If we can absolutely rely on the Company's accounting, then NVFY is a definite buy and an especially good addition to a Graham-like net-net basket.
But since we have some reservations about a few factors, especially with regards to the auditors of Nova Lifestyle, we feel it is prudent to be more careful in our recommendation. Therefore, given the currently available information and provided we don't discover evidence of any irregularities, we cautiously recommend NVFY as a buy.
Today, we are reversing our recommendation to Strong Sell.
The reason? We have found multiple irregularities that are highly indicative of fictitious or inflated sales:
Suspicious Activity: Fictitious/Inflated Sales
In its 2017 annual report Nova LifeStyle stated:
"Our largest customers in 2017 were Merlino Lewis LLP, Shanxi Wanqing Senior Care Service, Group and Home Centre LLC, which accounted for 24.3%, 13.7% and 11.5% of our total sales in 2017, respectively. Our two largest customers in 2016 were Shanxi Wanqing Senior Care Service, Group and Actona Company A/S, a global furniture distributor, which accounted for 10.8% and 9.7% of our total sales in 2016, respectively."
Looking beyond the numbers we discovered the irregularities:
Merlino Lewis LLP
This company appears to have been dissolved in 2013 (Source: The Gazette - UK's official public record of statutory notices.(A simple Google Search for "Merlino Lewis LLP" also quickly reveals the above fact.). Therefore, it couldn't possibly have been a customer of Nova LifeStyle in 2017 - four years later after being liquidated and closed down.
This company supposedly accounted for 24.3% of NVFY's total sales in 2017, or approximately $25.9 million (24.3% of $106,494,132 total sales). (Source: Annual report 2017)
We contacted Nova Lifestyle regarding the appearance that Merlino-Lewis LLP was dissolved during periods when Nova Lifestyle claimed sales to them, but did not receive a response.
Shanxi Wanqing Senior Care Service, Group
On December 3, 2015 NVFY announced that it had signed a strategic alliance agreement with Shanxi Wanqing Senior Care Service, Group to operate as its exclusive supplier for furniture design and manufacturing.According to the press release:
"Shanxi Wanqing plans to invest a total amount of 3.0 billion RMB (USD $460 Million) to build a major senior care center in Luoyang, Henan province in China, and Nova LifeStyle will operate as the lead designer and manufacturer for all furnishings in the complex."
We have performed a search for this company in China with no results, i.e. no company by this name (or a similar one, in English or Chinese) seems to exist. Its supposed website is also not functional (wanqing-group.com). (Source: State Administration for Industry and Commerce of the People's Republic of China)
However, we still found a company by this exact name incorporated in Nevada, USA. But it was registered on August 26, 2016 - nearly one year later after the announcement - and looks like an empty shell company, with the same person (Benedict Lo) serving as president, director, treasurer and secretary, and the business license likely expired on August 31, 2017. (Source)
One must ask, why would a private Chinese-based company, operating senior care centers in China, be incorporated in Nevada, USA? Also, the press release states that "construction at the property has already commenced", so the company must have existed before the announcement was made in 2015. However, the (Nevada-based) company was incorporated in 2016 - a year later, and making no sense at all.
We also looked into the supposed CEO of the company, Ms. Shengming Wu. While it's true that she's involved with nursing homes and various other activities (source), we did not once find any interview or coverage about her mentioning the building of a major senior care center in Luoyang, Henan. She is never quoted as the "CEO of Shanxi Wanqing". Also, she lives in Xi'An which is the capital of Shaanxi (note two a's), so one would expect her company name to rather be a reference to Shaanxi instead of another neighboring Chinese province called Shanxi (her living there also goes to show that the Nevada-incorporated company is highly suspicious). Still we were easily able to find information about her other companies, both in coverage about her and in the Chinese registry (e.g. Yangling Hongyang Fruit Industry Technology Development Co., Ltd., or Wu Mama Xing Nong Technology Development Co., Ltd. (source)). Due to the fact that Ms. Shengming Wu is actually involved with senior care the matter becomes a little more complicated and cumbersome, because it seemingly lends truth to NVFY's announcement.
