation.  The agent firm doesn't ask us for audited reports.  y.  We pay the fee and get the license back.  When I realized that the public can somehow access SAIC documents, ,we  immediately asked my team to do the filing on their own instead of agent firm.  That is why in 2009 the numbers will be consistent once realized people could go see their numbers. 

    Should there be differences between SEC and SAIC for accounting

    They will be slightly different for several reasons.  We filed based on a company basis for the PRC versus a consolidated basis for the SEC . Because the PRC documents are audited under PRC GAAP, there will be some small differences.  The SEC is primarily revenue recognition, because  US GAAP uses revenue recognition, while PRC GAAP is based off of invoice, where in China income is based off of the collection or the receipt.  The difference can be anywhere between 5-10%. 

    Why is the SAIC not more furious with your reporting?  I can't imagine the Chinese government likes being lied to?

    Probably, to be fair I have no idea.  We don't deal with the agent frequently.  We just tell them I need a new business license.  The most important is the filing with tax authorities. From what  we understand, SAIC does not focus about the earnings or the P&L statement, they just focus on the operations the operation of the company and require a set of other supporting documents to demonstrate this. . 

    Why didn’t they just develop a beverage themselves?

    We don't have the technology, how to extract those materials from the algae, it is not easy to redo.  it took them a couple of years to develop .

    So why was this valuable patent sold for less than $10,000?

    Their responsibility is to develop a tech and sell it to companies to commercialize it.  At the beginning, they don't know if it will be a successful project.  They have lots of formulas and patents, this is only one of them.  Mr Qiu is a very smart guy, he chose a very good one and he has been very successful.  At the beginning, no one could tell that it would sell 20 million in the first year.

    Why was the capital raise necessary? Given the profitability of business and current plans for cap ex, couldn’t they have financed themselves?  Did they just want a warchest?

    After the acquisition, our cash level would have been down to a very small level.  And we thought it was a good time to do the raise in order to replenish working capital needs.  If we wanted to purchase raw materials in bulk, we would have to use a bulk of cash to turn them into inventory. 

    Let's walk through the allegations from the acquisition:

    So it only cost 8,776 for the algae-based drink know-how?


    Why was no rent paid for office space?

    Actually, at that moment of time we did not have a relationship.  We provided limited office space which the young company used to focus on sales and book customer meetings on the phone and via e-mail.  We did this to build a relationship and know more about the operations of the new business because we were very interested in that business.

    Why did CMFO apply for the trademarks?

    Mr Qiu would like to apply for a trademark, and had little expertise, know how or time to do it  himself.  It is a pretty tedious process and requires a lot of forms, suppoting documents, time in the TM offices and frankly,  a good deal of follow up. .  We have experience with applying for trademarks, and so we said we could to do it for Mr. Qiu, it was only a few thousand rmb. .  It was similar to renting space in that it helped us further build the relationship. 

    Why $414 for PP&E? What comprised that $414? I would like to add that Coke, while a somewhat different business model, has 9.5 billion in PP&E so the Sales:PP&E ratio is approximately 3:1. Pepsi has 12.7 billion in PP&E compared to 43 bil in sales, so the ratios are similar for both companies. 

    The $414 could be a single computer or a printer, Hi-Power does't need any equipment.  We only need a few computers for Hi Power, some of the people bring their own.  Most employees go out to the distributors and points of sale all the time, they seldom go to the office.  They don't really need those fixed assets like bottling plants, distribution centers, huge office space, trucks, vending machines etc.   It would be nice to get there one day,  but this level of fixed assets was the reality of the business at the time we audited it.

    A lot of companies in China will hire those bottling facilities to work with them.  Most bottling companies have that kind of arrangement.  Going forward we will have our own facilities and some of them will use the OEM facilities.  At that point it will be a mature company. Coke and Pepsi will need different things because they are different businesses.  We just need office equipment and computers. 

    Is it basically a sales and distribution company? With a 3rd party bottler and 3rd party manufacturer

    Yes.  We have the formula, trademark, and brand name, and use the OEM to do the beverage and what you have to do is select distributors to use so that your product can be spread to multiple retail points. 

    Why is their only 11,000 in inventory? What was it made up of? Coke inventory is 2.3 billion with sales of 31 billion so the ratio is 15:1 in terms of sales:inventory.  Pepsi inventory is 2.6 billion with 42 billion in sales.  So coke and pepsi have similar ratios.

    The 11,000 is for raw materials.  We use just in time methodology for our supply chain.  We just purchase the raw materials including cans, extract, and packaging materials and send them to the 3rd party bottler.  We only buy when we receive purchase orders.  So we then send raw materials to the OEM facility.  When production starts, the raw materials will be used up. After production, we do not have really any inventory.  In addition, we and our bottlers do not have space for many raw materials.  The raw materials are readily available in the marketplace so we can purchase them quickly.   

    The most expensive raw materials are the packaging materials.  Apart from that, it will be the extract for the algae.  The raw materials are cheap, and when we have to order cans for a production run, we submit the order and they deliver they empty cans to the bottling facility. The third party bottler doesn't allow us to store a lot of raw materials into their warehouse. 

    So you purchased Hi Power for about 30 times book value?  For reference coke is at about 5 times BV now.  Book value is not that meaningful in this acquisition as we’re not buying its assets but all about intangibles like formula, brand, distribution network and people.

