Release Date: 25 March 2015

Shenguan Holdings
A New Hope

Ticker:

829.HK

Market Cap:
Recent Price:

HK$7.6 billion
HK$2.30

Target Price:

HK$3.68

Expected Return:

65%

Dividend Yield:

5.1%

Conclusion:

Strong Buy

Since 2011, Shenguan has been the target

of a series of fraud allegations. These
allegations have scared off investors and
collapsed the Companys share price.

In reality, Shenguan is a highly profitable

company that has been wrongly accused
of fraud. We have used SAIC filings,
customer disclosures, and irrefutable tax
data to independently verify its accounts.

We believe the contents of this report will

clear Shenguan of all substantial fraud
allegations and renew market interest in
its unjustifiably depressed share price.

You should have expected us

anon.analytics@neomailbox.net
Twitter: @anonanalytics
www.anonanalytics.com

Disclaimer
Neither Anonymous Analytics nor its principles is a registered investment advisor or otherwise licensed in any
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opinions, which we have based upon publicly available facts and evidence collected and analyzed including our
understanding of representations made by the managements of the companies we analyze, all of which we set out in our
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to the issuer. However, we do not represent that it is accurate or complete and should not be relied on as such, in
particular, Shenguan Holdings (Shenguan or the Company) and insiders, agents, and legal representatives of
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Dont be stupid and invest in the public markets unless you are prepared to do your own homework and due diligence.

Executive Summary
Since 2011, Shenguan has been the target of a series of fraud allegations and questions over the
accuracy of its accounts. These regular and repeated accusations have caused investors to steer clear of
the Company and triggered a multi-year decline in its share price. Today, shares of Shenguan are trading
at all-time lows and valued as a high-probability fraud.
However, this report will provide irrefutable proof that Shenguan is a real and highly profitable
company, that its accounts are real and independently verifiable, and that the numerous fraud
allegations against the Company have been the result of contrived or incomplete research.
Our extensive due diligence is based on tax confirmations, SAIC filings, customer verification, and site
visits, specifically:

We have obtained tax confirmations which show that Shenguans reported gross margins and
profits are accurate. These tax confirmations cannot be faked or forged by the Company, and
are the silver bullet that completely destroys any further allegations of fraud against Shenguan.

We have corroborating evidence based on SAIC filings and independent disclosures by

Shenguans largest customer that its reported revenue is accurate. We also learned through
industry interviews that Shenguan is the preferred supplier of collagen casings to Chinas largest
pork companies, including WH Group, Yurun, and Jinlui.

Site visits to Shenguans three production bases show large, well-maintained facilities with
bustling activity. Our team observed substantial cargo activity and worker presence during their
observation. Locals described Shenguan as a very profitable company thats always looking for
workers and runs three shifts a day to meet demand.

Despite similar growth profiles, Shenguan trades at 10.6x 2015 earnings while its closest global
competitors trade at 20x. This unjustifiable discount is based on an entirely false market assumption
that Shenguan must be a fraud because it is so profitable.
Given the evidence presented in this report, we believe Shenguan will be cleared of all substantial fraud
allegations, and we expect the current discount to disappear as Shenguan begins to trade more in-line
with its global peers.
Even assuming a 17x multiple on 2015 earnings, we value Shenguan at HK$3.68 per share. This implies
60% upside to the current share price of HK$2.30. In addition, shareholders are rewarded with a 5%
dividend yield for a total return of 65%.

Introduction
Shenguan Holdings (829.HK) is the largest manufacturer of edible collagen sausage casings in China.
In 2009, the Company raised HK$1.2 billion (US$148M) through a Hong Kong listing. Over the course of
the following two years, its share price rose nearly 300% and finally peaked in 2011.
Since then, a series of fraud allegations and questions over its accounting have hit the Company. 1,2,3 For
its part, Management has consistently done a tragically poor job of defending the Company, and
consequently, Shenguans share price has experienced a multi-year decline from which it has never
recovered:

Source: Google Finance

Shenguan has always been an easy fraud target. In no small part, Management has brought criticism on
itself thanks to the Companys poor operational disclosures and unsophisticated market communication.
Like most Chinese companies, Management has been slow to inherit the responsibilities of transparency
and proper corporate communication that come with being a public company.
But perhaps the singular and most obvious reason Shenguan has consistently fallen victim to fraud
allegations are its financial statements. Among other curiosities, Shenguan reports gross margins of 60%
and net margins of 45%, which intuitively defy belief for a company engaged in sausage casings.
We know from experience how suspicious Shenguans reported margins look. Two years ago, they were
the trigger that led us to investigate the Company for fraud. But after extensive due diligence we came
away with the surprising conclusion that Shenguan is a real company and its reported financial
information can be independently verified.
Since that time, Shenguan has only experienced more fraud allegations. Today, its share price is at an alltime low and doubts over the Company are at an all-time high. Given the immense suspicion facing the
Company, we decided to publish the results of our due diligence findings which will not only exonerate
Shenguan, but also show why it is a real and deeply undervalued company.
1

http://asiavalueinvesting.blogspot.ca/2011/07/shenguan-holdings-group-tkr-829-hk.html
http://www.citics.com.hk/file%5Cresearch%5C777_CSI%20Equity%20Daily%204%20Feb%2013.pdf
3
http://www.emersonanalytics.co/downloads/Shenguan-HK_0829-StrongSell.pdf
2

Gross Margin and Profit Confirmation

Fraud accusation #1: Shenguan has substantially inflated its gross margins and profitability.

Without doubt, Shenguans reported margins have invited the most suspicion and controversy over the
years. This is understandable Shenguan operates in the unexciting business of sausage casings, yet
reports gross margins averaging 60% and net margins averaging 45%. Prior to our research, we were
highly skeptical of these margins. Furthermore, we know that any report on Shenguan needs to address
the accuracy of these margins head-on.
First, we would like to note that 60% gross margins are not entirely unheard of in the sausage casing
industry. Shenguans closest global peers are UK-based Devro and Spain-based Viscofan. Among the
three, Viscofan reports the highest gross margins, followed by Shenguan and then Devro:
Exhibit 1
Peer Gross Margin Comparison
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2010

2011

2012

Shenguan

Viscofan

2013

2014

Devro

Source: Company reports

One of the explanations for these margins is the fact that the core raw material for collage casings is
cattle inner skins. These skins have limited alternative uses, which gives large casing producers like
Shenguan considerable bargaining power over fragmented suppliers. Accordingly, high gross margins
are not entirely unusual for the industry.
In any case, given the central role that these gross margins play in fraud allegations against Shenguan,
we have done more than simple peer analysis. We have obtained tax documentation that irrefutably
proves that the Companys reported margins and profits are accurate.
This tax documentation will not only independently verify Shenguans financial information, it is also the
silver bullet that completely destroys any further allegations of fraud against the Company.
4

Tax Payments: the Silver Bullet

Shenguan has three production factories, all based in Guangxi Autonomous Region. Each year, the
government releases a tax list of the top tax-paying companies in the region. In 2012, Shenguan was
ranked the 18th highest taxpayer in Guangxi. In 2013, Shenguan was ranked 24th:

2012 Tax List

2013 Tax List

Source: http://bs.gxgs.gov.cn/art/2013/6/6/art_100538_233743.html & http://gxrb.gxnews.com.cn/html/2014-01/18/content_924160.htm

As background, Guangxis GDP in 2014 was approximately US$250 billion4 which is comparable to the
GDP of Finland. In that sense, being ranked as one of the top tax-payers in the region is a no small
accomplishment.
Unfortunately, the tax lists only provide the names of the companies and their relative rankings, but not
the amount of taxes actually paid. However, we can extrapolate how much in taxes Shenguan paid in
2012 and 2013 by comparing its placement on the list with other companies on the list that also disclose
tax information.

https://www.dbresearch.com/servlet/reweb2.ReWEB?addmenu=false&document=PROD0000000000247521&rdS
howArchivedDocus=true&rwnode=DBR_INTERNET_ENPROD$RMLCHPM&rwobj=ReDisplay.Start.class&rwsite=DBR_INTERNET_EN-PROD

2012 Tax Payments

In China, there are two major taxes:
1. A 17% VAT (Value Added Tax) is paid on sales less cost of goods sold (gross profit),5 and
2. Income tax on pre-tax earnings.
For Shenguans 2012 reported gross margins and net profit to be accurate, the Company should have
paid approximately RMB338 million in national taxes that year, consisting of:

RMB163 million in VAT (17% of RMB959 million in gross profit reported in 2012), plus
RMB175 million in income tax paid, as per Shenguans 2012 cash flow statement6

To confirm payment, we can benchmark Shenguan against Bank of Liuzhou. Bank of Liuzhou is ranked
closely behind Shenguan at 22nd on the 2012 tax list, and publishes annual financial information
including its tax payments. Below, we present Bank of Liuzhous cash flow statement for 2012, which
show that the Bank paid RMB360 million in total taxes (VAT + income tax + minor taxes):

Source: Bank of Luizhou 2012 annual report

The RMB360 million in taxes reported by Bank of Liuzhou and its placement on the list is consistent with
the estimated RMB338 million in taxes we would have expected Shenguan to pay if its financial
information for 2012 were accurate. So far, so good.