Seeing how big the senior care center was supposed to be, and knowing that Ms. Shengming Wu's mission revolves around nursing homes and elderly care, this should have been her crown jewel - yet nothing is ever mentioned of this project, not in 2015, 2016 or any year later. We only found information about her contracting land in the small district of Yangling, near Xi'An (not in Luoyang, Henan) to build an old-age apartment there within two to three years for 60 people - hardly a $460 million project (this was published just one month before NVFY's press release). There was also a video interview earlier this year (2018) where she at one point says that it is her dream to "build a model nursing home" (thereby surely implying that she has not been involved with building anything of such scale as the supposed major senior care center that was so vividly described in NVFY's press release).
The truth of the matter is that in 2010 Ms. Shengming Wu was actually approached by an owner of an elderly-care home in Xi'An to become its managing director, not a CEO of a "Senior Care Service Group". And according to all our sources, and as is generally described below, this is where she has been ever since. In other words, Ms. Shengming Wu simply manages a small elderly care home in Xi'An.
"In 2010, the owner of Yuhua Senior Apartment learned about Wu Shengming from TV and online, and invited her to manage this old apartment. At that time, she also operated her own company in Yangling Agricultural Science City. After being invited, she handed over the company to others and went to Xi'an alone.
[At] Yuhua Senior Apartment in the intersection of Xi'an North Second Ring Road and Mingguang Road, the reporter saw Wu Shengming, who is known as "Mu Wu". She is the manager of this elderly apartment. Wu Shengming does not live in an elderly apartment, but rents a unit in the neighborhood opposite the apartment. Room, for one person living alone. "I go to the office at 7:20 every morning and work until 6 or 7 in the evening."
"In the past few years, I have been with the old people most of the time, so I can accumulate more management experience." Wu Shengming told reporters that the reason why she [took on] the management of this apartment is that she wants to run a nursing home in the future." (Source, Note: This was published in November, 2015 - right before NVFY's press release - and clearly indicates that she is most certainly not a CEO of a company already building a $460 million nursing home complex in another part of the country.)
And further, in an interview published one year later on December 26, 2016 she is quoted as "the manager of the nursing home". She also states clearly that she has entrusted others to run her own companies while she manages a nursing home of 80 elderly people in Xi'An (Yuhua senior apartment home) and:
"I am just earning a salary. I still have a distance from a charity nursing home. It is estimated that it will take about three years." She said that the reason why she took over this small-scale nursing home is that she wants to accumulate experience. "I will open my own nursing home in the future."
"What I am doing now is mainly grassroots work." This nursing home is very small and the things are fine and complicated. She can only manage with the mentality of learning and spends most of her time in contact with the elderly.
"[In large pension apartment centers] the top leaders only need to take care of the overall situation. But for small pension apartments, which plug is broken today, which tap tomorrow? Broken [items], security issues, electricity problems [...], I have to personally help."
This is obviously a far cry from being the CEO of a multimillion dollar senior-care and hotel-development company that at the time had supposedly already commenced construction of a massive $460 million major care center with housing, entertainment, and medical facilities in Luoyang, Henan while partnering with a large, state-owned entity. And note, the above statement and interview was published one year later after the announcement by Nova LifeStyle. That is, even a year after NVFY announced the project she held the title "manager of a small-scale nursing home" in Xi'An - clearly describing the daily activities of a caretaker in an elderly-care apartment building - and obviously with no mention of any involvement with major developments in Luoyang, Henan, or relations to the state-owned Luoyang Glass.
So, at the time of Nova LifeStyle's press release Ms. Shengming Wu was managing a small apartment home for elderly in Xi'An, while dreaming of running her own nursing home in the future - not being the CEO of a large senior-care and hotel-development company already building a major care center in Luoyang, Henan in cooperation with a giant state-owned enterprise.
In regards to the cooperation with the publicly-traded, state-owned glass manufacturer Luoyang Glass: We read through all the firm's quarterly and annual reports since 2014, and not once was anything mentioned about Shanxi Wanqing or a senior care center project. Multiple searches about any relations between this project and Luoyang Glass further revealed nothing.Considering the supposedly large scale of the project (3 billion RMB or $460 million), it is simply strange that not a single comment can be found about it anywhere outside of the press release by Nova LifeStyle.
All in all, we found no company registered in China by the name "Shanxi Wanqing Senior Care Service, Group", no evidence of any links to Luoyang Glass, and no affiliations with Ms. Shengming Wu (who at the time of the announcement was a managing director of a single elderly home, dreaming of running her own small nursing home in the future in Xi'An - not a CEO of a multimillion dollar senior-care and hotel-development company already constructing a gigantic complex in Luoyang, Henan).