    Our projected eps in 2010 makes the forward pe ratio about 8 times.  If you use 2009 numbers then yes it would be 30 times book value.

    CMFO can sell 60 million cans, how can this happen in the first year without any experience in the beverage industry or established branches, offices, and locations?

    In China, another example is the Wang Lao Ji herbal drink.  I know them because they only have a single product in China. The revenue is 18 billion RMB, 2.5 billion USD.  I just want to tell you that the drink market is too huge for us to capture.  There is 1.3 billion people, so actually the market is too huge.  The drink market is fast moving in terms of the consumption market.  It is an unpredictable. 



    Disclosure: no position
    Tags: CMFO
    Jul 01 9:10 AM | Link | Comment!
  • Interview with CNBI Chairman and CEO Huitian Tang and CFO Shelly Zhang

    I was able to speak with Chairman and CEO Huitian Tang as well as  CFO Shelly Zhang of China BCT Pharmacy Group (OTCPK:CNBI).  China BCT Pharmacy Group, Inc. is engaged in pharmaceutical distribution, retail pharmacy stores and manufacturing of pharmaceuticals and medical-related products through three subsidiaries: Liuzhou BCT, Hefeng Pharmaceutical, and BaicaoTang Retail, each of which is located in Guangxi Province, China. CNBI is different from most other pharmaceutical companies, such as LTUS, CHME, or WKBT in that it is located primarily in Southwest China, where most other pharmaceutical companies are in Northern China. They are the largest pharmaceutical distribution network in southwest China with 8,000 products across sales channels and 4,000 suppliers. China Baicaotang has over 125 -store retail pharmacy chain. With rapid growth, a strong balance sheet, and a pe of 8, this is a company worth watching.  China Baicaotang is planning to upgrade to a senior stock exchange this year.

    Where do you see the company in 5 years?

    With its experience and track record, we see China Baicaotang as a consolidator in the pharmaceutical distribution industry, partly supported by demand created by the China BCT retail pharmacy stores.

    Our corporate growth strategy focuses on leveraging economies of scale supported by aggressive merger & acquisition activities in retail pharmacy network and reinforcing synergies through vertical integration by expanding the pharmacy and distribution networks. On the retail side, we will adopt a more modern drug store trend. In 5 or 10 years period, we see ourselves as China’s Rite Aid or CVS.  


    What are cnbi’s competitive advantages?  What makes these sustainable over long periods of time?

    With the largest wholesale network in the region, we work with 4,000 suppliers to offer over 8,000 products, include 3,000 under exclusive contracts within the province. Similarly, each of our retail pharmacies offers more than 3,000 products across a range of price levels in mostly under the radar second and third tier cities in Guangxi.

    We believe this is a scalable and replicable business model and plan to expand and growth through new store openings and acquisitions over time to maintain our competitive edge in providing product breadth and depth, as well as expand our regional footprint in Guangxi and beyond.


    How do you plan on expanding outside of Guangxi Province?


    In the wholesale segment, we will focus in Guangxi province and strengthen our competitive advantages in Guangxi.


    In the retail segment, after we build out a comprehensive drugstore chain in Guangxi province, we plan to expand to other provinces, such as Guizhou, Sichuan and Yunnan. 

    In our pharmaceutical manufacturing segment, we currently sell our products nationally and work on strengthening our distribution network inside of China. 

    Can you explain your main competitors a bit more?

    Our competitors are mostly smaller, regional competitors in Guangxi province. China BCT is in the process of acquiring local pharmacy chains as a market consolidator.  In April, we acquired 11 pharmacy stores. We will invest a total of approximately 49,000 to upgrade to the company's operating standards.  The renovation has already begun and is expected to be completed by July. 

    On a national basis, China Nepstar, Shenzhen retail pharmacy, and Hunan Laobai Xing Pharmacy are some of our competitors.  Our competitive advantage against our competitors includes that we have different target markets.  Most of our big competitors look at first-tier cities, which increase operational risk. For example, Nepstar has a gross profit margin at 45%, and net profit is at 8%. But we have gross profit at 30%, and net profit at 15%.  

    Why do your customers choose you over the competition?

    In our retail pharmacy business, our diverse product offering and convenient store locations are among the key attractions. A typical BCT retail store carries close to 3,000 different products, with the mix regularly reviewed and refined by store managers to ensure timely response to changes in customer demographics, habits, product preferences, etc.

    In our pharmaceutical distribution business, we operate one of the largest networks in southwest China. In our wholesale distribution channel, 1,200 of the 4,000 suppliers (including Hefeng) and 3,000 out of the 8,000 products are under exclusive wholesale contracts at provincial level. These exclusive product contracts cover 95% of the drugs listed in China’s 307-product National Basic Drug Catalogue, providing affordability to ensure adequate patient access to these essential medicines.

    What were the terms of the acquisitions for pharmacies?

    On average, we pay around 500,000 RMB for the pharmacies, which is around $70,000 per store.  We pay 4-5 PE multiples according to their profitability.

    Do you expect to raise additional capital through the equity markets?

    Yes, we will plan on doing this after up-listing to a major exchange.

    How long does a retail store usually take to reach breakeven?

    The average payback period per each newly acquired store is approximately 2.5 to 3 years.

    What will be the capex for the modernized logistics center? 

    15 million to 30 million USD.



    Disclosure: Long WKBT
    Tags: WKBT
    Jun 25 10:40 AM | Link | Comment!
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