5
6

There are usually some adjustments made to gross profit, but for our purposes we are keeping it simple.
http://www.hkexnews.hk/listedco/listconews/SEHK/2013/0411/LTN20130411390.pdf pg. 48

2013 Tax Payments

Using the same process, we can also corroborate Shenguans reported gross margins and net profit for
2013. Based on its reported financial results, Shenguan should have paid approximately RMB345 million
in national taxes, consisting of:

RMB164 million in VAT (17% of RMB967 million in gross profit reported in 2013), plus
RMB181 million in income tax paid, as per Shenguans 2013 cash flow statement7

To confirm payment, we can benchmark Shenguan against Liuzhou Steel, which was ranked 26th on the
2013 tax list. Below, we present Liuzhou Steels cash flow statement for 2013, which shows that it paid
RMB348 million in total taxes (VAT + income tax + minor taxes):

Source: Luizhou Steel 2013 annual report

Once again, the RMB348 million in taxes reported by Liuzhou Steel is consistent with the estimated
RMB345 million we would have expected Shenguan to pay if its financial statements for 2013 were
accurate.
This analysis is irrefutable proof that Shenguans reported gross margins and profits are true and
accurate.
And just to be clear: It is extremely difficult to fake tax payments. 8 If Shenguan was engaged in a fraud
to overstate its profitability, it would have to voluntarily pay hundreds of millions of RMB to the Guangxi
government each year to maintain its tax-payer status. Such a scam would be prohibitively expensive to
sustain and makes no economic sense.
7

http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0410/LTN201404101064.pdf pg. 47
We used similar tax confirmation as the primary evidence in our successful expos of Tianhe Chemicals (1619.HK)
last year. Since then, the stock is down ~50% and has lost US$4 billion in market value.
8

Revenue Confirmation
Fraud accusation #2: Shenguan has exaggerated its revenue.

While the tax confirmation is proof enough on its own, we want to address other accusations against
Shenguan, including concerns over inflated revenue.
Historically, natural (gut) casings have been used in the production of sausages in China. With the
advent of collagen casings, Chinas sausage producers are switching from gut casings. Collagen casings
have the added properties of improved hygiene, ease of storage and consistency.9 Furthermore,
collagen casings can be machine-filled, whereas gut casings are filled manually, making them more
labor-intensive. Since 2002, Chinas collagen casing market has grown by an estimated 40% per year.10
As Chinas undisputed industry leader, Shenguan has been the primary beneficiary of this growth:
Exhibit 2
Shenguan Revenue
(RMB millions)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Company annual reports

To corroborate this reported revenue, we pulled Shenguans most recently available SAIC filings11 and
compared them to the regulatory filings the Company submitted to the Hong Kong Stock Exchange.
Historically, material discrepancies between SAIC filings and regulatory filings have been a warning sign
of fraud.
In this case, Shenguans SAIC income statements for 2011 and 2012 matched the revenue and profit
numbers in its Hong Kong regulatory filings:
9

http://www.devro.com/uploads/tx_sbdownloader/Case_for_collagen.pdf
Devro annual report 2013, pg. 22
11
By way of background, Chinese companies are required to file annual financial and business information with the
State Administration for Industry and Commerce (SAIC). SAIC filings are public documents.
10

Shengaun SAIC Income Statement 2011/2012

Source: SAIC filings

Shenguan Annual Report

Source: Companys 2013 annual report

These corroborating SAIC filings further authenticate Shenguans revenue. However, we note that the
problem with solely relying on SAIC confirmation is that fraudsters often fabricate their SAIC filings to
match their regulatory filings.
For this reason, we also verified the revenue figures through customer confirmation.
9

Largest Customer Confirmation

Fraud accusation #3: Shenguan has overstated sales to its largest customer.

