Shares in Ozner Water, one of China’s largest water purification suppliers, fell 17% before trade was suspended on Monday after a research report claimed the company had exaggerated its production, sales and profits.
The sell report, published by Glaucus Research Group California, a US short-selling group, comes roughly eight months after Ozner Water raised HK$1.14 billion ($147 million) from its initial public offering in Hong Kong.
In the report published February 16, Glaucus valued Ozner Water at between HK$0.27 and HK$0.85 per share, 76% to 92% below Friday’s closing price of HK$3.29. The share price subsequently tumbled on Monday from HK$3.16 at around 1:30pm Hong Kong time to HK$2.63, before being suspended at 2:30pm.
Justifying its lowly valuation, Glaucus claimed the business is “substantially smaller in production and sales, and much less profitable than Ozner claims.”
A spokeswoman for Ozner Water told FinanceAsia that the report contains "errors of fact, misleading statements and unfounded speculations against the company", and said Ozner Water will respond in detail to each of the allegations.
Glaucus said that State Administration for Industry and Commerce (SAIC) filings indicate that Ozner Water has overstated its production, sales and profits.
The report noted that Ozner Water’s IPO prospectus states that the cost of raw materials and components for the manufacture of water purification systems — which account for about 70% of total production costs — totaled Rmb184 million ($29.4 million) in 2012 and Rmb130 million in 2011.
But it said that Ozner Water’s subsidiary, Shangyu Haorun Environmental Technology, manufactured all of its water purification systems during the period in question and therefore should have incurred all of the production costs. And SAIC filings, in turn, show that Shangyu’s production costs were only Rmb7.5 million in 2012 and Rmb12 million in 2011.
“In our opinion, this indicates that Ozner materially exaggerated the scale of its production and business in its prospectus,” the report said.
Glaucus also said that the company’s profits and revenues from its leasing purifiers are much less than reported.
Annual rental fees from leasing water purifiers to corporations and households accounted for approximately 70% of Ozner Water’s reported revenue before their IPO. However, SAIC filings of Shaanxi Haoze Environmental Technology and Shanghai Haoze Water Purification Technology Development — two operating subsidiaries that lease water purifiers — indicate that Ozner Water’s 2011 and 2012 revenues from leasing water purifiers were 54% less than it reported in the prospectus, the report said.
In addition, Glaucus said that rather than generate Rmb18 million in operating profits in 2011 and Rmb98 million in 2012, the leasing subsidiaries were unprofitable in 2011, losing Rmb3 million, and only generated Rmb18 million in 2012, 81% less than reported.
The research firm also claimed that Ozner Water failed to reveal pertinent information about the sale of its business. In 2009, Shu Xiao, Ozner Water’s chairman, chief executive officer and founder, sold his water purification leasing business, including the Ozner-brand, to Hong Kong-listed Chaoyue Group Limited (CGL). CGL reported its water purifier leasing business lost Rmb195 million from 2009 to 2012, including write-downs.
CGL eventually sold the business back to Ozner for HK$78.6 million in September 2012, after the losses forced CGL to write off most of its value, the report said. While this information is disclosed in filings, Glaucus said Ozner failed to disclose the similarities between CGL’s failed water machine leasing business, which it sold in 2012, and Ozner’s reportedly profitable business, which went public in 2014.
IPO
Ozner Water raised $147 million in June after selling some 442 million primary shares at HK$2.70 per unit, the top of its initial HK$2.25 to HK$2.70 range under the joint leads of Goldman Sachs and Standard Chartered.
The company was sold at a discount to its closest comparable, Korea’s Coway, which traded at 22 times 2014 earnings compared with Ozner Water’s ratio of 18 at the time of the June listing.
In addition to its relatively lower valuation, well-documented fears about the safety of China’s water supply made the company look attractive to prospective investors. Residential usage of water purifiers were forecast to jump to 32% by 2017 from 7% in 2013, while commercial usage was anticipated to jump to 28% from 12%, Ozner said in its prospectus.
These factors coupled with the backing of US hedge fund firm Och Ziff Capital Management Group led the deal to be very popular. The institutional book was oversubscribed by 30 times, while the retail portion was 45 times covered. Over 132 institutions participated in the deal, a mix of long-only institutional investors and specialty funds. The majority of investors were located in Asia, followed by Europe and to a lesser extent, the US.
“Ozner has a real working business, produces real products and leases such products to real customers,” Glaucus said in its report.
At the time of the IPO, SAIF Partners, Ares Management and Goldman Sachs owned 19.84%, 13.86% and 8.24%, respectively, of the company. The three remain invested as of February 16, as do Credit Suisse and Och Ziff.
Founder Xiao was the company’s biggest shareholder with a 26.4% stake when it floated its shares.
Short-seller reports
Ozner Water isn't the only company to come under fire recently.
Tianhe Chemicals, raised HK$5.07 billion ($654 million) in its Hong Kong IPO also in June, fell 4.9% before share trading was halted on September 3 after Anonymous Analysis, the short-selling group, gave it a zero target price.
Shares in the Chinese chemical company resumed trading on October 9 but remain down more than 50% from their HK$2.31 price on September 2.
Glaucus also issued a “strong sell” report on March 25, 2014 on China Lumena New Materials, a producer of thenardite and polyphenylene sulphide. Shares remain suspended on the company.
