China Ouhua quietly sets a new course

  • Opinion
  • Saturday, 09 May 2015

When wine turns to whine and grapes to gripes, shouldn’t shareholders be told more and sooner?

SHAREHOLDERS of China Ouhua Winery Holdings Ltd who haven’t read thoroughly the wine producer’s last four quarterly reports probably have no idea how much its outlook has darkened over the past 12 months.

And this is without considering the fact that the auditors have qualified their opinion on the company’s accounts for the second consecutive year over a December 2013 purchase of state-owned property; the deal hasn’t been completed although 90% of the price has been paid.

In April last year, executive chairman and CEO Wang Chao wrote in the annual report 2013 that the increasing imports of bottled wines had softened the sales of made-in-China wines. However, he expected the latter to recover and lead the market “in the near future” but didn’t explain how this would happen.

He had more to say about the company’s prospects, though, pointing out that the Chinese drank 20% more wine in 2013 than they had the year before. He added that it was important to capitalise on this trend so that China Ouhua could grow faster.

He explained – or tried to explain – how the management would respond to the situation:

“Our target for the company in 2014 is to keep the current market, keep the market share and wait for new development opportunity (sic), improving production of middle and low-level products to meet the expectation of the ordinary consumers.

“We also put efforts on improving the capability of our research and development.

“We will make appropriate measures to cope with the declining of our profits and make the company live through the temporary difficult phase caused by severe competition from imported and local market. We will pay close attention to influences that related government policy bring to the winery market and look for good development opportunity (sic).”

Despite the vagueness and grammatical awkwardness, the message was that the company had a game plan and things would get better.

However, a month later, when China Ouhua released its results for the first quarter ended March 2014, much of the optimism has ebbed away. The management said it had done deep research and analysis on the wine market, and had concluded that grape wine consumption had been “seriously affected” by factors such as the challenging market conditions at home and globally, and government measures to curb drink driving and promote a frugal lifestyle.

“We envisaged that the downward trend is likely to continue in the near future. Facing with the unavoidable sluggish external market environment and the increasingly competitive grape winery market in China, the group made efforts to improve the sales revenue but get no effects (sic),” said the management.

Translation: Things weren’t getting better and whatever the company was doing to go against the tide wasn’t working.

All it could do, said the company, was to “continue remaining steadfast and adopting conservative approach in our overall strategy”. It added, “We will plan the production according to the sales and reduce our winery production storage to decrease the operating risk.”

China Ouhua basically repeated the same lines in its next quarterly report, plus the observation that there were “no obvious signs of recovery in the near future”.

In the third-quarter report, the notes on the company’s prospects were also largely a copy-and-paste job. However, the final sentence was new and demanded more scrutiny: “Moving forward, in order to have a better future for the group, the management decided to proactively look for other good investment opportunities which are feasible for diversified development strategy as a way to improve the value of the shareholders.”

This was without question a major development. The management has acknowledged that its present business model had been crippled and has signalled that it wanted to diversify. Isn’t this a change in general business direction, which is stated in Bursa Malaysia’s listing requirements as an example of events that require immediate disclosure?

Yet, this news was deemed worthy only of being slotted into the quarterly report’s commentary on the company’s prospects. Sure, stakeholders are expected to diligently go through a listed company’s announcements, but China Ouhua could have chosen to make a separate announcement on the development so that it could be properly highlighted and explained.

Instead we have this statement that raises questions more than it provides information. When exactly was it decided that the company should diversify and did the board deliberate on the matter? What criteria are used to identify these “good investment opportunities”? What’s this “diversified development strategy”? And lastly, why can’t China Ouhua ensure that its announcements at least follow the basic rules of grammar?

Let’s assume the management has taken the position that merely deciding to consider diversification options isn’t a big deal and therefore doesn’t warrant an announcement of its own. But what about what was disclosed in the results for the fourth quarter issued in February this year?The commentary on the prospects kicked off with the familiar diagnosis that the Chinese wine market has slumped, thus causing the company’s revenue to decline tremendously. Then came some alarming revelations.

“In order to overcome the difficult situation and maintain our business as a going concern, the management has taken measures to cut down on unnecessary expenses,” said the company. “After conducting cost-benefit analysis, the management decided to discontinue the planting of grapes at the vineyards to cut further losses because throughout the years, almost all of them have died off due to bad weather and diseases infected by insect pests. The huge investment cost in biological asset has produced very poor yield for the past years.

“Moving forward, in order to have a better future for the group, the management decided to proactively look for other good investment opportunities which are feasible for diversifying development strategy as a way to improve the status of the difficult business operation (sic).”

Penetrate this fog of fractured English and you’ll pick up two worrying elements – that the company’s status as a going concern has come under threat, and that a wine producer (once said to be among the top 10 in China) has abandoned its vineyards. Must shareholders wait for the release of financial results to get such information? Won’t it be too late already?

Executive editor Errol Oh is amazed how fast things have soured for China Ouhua since its November 2010 stock market debut.

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