Each year as part of its annual disclosures, Shenguan reports percentage of sales to its largest customer.
Shenguans largest customer since its IPO has been Shuanghui Group, 12 which was renamed WH Group
last year in preparation for its own IPO.
After its acquisition of Smithfield in 2013, WH Group became the worlds largest pork company, and
listed on the Hong Kong Stock Exchange (288.HK) last year. In its IPO prospectus, WH Group disclosed
the amount of raw materials purchased from its largest supplier in each of 2011, 2012, and 2013. 13
Sources tell us that WH Groups largest supplier was Shenguan 2012, and we believe it was also the
largest supplier in 2011.
As presented in Exhibit 3, we used this information to corroborate Shenguans sales claims:
Exhibit 3
Shenguan Sales vs WH Group purchase
(In RMB millions)
2011

2012

2013

Shenguan total revenue

1,502

1,649

1,655

Sales to WH Group (%)

33.2%

30.8%

30.8%

Shenguan - reported sales to largest customer

499

508

510

WH Group - reported purchase from largest supplier

513

509

673

-2.8%

-0.2%

-32.0%

Difference (%)
Source: company filings, slight differences due to FX conversion.

As we can see, Shenguans disclosed sales to WH Group are consistent with WH Groups disclosed
purchases from its largest supplier in 2011 and 2012. This independent verification shows Shenguans
reported sales to its biggest customer are accurate.
We note that in 2013, WH Groups purchase figures from its largest supplier are higher than the sales
figures reported by Shenguan. We suspect that after the Smithfield acquisition in 2013, the ranking of
WH Groups largest supplier changed. In any case, given that Shenguans sales to WH Group match WH
Groups disclosed purchases in 2011 and 2012, it is obvious that Shenguan is not overstating these sales.
Taking it a step further, we learned through interviews with former WH Group employees that
Shenguan is the top collagen casing supplier to WH Group and supplies it with most of its collagen
12
13

http://www.hkexnews.hk/listedco/listconews/SEHK/2009/0930/LTN20090930023.PDF pg. 82
http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0415/LTN20140415117.PDF pg. 5

10

casing. These sources believed that Shenguan can charge customers a premium for its products due to
higher quality standards. We also learned through interviews that Shenguan is the preferred supplier to
other large meat producers, namely Yurun and Jinlui.
Having confirmed that Shenguans reported sales to WH Group are accurate, we are confident that the
Companys total reported sales are also accurate (notwithstanding the aforementioned tax proof).
Between 2008 and 2014, sales to WH Group have accounted for approximately 30-40% of total
Company sales:
Exhibit 4
Shenguan Revenue Composition
100%
80%
60%
40%
20%
0%
2006

2007

2008

2009

2010

WH Group sales

2011

2012

2013

2014

All other sales

Source: Company filings

There are two take-aways from this graph:

First, its important to note that prior to the Smithfield acquisition, WH Group accounted for
approximately 5% of the pork market in China,14 yet contributes to over one-third of Shenguans total
sales. If Management was overstating Company revenue, then sales to WH Group would likely represent
far less than the current mix.
For example, Management could inflate sales and justify it by claiming that since WH Group represents
5% of the pork market, it also represents 5% of total sales. It could even point to the fact that there are
other uses for collagen casing, such as chicken and beef sausages.
Second, if Shenguan was overstating its revenue, it is likely that total company sales would grow faster
than sales to WH Group. However, sales to WH Group have remained relatively stable since 2008.

14

http://usa.chinadaily.com.cn/business/2013-05/31/content_16549492.htm

11

Site Visits
As a final test, we conducted site visits to Shenguans three production facilities located in the Guangxi
towns of Fudian, Sifu, and Wangfu. Our site visits showed large, well maintained facilities with bustling
activity.

Wangfu Production Site

Wangfu is Shenguans largest production facility and we sent a team to observe the facility on a
Saturday morning. Our team witnessed several full buses transporting employees to the site, as well as
additional workers coming in by scooter. We learned that the facility is so busy that it operates three
shifts a day. Furthermore, our team saw numerous cargo trucks coming in and out of the facility:
Massive production facility

Three of the buses transporting workers to the facility in the morning

12

Sifu Production Site

The Sifu facility is almost as big as the one in Wangfu, consisting of one long row of new, large buildings. Our team
visited the facility twice, and each time saw numerous trucks coming in and out. One of our contacts also had a
memorable conversation with the security guard at the facility: the security guard was a humble man who was
quite proud of working for Shenguan. He even suggested our contact apply for a job there because it was a very
profitable company always in need of employees.
In a separate conversation, a local taxi driver told our contact that he had a relative working at Shenguan, and that
it was a good company and highly profitable.

