Posted by: donmihaihai | August 29, 2010

REC fought a war in 4Q2010!!!

REC reported its report card for FY2010 on 24/08/10. From the financial statements, it looks like REC fought a tough war in three fronts in 4Q2010.

These are some number that might ring a bell.
Current share price = $0.275
52 week low = $0.275
52 week high = $0.62
Number of share outstanding = 2,580,423,702.
Market capitalisation range from $710 million to $1,600 million.
Net profit after tax FY2009 = $51.59 million, FY2010 = $55.82 million
Shareholder equity include non controlling interests FY2009 = 539.53 million, FY2010 = 598.12 million

Western Front – Other operating income
Q1 to Q3 2010 = $2.478M
Q4 2010 = $37.659M
FY2010 = $40.137M
Reason given for Q4 $36.7 million — Relates to a government grant received from Langfang Development Zone Treasury Authority as funds for education development in Oriental University City (“OUC”)

Impressive!!! Getting a $36.7 million grant from local government. That is about RMB 183 million.

Things to consider
1) Why there is no announcement? REC used to be so keen to announce any immaterial news. This is significant.
2) LAndfang Development Zone Treasury Authority . Landfang who? This name should ring a bell; the whole thing about OUC has been Landfang, Landfang and Landfang.
3) Lastly, why Q4?

Eastern Front – Partial received of money from sale of land in OUC to unknown parties.
Investment properties as REC call it was sold in FY2009. In FY2010, REC received;
Q1 to Q3 = ZERO
Q4 2010 = $58.11 million.

Questions to ask
1) Actually really nothing much except —– why Q4 again.
5) And who are these parties is it Landfang again and when will it received the remaining proceeds?

The main front – Investment properties
In 4Q 2010, yes it is 4Q again, REC investment an additional $81.42 million into OUC.

Things to consider
1) What investment properties? REC was selling Investment properties in OUC in FY2009 and has not received all money up till 4Q2010. REC was unable to pay for the purchase of OUC and had to restruct payment timeline.
2) Why there was no announcement for a company like REC that is so keen to seek publicity. Next is there a requirement for announcement under Chapter 10 of listing manual. At $81.2 million, it was still greater than 5% of the highest market capitalisation REC every get in the past 52 weeks. Not to say the other obverse.
3 Buying from whom?

Cut out all the craps. What do I think what I see? Playing with account. As simple as that and with someone helping. The amount collected from grant and partial collection from sale of investment properties was dumped into investment properties. The possible reason on why is it happening is shifting problem, questionable receivables or sales or uncollectible receivables to Fixed Assets, investment properties in this case.

I don’t care what REC reputation is but it is not a saint. Unaudited financial results and audited financial of FY2009 show something. Will there be good material different between unaudited results and audited results when annual report is out? Let’s see.

Financial Shenanigan
One of way company does with fraud is to shift bad receivables or expenses into Fixed Assets. I think shifting expenses is much easily than receivables but it is the same because once shifted, those stuffs won’t be hurting P&L statement at one goes. At worse, it is just depreciation or amortisation on yearly basis. In case of investment properties, it is even better as no depreciation is required as it was base on market valuation. Now do i believe in that valuation?

Unfortunately, REC is not the only one that I think I am seeing shifting of stuffs into Fixed Assets. It is possible that Tat Hong is doing the same thing as well.



  1. Hi Donmihaihai,

    I invite you to post on, a forum dedicated to value investing. Thanks.

  2. Thanks

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