Golden Heaven Group Holdings - GDHG
Because everybody can use a play date!!!
If you look at the chart of GDHG, something happened on September 8th. That is the day the volume went from less than 10K shares a day up to 1.7M shares, and it has not backed off much ever since. The stock didn’t really do much on that day considering the amount of volume that came into it, but since then it has been steadily marching higher. There are no filings with the SEC at all during September, nor did the company have any press releases during that time. While I have been unable to discern the true reason for the sudden influx of activity and the subsequent stock price increase, I would imagine a relatively small float is likely the primary culprit for the recent outperformance of the shares of GDHG. Low float Chinese stocks have been known to be rather jumpy and move around a lot, so you may want to exercise some caution if this story holds any interest for you.
The company itself claims to be an operator of 6 amusement parks in southern China, and by the look of pictures from their website these parks are fairly rudimentary by US standards; a poor man’s version of Atlantic City in its heyday, perhaps, but Shanghai Disney really has nothing to worry about. Their rides and attractions appear to be more of something you would see locally at a 4th of July gathering or perhaps a local high school’s annual carnival, but not a permanent attraction site.
Golden Heaven Group Holdings (GDHG - $13.34)
Shares Outstanding: 52M
Golden Heaven Group Holdings (GDHG) came public back in April 2023 in a 1.7M share offering that priced at $4 a share, the bottom of the pricing range, and raised around $7M or so for the company before expenses. Revere Securities and R.F. Lafferty & Co. acted as underwriters. GDHG first filed documents to come public back in November 2022 and was initially hoping to raise up to $35M before lowering that target to $27M in February and ultimately settling for $7M in April. Most companies that are forced to take an 80% haircut on the offering trail might be inclined to wait for a better window to come along, but not these folks. Makes one wonder why did they need to money so bad? They supposedly already had $28M in cash on their balance sheet at the end of March 2023, so adding another $6.5M or so wouldn’t have really made that much of a difference.
Use of proceeds revisited – A few days ago we learned why the company was looking to raise $35M from US investors. In their press release along with the subsequent 6-K filing with the US SEC the company announced the hiring of a construction and engineering firm and then laid out plans to construct a total of 3 additional amusement parks to go along with their operating collection of 6 parks.
Oh, did I say 6 operating parks? – Better make that 5. No better place to bury an announcement that you’re closing down one of your parks and maybe changing its business model than at the bottom of an announcement where you are talking about developing 3 brand new parks.
Temporary Closure of Mangshi Jinsheng Amusement Park (the “Park”)
The Park is one of our existing amusement parks. The Park has been temporarily closed since September 30, 2023. Such park closure is a strategic decision, in light of the new amusement park projects, to explore the future business development of the Park. The Park may be re-opened in the future with a new business model, once the detailed plans are finalized by our management.
How much are these 3 new parks going to cost shareholders? – According to their public statements, the company will need a grand total of RMB590M or roughly $80M for the construction and outfitting of the parks, plus they pay another $350K or so a year for the land-leases. The parks vary in size, the smallest at 15,000 square meters, next is 20,000 square meters, and 30,000 square meters the largest, for a combined 65,000 square meters for all 3 new parks. In acres, that’s a grand total of 16 acres of land for all 3 parks, which is quite tiny by amusement park standards. The smallest park is only about 3.5 acres in size and the largest maybe 7 acres. GDHG’s other 6 parks sit on a combined 100 acres of land, or an average of 17.5 acres or so for each, so these 3 new parks are going to be much smaller than anything that they currently having operating. By comparison, Disneyland sits on 500 acres of land, with the actual park itself occupying only 85 acres. A water park outside of Los Angeles called Raging Waters is around 50 acres in size.
How much cash do they have? – It appears that GDHG is going to be one of those crappy Chinese companies that only files financial statements every half a year, and then they get another 120 days or so for the filing, so you won’t really know what’s going on for 10 months or more; their March quarter filing didn’t arrive until August 3rd. At the end of March, and remember that is before the IPO, they supposedly had around $28M in the bank, plus the $6.5M or so they got from the IPO, plus, if the second half proved to be equivalent to the first half, then maybe another $6M from operating cash flow. This is all if you believe their numbers, of course. The fact that they shut down one of their parks at the end of September should be telling us something about their business, but whatever. So at the outside they should have maybe $40M or so that they can use for the construction of their 3 new facilities, plus whatever they manage to earn in the interim during construction, which should be another $5M-$10M. This means they would need to raise an additional $30M-$40M either through bank loans or stock sales to complete their 3 projects. And how much were they looking to raise at first? Yeah.