Property entrance sign

Outside facility

13

Fudian Production Site

The Fudian facility is the smallest of Shenguans three production facilities. It was built near the main
road which makes it impossible to expand the site. But despite its smaller size, our team still saw ample
commercial and employee activity.
Front gate

Truck leaving the facility

Long row of employee scooters

14

Valuation
Since 2011, Shenguan has lived under a cloud of doubt and suspicion that has forced the market to
dismiss the Company and value its shares as a high-probability fraud.
Shenguans closest global competitors are London-based Devro and Spain-based Viscofan, both of which
specialize in collagen casing. Shenguan trades at a substantial discount to both these peers:
Exhibit 5

Viscofan
Devro

Ticker

Share
Price
(local)

Market
Cap
(US$ mm)

VIS.SM

57.74

DVO.LSE

288.00

Rev Growth

EPS Growth

2015E

2015E

2,981

13.7%

11.5%

737

1.7%

Average
Shenguan

829.HK

HK$2.30

976

P/E

ROE

Current

2015E

Yield

19.4%

35.6

23.2

2.0%

12.6%

3.0%

19.2

16.8

3.4%

7.7%

12.0%

11.2%

27.4

20.0

2.7%

3.1%

4.8%

20.7%

11.2

10.6

5.1%

Source: Bloomberg

Based on consensus estimates, Shenguan is trading at 10.6x 2015 earnings. In contrast, Devro and
Viscofan trade at an average of 20x 2015 earnings, which represent a near 100% premium. Clearly,
having spent the last four years being accused of fraud has done little to help Shenguans valuation.
Considering our extensive due diligence, the current discount is excessive and has no fundamental basis
other than misplaced fear. Given their comparable size, we believe Shenguan should be valued similar to
Devro. Assuming a 17x multiple on 2015 earnings would values Shenguan at HK$3.68 per share. With a
5% dividend yield, this implies 65% upside to the current share price of HK$2.30.
Admitted, Shenguans 2015 estimated earnings growth is below Devro (although everything else is
higher). However, there are several reasons we believe Shenguan to be the better company.
First, Shenguan has a dominant, near-monopoly position in Chinas collagen casing market. And while
there has been a lull in collagen casing growth over the last two years, the longer-term trend is secular.
Chinas per-capita protein consumption is less than 60% of the developed world,15 giving the industry
ample room for growth and making it the fastest growing market for collagen casings.16 For this reason,
competitors have been trying to break into China for years with limited success.17
Through industry interviews, we learned that Shenguan has established relationships with Chinas
leading sausage producers. Shenguan has developed customized products for its customers and is
deeply integrated with its customers production lines. Furthermore, casings are only a fraction of the
15

http://www.uwa.edu.au/__data/assets/pdf_file/0009/85437/Animal-Protein-Keogh.pdf
http://www.devro.com/uploads/tx_sbdownloader/Case_for_collagen.pdf pg. 21
17
http://www.globalmeatnews.com/Industry-Markets/Casings-China-growth-drives-global-market
16

15

sausage production cost, which gives sausage producers no incentive to change casing supplier once it
has been certified and fully integrated into the production process.
These immense barriers have proven difficult for foreign competitors to overcome. For example, Devro
has been operating in China since the early 1990s, but still has no discernable market share to speak
of.18
Furthermore, in its pursuit of growth, Devro has burned through both its balance sheet and cash flow.
We believe that Shenguan is in a far superior financial position relative to Devro, and will have little
trouble maintaining and growing its market monopoly in China.

Cash Flow and Balance Sheet Analysis

The following tables present the free cash flow generated by Shenguan, Devro, and Viscofan in 2012,
2013, and 2014:
Cash Flow Analysis
(US$ millions)
Shenguan

2012

2013

2014

Operating cash flow

121

76

46

Capex

(53)

(32)

(10)

68

44

36

2012

2013

2014

69

59

60

(55)

(56)

(87)

15

(27)

Viscofan

2012

2013

2014

Operating cash flow

136

165

152

Capex

(90)

(131)

(77)

46

35

75

Free cash flow

Devro
Operating cash flow
Capex
Free cash flow

Free cash flow

Source: Company annual reports

Over the last three years, Shenguan has consistently generated free cash flow levels similar to Viscofan,
and far more than Devro. What makes this achievement all the more impressive is that Viscofan is three
times larger than Shenguan in terms of revenue and market value. Meanwhile, Devro is similar in size to
Shenguan but struggles to generate any free cash flow.