Based on the above, the statement by Nova LifeStyle has no support to be true. A few months before the press release shares of Luoyang Glass shot through the roof - going from 5 CNY in early 2014 to 45 CNY in October, 2015. The life story of Shengming Wu was also quite prominently featured in China. At the very least this Shanxi Wanqing Senior Care Service, Group is a significant irregularity, and in a worst-case scenario at most a complete fabrication or severe distortion of the truth.
Shanxi Wanqing Senior Care Service, Group supposedly accounted for 13.7% of NVFY's total sales in 2017, or approximately $14.6 million (13.7% of $106,494,132 total sales), and 10.8% of total sales in 2016, or approximately $10 million (10.8% of $92,648,195 total sales). That's $24.6 million in total for 2016 and 2017. (Source: Annual report 2017)
We contacted Nova Lifestyle regarding Shanxi Wanqing Senior Care Service, Group, but did not receive a response.
Further Sales Analysis
In addition to the above we briefly set out to verify the numbers for NVFY's other customers. Note that we did not look as extensively at these other customers, so readers should perhaps view the following analysis as more of a strong indication than a definitive identification of irregular activity (although this may apply more to Actona Company A/S than High Fashion Home below).
In its 2016 annual report Nova LifeStyle stated:
"Our largest customers in 2016 were Shanxi Wanqing Senior Care Service, Group and Actona Company A/S, a global furniture distributor, which accounted for 10.8% and 9.7% of our total sales in 2016, respectively. Our two largest customers in 2015 were Actona Company A/S and Encore Sofa Inc., which in total accounted for 11.8% of our sales in 2015."
In its 2015 annual report Nova LifeStyle stated:
"Our two largest customers in 2015 were Encore Sofa Inc. and High Fashion Home which in total accounted for 13.5% of our total sales in 2015. Our two largest customers in 2014 were Actona Company A/S, a global furniture distributor and Dongguan Metals and Minerals Import and Export Company (Dongguan Wu Jin Kuang Ye), which in total accounted for 14% of our sales in 2014."
NOTE: Here is an obvious discrepancy between the 2016 report and 2015 report. According to the 2016 report, the largest customers in 2015 were Actona Company A/S and Encore Sofa Inc. But according to the 2015 report, the largest customers in 2015 were Encore Sofa Inc. and High Fashion Home. We contacted Nova Lifestyle regarding this discrepancy, but did not receive a response.
In its 2014 annual report Nova LifeStyle stated:
"Our two largest customers since 2012 are Actona Company A/S, a global furniture distributor and Dongguan Metals and Minerals Import and Export Company (Dongguan Wu Jin Kuang Ye), which accounted for 14% and 26% of our sales in 2014 and 2013, respectively."
In its 2013 annual report Nova LifeStyle stated:
"Our two largest customers since 2012 are Actona Company A/S, a global furniture distributor and Dongguan Metals and Minerals Import and Export Company (Dongguan Wu Jin Kuang Ye), which accounted for 26% and 32% of our sales in 2013 and 2012, respectively."
In its 2012 annual report Nova LifeStyle stated:
"Our two largest customers are Actona Company A/S, a global furniture distributor and Dongguan Metals and Minerals Import and Export Company (Dongguan Wu Jin Kuang Ye), which accounted for 18% and 14% of our sales in 2012, respectively. In 2011, our largest customer was Actona Company A/S which accounted for 24% of our sales in 2011."
The irregularities are described below:
Actona Company A/S
To the best of our knowledge Actona Company A/S is honestly operating a furniture supplying business with headquarters in Denmark, Europe.Seeing how there was nothing suspicious about the company we decided to contact them and verify if they were actually a customer of Nova LifeStyle.
Here is the email correspondence:
"Hello,I’ve been looking at some furniture companies with respect to a project we’re working on and noticed that you are a distributor (to stores).
Just out of curiosity, do you carry products from Nova LifeStyle (or Diamond Sofa, or maybe Bright Swallow)? It would be really helpful for our purposes to know where you get your supply from. And just in general, where do you originally get your products? Do you manufacture yourself or buy from third parties (and then from who?)?"
Actona Company A/S:
Thank you for your interest in Actona Company.
