Exceed Co Ltd (EDS)

[realfast95]

EDS questioned for massively overstating scale, drops 26pc

It was quite strange that when Exceed Company Ltd. (NASDAQ:EDS), the owner and operator of Xidelong, one of the leading domestic sportswear brands in China, announced on June 5 Q1 financial results in accordance with analysts’ expectations, the stock price fell 26.56pc to $2.24 and trading volume tripled from the average level.

Revenue increased by 19.0 percent, from 751.4 million yuan in Q1 2011 to 894.6 million yuan ($142.1 million) in Q1 2012. “The increase in revenue was primarily driven by the increased demand for our products and the continuous expansion of the Xidelong retail network by our distributors in China,” the company said.

According to the company, the number of Xidelong retail locations, which are operated either by the company’s distributors or by authorized third party retailers, increased by 464 from 4,458 as of March 31, 2011 to 4,922 as of March 31, 2012.

Operating profit and net profit were 147.3 million yuan ($23.4 million) and 128 million yuan ($20.3 million), respectively, representing a 14.8 percent and 3.1 percent year-on-year increase.

However, Michael Joseph, who runs a research firm focused on Chinese due diligence called D.B. Research, believes the scale of EDS’s retail network has been massively overstated. After interviewing all of EDS’s major distributors, he wrote that the majority of stores claimed by the company do not exist.

Details on the purchase of 600 acres land to construct new production facility are also disputed.

It is reported that in December 2011, the company entered into a contract with the municipal government of Ruichang city for the investment and construction of a manufacturing base. The total consideration for the land is 198 million yuan.

The company spent 330,000 yuan per acre for the land in Jiangxi province, one of the poorest places in China. But officials at Ruichang Industrial Park told researchers sent by D.B. Research that land is priced at the national benchmark 80,000 yuan per acre, or less than a quarter of the price the company reportedly paid.

http://morningwhistle.21cbh.com/html/2012/China_Stocks_0606/212541.html