18

Annual report 2013, pg. 22

16

Looking at balance sheet strength, Shenguans cash generating abilities have provided it with a strong
financial base. Shenguan is by far the least levered among its global peers, having managed to expand
operations through internally generated funds, while paying robust dividends with a payout ratio
averaging more than 50%.
Gearing Ratio (net debt/equity)

Devro

52.0%

Viscofan

16.5%

Shenguan

14.6%
0%

10%

20%

30%

40%

50%

60%

Source: 2014 results

Future Growth Driver

With near-total control of Chinas collagen casing market, this year Shenguan turned its attention to
collagen applications in cosmetics, face masks, and other consumer products.19 Shenguan has extensive
technical expertise in the field and will likely be able to deliver higher quality technologically advanced
small-molecule collagen than many other Chinese cosmetics suppliers.
Collagen for cosmetics and pharmaceuticals is a rapidly growing RMB4 billion market20 in China and
industry players are rewarded with huge valuation premiums. For example, Baotou Dongbao Biotech, a
small, publically traded collagen company (300239.SZ), is valued at 83x forward earnings.
Its still early days and we expect this new line of business to take one to two years to properly scale. But
the potential here is substantial and is the next logical step for Shenguan.

19
20

http://www.hkexnews.hk/listedco/listconews/SEHK/2015/0320/LTN20150320874.pdf pg. 21
http://www.cb.com.cn/info/2011_0520/211067.html

17

Conclusion
Through a combination of tax confirmations, SAIC filings, customer verification, and site visits, this
report has provided clear and irrefutable proof that Shenguan operates a very real business, and its
reported financial statements are accurate and can be independently verified.
Since 2011, Shenguan has consistently had its accounts questioned, which has caused the market to
value its shares as a high-probability fraud. However, our extensive due diligence shows that the
numerous fraud allegations against Shenguan are based on contrived or incomplete research.
Shenguan trades at 10.6x 2015 earnings while its closest global competitors trade at 20x. This discount
has no fundamental rationale considering that Shenguan has superior cash generating abilities, a
stronger balance sheet, and a considerably higher dividend yield than both Devro and Viscofan.
Given the evidence presented in this report, we expect this discount to narrow as fraud concerns fade
from the market and investors renew their interest in the Company. To reiterate, we value Shenguan at
17x multiple on 2015 earnings. This values Shenguan at HK$3.68 per share, which implies 60% upside to
the current share price of HK$2.30. In addition, shareholders are rewarded with a 5% dividend yield for a
total return of 65%.

Conclusion: Strong Buy

Expected Return: 65%

18

Open Letter to Chairwoman Zhou Yaxian

Dear Ms. Zhou,
Over the last four years, it must have been frustrating operating under the constant suspicion of fraud
and helplessly watching your share price collapse. We hope that this report will represent a new
beginning for your Company, as we expect the market to view Shenguan with renewed interest.
However, you should not make the mistake of thinking that just because you have been exonerated of
wrong-doing, you have done nothing wrong.
Taking Shenguan public was a choice you made. With that choice come the responsibilities of
transparency and open communication. So far, the Board and Management have shown abject failure in
these areas. Your financial reports lack substance and are bereft of detail. You have given investors
ample reason to doubt your Company.
Vague excuses like commercially sensitive21 and trade secrets22 are not viable justifications for
omitting relevant information from your shareholders. Chinese companies no longer have the luxury of
being opaque. We dont live in that world anymore.
But you can help change that by leading your peers to better corporate governance through example.
Shenguan is not engaged in sophisticated R&D or in national defense. You make sausage casings. If you
cant be more open with your shareholders, then what chance does the rest of China Inc. have?
You have recently shown an interest in broadening the shareholder and capital base of the Company.23
We suggest the easiest way to achieve this goal is by increasing reverse roadshows, offering site visits,
customer testimony, and providing expanded access to select corporate records, particularly taxes paid.
Shares of Shenguan are unjustifiably depressed and your enviable problem is one of poor
communication rather than one of poor business operations.
Greater transparency will lead to substantial value creation as investors gain confidence in your
Company. As majority shareholder, surely you have no interest in watching Shenguans extreme
undervaluation persist.
We hope that you take this report as a new chapter in your Company. With your leadership, we look
forward to watching Shenguan return to its glory days.

Yours truly,
-Anonymous Analytics
21

http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0926/LTN20140926699.pdf pg. 4
http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0926/LTN20140926699.pdf pg. 3
23
http://www.hkexnews.hk/listedco/listconews/SEHK/2015/0212/LTN20150212656.pdf pg. 7
22

19

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