Bank loans or stock sales? – When they filed their proxy back in July they filed a resolution to exchange all of their investor’s shares from ordinary shares to class A ordinary shares along with the creation of a class B class of shares. They also wanted to increase their authorized share count from 500M to 2 billion shares. One of their owners, Jinzheng Investment Co. Pte. Ltd. is the owner of 15M ordinary shares, but the company put forth another resolution that called for basically exchanging 10M of this holders shares for class B shares and leaving the other 5M shares as class A shares. Class B shares have 20 votes per share. So this holder will have 205M votes compared to the rest of the holders with a combined 47M or so votes. So who owns Jinzheng Investment Co. and all of those wonderful votes?
“Prior to the proposed repurchase and issue of shares, Ms. Qiong Jin, our Chief Executive Officer and Chairman of the Board of Directors and the 100% owner of JINZHENG INVESTMENT CO PTE. LTD., beneficially owns a total of 15,000,000 ordinary shares of the Company, representing approximately 28.99% of the total voting power of the Company. Immediately after the proposed repurchase and issue becomes effective, Ms. Qiong Jin will beneficially hold approximately 84.8% of the total voting power of the Company.”
Traditional 180 day lockup period has expired – Insiders agreed not to sell any shares for 180 days following the IPO, and given the IPO date of April 12th 2023, the Lockup will have expired somewhere around October 9th.
Aren’t loans to property developers kinda taboo in China right about now? – There are numerous stories out there about developer after developer defaulting on bond payments and loans. Last week it was Country Garden warning of default https://www.theguardian.com/business/2023/oct/10/china-country-garden-default-on-debt-property-developer and upwards of two thirds of their top 50 developers are reportedly in trouble. https://markets.businessinsider.com/news/bonds/china-property-debt-crisis-two-thirds-developers-default-country-garden-2023-9?op=1 Given this as a market backdrop, what are the odds that they would be able to float some kind of a debt deal locally in China in that type of a market? I’m not a huge follower of debt, but I would say any offering would be both a tough swallow and incredibly expensive for them to do. Which, naturally, is likely why they opted to list shares in the US.
It’s not really a Chinese company, but rather a Cayman Islands company! – that’s pretty standard disclosure for all Chinese stocks, and though I whine about the structure constantly, nobody really seems to care. When the following is said on the front page of your prospectus, how US regulators continue allowing this to be foisted on US market investors is just beyond me.
“We are not a Chinese operating company but a Cayman Islands holding company. We have no material operations of our own and conduct substantially all of the operations through the operating entities in China. Investors in our ordinary shares are purchasing equity interests in the Cayman Islands holding company, and not in the Chinese operating entities. Investors in our ordinary shares may never hold equity interests in the Chinese operating entities. Our operating structure involves unique risks to investors. The Chinese regulatory authorities could disallow our operating structure, which would likely result in a material change in our operations and/or a material change in the value of our ordinary shares, and could cause the value of our ordinary shares to significantly decline or become worthless.”
Revenue growth may be kinda punk, but they’re really profitable, right? – According to their most recently published financials, revenues in the first 6 months of FY2023 (they have a September FY) were slightly down to $20.1M on a dollar basis vs. the first 6 months of FY2022 when they were $20.8M. On a Renminbi basis, they put revenues up 6%, though down due the strong dollar. While they did not mention anything about guidance going forward, I would imagine operating only 5 parks rather than 6 should be hurting their revenues a bit, though perhaps margins would be a bit higher if the closed park was low-performing. The closed Mangshi park was responsible for about 10% of their employees, so one would expect at least some impact. Profitability, however, is where these folks shine. Operating margins are a cool 50%, a level that would make even Microsoft blush, and net income margin is in the 35% range. For the year, that would put their net income at approximately $15M, or about 30 cents a share. Here in the states we are cursed with operators like SIX or FUN that have to be sold as EBITDA stories most of the time, but over in China these types of operations are able to apparently just print money.
Valuation has increased markedly – Revenue growth over the past couple of years has been low single digit at best regardless of currency, which puts the current earnings multiple for a really low growth stock at maybe 40x today’s stock price. At their $4 offering price, it was maybe decently priced given their growth and other issues, but today it makes much less sense. That is, unless they add 3 shiny, though tiny, new parks and the associated revenues to their stable of income producing properties. Then we’ve got a growth story on our hands.
So if I were a betting man, given the huge run in the stock, I’d be betting on a stock offering. Between the tight float, the company’s ownership structure and location, the underwriters involved, and the smoke signals the company appears to be sending out with their proxy statement voting and maneuverings, would it surprise me if the stock price was being artificially inflated and walked higher in order to allow the company and their underwriters to do some sort of a share sale deeply in the hole? Not at all. What would be surprising is if they didn’t attempt to take advantage of their current string of good fortune and offer up a healthy dose of newly printed class A shares.