I can inform you that we produce our own products primarily in China.
"Ok, so you do not buy anything from other parties, such as Nova LifeStyle or Diamond Sofa, etc., or anyone else?"
Actona Company A/S:
We also use third party companies sometimes, but we do not recognize the companies you mention below.
Best regards // Med venlig hilsen
ACTONA COMPANY A/S"
In other words, Actona Company A/S primarily sells and manufactures its own products - something that makes perfect sense since they have their own operating factories in Ukraine and China. Interestingly, according to the company's website, Actona Company's operations in China are located next to Qiaotou town in Dongguan, which is where Nova LifeStyle has had some operations ("Nova Macao [NVFY subsidiary] is a trading company, importing, marketing and selling products designed and manufactured by Nova Furniture (Dongguan) Co., Ltd. [NVFY previously-owned, divested subsidiary]", source). That may have brought Actona Company on to NVFY's radar. But as stated above in Actona Company's response to our inquiries, they do not seem to recognize doing business with Nova LifeStyle (or its sub-brands).
While this does not entirely establish deceitful behavior of NVFY (our contacts at Actona Company may not have been fully aware of all the company's dealings), this still raises some doubts and questions about Nova LifeStyle.
The table below outlines Actona Company's share of Nova LifeStyle's total sales since 2011 (sources: Annual reports 2012-2017):
|Year||%||$ NVFY Total Sales||$ Sales to Actona Company A/S|
|2015||<11.8% (?)*||$108,820,112||<$12,840,773 ($6,420,387)|
*NVFY only gives the total percentage for the largest customers and doesn't detail individual customers' share of sales.
(?) Due to the discrepancy between annual reports we don't know for sure if Actona Company A/S was among the supposed largest customers in 2015.
Numbers in parentheses are half of the calculated sales to Actona Company A/S (we use it as a rough estimate of sales to Actona Company since NVFY doesn't detail the % split between largest customers in 2013-2015).
According to the table above Actona Company A/S supposedly accounted for an amount that approached roughly $78 million (includes other customers in 2013-2015). If we take a rough estimate and say it accounted for half of the stated amounts in 2013-2015 then Actona Company A/S supposedly accounted for nearly $55 million of NVFY's total sales since 2011.
We contacted Nova Lifestyle regarding Actona Company A/S, but did not receive a response.
High Fashion Home
The High Fashion Home company referred to by Nova LifeStyle appears to be a furniture store in Houston, Texas, and like in the case of Actona Company A/S we found nothing suspicious about this customer.
We contacted High Fashion Home to inquire about their relationship with Nova LifeStyle (High Fashion Home was NVFY's second largest customer in 2015, according to the 2015 annual report). Here's the answer we got:
We've been looking at some furniture companies with respect to a project we're working on. I was curious about your products and was hoping you could provide me with some information regarding them.
Do you manufacture your own products? Or do you source from other manufacturers? If so, which ones?
We've been looking at Nova LifeStyle's products - have you bought from them or had them manufacture for you? (or any of their brands, such as Diamond Sofa, Bright Swallow, Colorful World, Giorgio Mobili, Ming Ma, Nova QWIKI, 1Sofa, Wo Zhi Bao, Nova Macao, or Nova Dongguan)?"
High Fashion Home:
We do not manufacturer our own products, we do source from places like Four Hands, Bernhardt, McCreary Modern, Tov, Nuevo, etc... We do not source from the ones you listed.
High Fashion Home"
According to NVFY's 2015 annual report, Encore Sofa Inc. and High Fashion Home accounted in total for 13.5% of NVFY's sales, or approximately $14.7 million. If we take a rough estimate and say High Fashion Home accounted for half of that then High Fashion Home supposedly accounted for around $7 million in 2015.
We contacted Nova Lifestyle regarding High Fashion Home, but did not receive a response.
In total, sales to Merlino Lewis LLP and Shanxi Wanqing Senior Care Service, Group for the years 2016 and 2017 were approximately $50.5 million. Sales to Actona Company A/S may have amounted to a similar number. And High Fashion Home may possibly have accounted for around $7 million.
NVFY mentions a few other customers in the annual reports since 2011. We reached out to them but are still awaiting responses. Those customers all seem legitimate, but in light of the above one must at least question if they were actually customers of NVFY and if there are more irregularities at Nova LifeStyle.
