Bosideng: A Subsidiary Of The Gao Conglomerate

I believe the Gao family are running a low-profile embezzlement operation against the investors of Bosideng, the Hong Kong-traded holding company which was incorporated in the Cayman Islands. Although it might be in the process of becoming one, it's not your typical Chinese capital-expenditures fraud. I think it is a bit more elaborate. Mainly, it consists on two different strategies:

1) Selling economic participations of their family businesses to Bosideng (Cayman) at a significant overprice.
2) Using the cash of Bosideng (Cayman) to finance the expansion of the family conglomerate.

The Gao family conglomerate owns land, factories, retail shops and maybe even hotels and other investments not related to the apparel sector. Their businesses are spread across a wide array of corporations incorporated in China, UK and offshore (Cayman, Bermuda, and others). From the Gaos point of view, Bosideng (Cayman) is just another subsidiary, from which they can take the cash they need to finance the expansion of the family conglomerate. So, whenever Bosideng goes into a lease agreement, the Gao conglomerate is the lessor. And whenever a batch of clothes are manufactured, the Gao conglomerate manufactures it and dispatches it to Bosideng.

Have a look at the last two "acquisitions": Jiangsu Kangbo Clothing Co., Ltd. (Menswear company), and Talent Shine Limited and Sunny Bright Global Investments Limited (Womenswear companies). The total goodwill paid on those two transactions is CNY 777 million. In addition, Bosideng paid CNY 597 million for "customer relationships". Whether or not real contracts exist, the "Customer relationships" account actually represents economic participations in the Chinese subsidiaries owned by the Gao conglomerate. With such an arrangement, the Gaos never lose control over the Chinese subsidiaries that really own the factories, and yet Bosideng could be benefited somewhat.

It is interesting to note that the Womenswear companies were owned by another "independent third party." In this case, the "independent third party" is Talent Shine International Limited, which was incorporated in the British Virgin Islands (BVI). Now, Talent Shine International Limited (BVI) was incorporated around the same time Talent Shine International Limited (Hong Kong) (朗材國際有限公司) was dissolved. I believe this was done to conceal the identities of the individuals behind Talent Shine, as it is easier to do so with a company incorporated in the BVI. Nevertheless, they left a paper trail. If you are curious about who the directors of Talent Shine International Limited (Hong Kong) were, you can find the answer at the Companies Registry in Hong Kong. Obviously, Talent Shine is yet another subsidiary of the Gao conglomerate.

Moreover, as opposed to the previous acquisition, Bosideng issued shares to raise CNY 507 million in order to purchase the Womenswear companies. However, they supposedly had CNY 3000 million in cash at the time. Why not use it to purchase the Womenswear companies? My explanation is that the Gao conglomerate has already used that cash for its own benefit, and not for the benefit of Bosideng. It may have even been used by the Gaos to purchase the UK retailer Greenwoods Menswear, which was acquired by Harvest Fancy (Hong Kong), the "independent third party" who sold the Menswear company to Bosideng. The names of the original Greenwoods directors will sound familiar to you: Xiadong Gao, Lifang Gao, and Kin Wa Tso, who used to be a director at Bosideng Corporation (Hong Kong) before being a director at Harvest Fancy. It is highly likely that the Gao conglomerate will eventually sell Greenwoods to Bosideng for a hefty price.

Parallelly, keen observers will notice a significant rise in bank borrowings from CNY 587 million to CNY 1740 million in spite of the cash on hand. Be wary if they say that it was done so in order to comply with the State Administration of Foreign Exchange.

Finally, there has also been a significant increase in fixed assets. Fixed assets used to be minimal until 2008. But in the last three years, they have begun to rise at an unprecedented rate. I'm wondering whether that change marks the beginning of a classical Chinese capex fraud, or an actual transfer of assets from the Gao conglomerate to Bosideng, of course, at an overprice. As a consequence, I think that Bosideng will issue more shares in the coming months in order to raise the necessary cash that the Gao conglomerate needs.

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