No. of Recommendations: 14
GEONG International – big cash trouble in little China!

The China based internet software solutions provider issued a trading statement for the nine months ending 31st December 2011 that highlighted the usual concerns.

It’s disappointing to note an apparent stagnation in the business with total revenues for the period marginally lower than in the same period last year at approximately £7.6m, although we do appreciate a changing business mix. Given the other cash flow issues surrounding little Geong I would question the logic of UK investors investing in a China based businesses other than for exceptional top line growth – I could offer a whole basket of UK business offering more pedestrian growth with a more reliable cash flow model.

The performance related element of the SaaS business which is dependent on the increased level of the customers' business performance is a model I haven’t come across before and obviously results in quite a lumpy sales model with the majority of performance fees arising at the end of the trading year. SaaS revenue in the 4th quarter is therefore anticipated to being significantly higher than in the previous three quarters but one can assume it is almost impossible to currently put a figure on how much higher this might be. This will once again extend the cash collection cycle and give the auditors plenty to think about!

As at 31 December 2011, amounts due from customers were £17.3m, comprising £4.4m invoiced trade receivables and £12.9m of accrued income, down from £5.3m and £13.2m respectively, as at 30 September 2011.

They have confirmed that the cash balance at 31st December 2011 was £6.1m down from £7.3m at 30th September 2011.

Of greater concern is the statement that investors should expect accrued income to continue to represent a relatively large proportion of amounts due from customers, as this arises from management’s efforts to manage cash flows most effectively around the need to pay business taxes. Isn’t it more effective from a cash collection perspective to invoice your customer as quickly as possible and then ask them to pay that invoice promptly, notwithstanding the timing of tax collections? Clearly the tax authorities in China aren’t to be messed with and it’s much better for shareholders to carry all the risk!

The trading statement clarifies the unusual ‘annual’ payment terms applicable in China but why on earth would UK investors bother getting involved with this.

Apparently unlike the UK, business tax and VAT on bad debts in China is not recoverable and, although GEONG has experienced a very low incidence of bad debts, by delaying invoicing until near the payment date collectability is better assured.

The current order book is confirmed as approximately £14m but there was no detail on the timing on servicing of orders.

On a simple price earnings multiple the shares look great value at only 3.3x 2012 full year estimates, however, it’s worth pointing out that the 9 month revenue only accounts for 59% of the broker’s full year 2012 forecast so it’s going to be a big final quarter with plenty of performance fees – as I said, the auditors will have a field day!

There are so many other questionable issues surrounding this stock and its business model I would still keep clear.
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