In addition to the above indications of irregular activities there are a few other concerns that surely raise red flags and help give a clearer picture of Nova LifeStyle:
Diamond Bar: NVFY acquired Diamond Bar in 2011 for just $450 thousand (Source: Annual Report 2011). Now in 2018 Diamond Bar supposedly has net worth of at least $20 million (according to covenant requirements, see our earlier article). This is nearly 50-fold increase in just seven years.
Shareholder: The Company has one significant (principal) shareholder, Steven Qing Liu, with 36% shareholding.
Reverse Merger: NVFY filed its initial public offering through a reverse merger.
China: NVFY's origins are in China, which historically has been very closed and difficult to assess. The Company is also small with low institutional ownership, which may raise the required level of trustworthiness and due diligence.
Hype: The Company has been drawn to hype, e.g. with somewhat questionable ventures in Blockchain technology and intentions to finance and promote an academic e-commerce platform (source).
Accounts receivable: According to the financials, the Company has made most of its sales on credit while taking over 160 days to collect outstanding sales (source). This has led the receivables account to balloon to approximately 67% of assets in 2017 (source). High level of accounts receivable is generally a cause for cash-flow concerns but it can also be an indication of fictitious or inflated sales.
To continue reporting fictitious or inflated sales (and receivables) and likely avoid investor scrutiny a company must either continue to grow its revenue or find alternative ways to justify a large account; e.g. by adjusting or manipulating other accounts (perhaps growing inventories, fixed assets, or increasing advances to suppliers, as we saw NVFY do in Q3 2018), increase bad debts allowance, or vary the sales levels (e.g. drive sales fluctuations between regions and quarters; sales might drop in one quarter within one region but are replaced the next one with new sales, thereby deceiving and drawing attention away from the receivable account) - all to avoid "cashing in" the fictitious receivables.
Questionable auditors: Centurion ZD CPA has been NVFY's auditor since 2016. It has audited many small, Chinese companies (often established through reverse mergers) that have listed (and delisted) in the US public and over-the-counter markets (see filings by Centurion ZD CPA). Centurion ZD was formed in April 2016 by a merger of two independent CPA firms, Dominic K.F. Chan and AWC Limited (previously Albert Wong & Company; Albert Wong is now banned from being an associated person of a registered public accounting firm). And, in November 2017, there was a disciplinary case that involved Centurion ZD.
We have found multiple evidence of serious irregularities that suggest Nova LifeStyle has reported fictitious financials since 2011 - inflating sales for the years 2016 and 2017, totalling approximately $50.5 million. And possibly over $100 million when accounting for Actona Company A/S since 2011 and High Fashion Home in 2015.
The Company has done this by booking sales to both a dissolved company (Merlino Lewis LLP) and a nonexistent one (Shanxi Wanqing Senior Care Service, Group) (possibly creating a shell company to deceive investors).
Merlino Lewis LLP was dissolved in 2013, but in 2017 NVFY recorded sales to the company of approximately $25.9 million.
We found no information about Shanxi Wanqing Senior Care Service, Group in the Chinese State Administration registry. Its website is nonexistent and we find the press release issued by Nova LifeStyle on December 3, 2015 hard to believe - asserting doubtful statements by assuming a connection with a publicly-listed, state-owned glass manufacturer (Luoyang Glass) and a known personality in the elderly-care and nursing-home sector. NVFY recorded sales to Shanxi Wanqing Senior Care Service, Group of approximately $10 million in 2016 and $14.6 million in 2017, totalling $24.6 million.
We contacted other customers of Nova LifeStyle to verify their relations with the Company. Of the ones that have responded the following do not seem to recognize doing business with NVFY: Actona Company A/S (possibly accounting for sales of around $55 million since 2011), High Fashion Home (sales around $7 million in 2015). Totalling over $60 million.
Other concerns, such as high levels of accounts receivable, reverse merger listing, a significant shareholder, questionable auditors, and more, raise red flags that further shine a light on the questionable practices of Nova LifeStyle.
We contacted Nova LifeStyle regarding all these irregularities, but did not receive a response. Updates will be published here if NVFY contacts us.
We believe this will result in a delisting and share-price drop to near zero.
We reverse our recommendation to Strong Sell.
Disclosure: I am/we are short NVFY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.