Report Card: Of Richina Pacific's excuses and a load of old cobblers

By David McEwen

Friday 21st June 2002

It's somebody else's fault.

Investors hate hearing this from the board and executive team they have entrusted with their capital when performance is poor.

These people are paid well to invest shareholders' funds for maximum return and prudently manage the resulting assets.

Part of their job is to react to changed circumstances in a way that benefits shareholders.

It does not become boards and managers to blame poor performances on external factors. Change is a constant and their job is to make the best of each new surprise.

Richina Pacific chairman Alastair MacCormick and managing director Richard Yan in the company's latest annual report are quick to blame "events totally outside our control" for a loss-making year.

September 11, a slowing world economy and nervous US cobblers affected Richina's leather operations, while lower tourism numbers and continued discounting hurt its Blue Zoo aquarium.

They are right in that these events could not have been controlled but life's full of such problems. What investors want to see is not a wringing of hands over problems but rather a clear indication of how those who control the company are responding to changed circumstances.

Ironically, Mr MacCormack and Mr Yan miss the opportunity to highlight in their joint report that their leather operation stayed profitable, unlike most of its competitors'. The obvious assumption is that it did so because it was well-managed.

Richina turned in a profit before asset writedowns of $2.9 million for the year to December 31, down 34%. However, an $18.6 million drop in asset values took the bottom line to negative $15.3 million from a $4.7 million profit in 2000.

Despite this, the company produced a net operating cashflow of $8.6 million against a loss of $6.3 million in 2000.

The company's fortunes were boosted during the year by the sale of its major New Zealand assets, Mair Venison and Colyer Mair.

This followed a strategic review where the diverse company decided "the best long-term interests of the company would be served by focusing on those businesses which had the potential to be world market leaders."

These happen to be based in China rather than New Zealand, raising the question of Richina's future on the local sharemarket, especially as its major investors are also based overseas.

The company is controlled by a group of US investors, known as the Richina Consortium. This broke up in May but the report says individual members have indicated they will keep their stakes.

A note to the accounts shows that members of the consortium have lent the company $10.3 million, at interest rates of 7.5-18%. These loans are unsecured and "are repayable within five days of demand."

That hardly seems like a sensible way to finance a business. Surely something more certain could be found from a bank.

With the sale of the two businesses, Richina is left with its China assets and Mainzeal Construction, which has a strong presence overseas.

The report hints that the company might move closer to where the action is.

"Ideally, we need to attract local Chinese investment into the company to fund its future expansion and its need for working capital if we are to achieve the full benefit of the [leather] plant's underutilised capacity. Conversely, local Chinese investors are not attracted to equities listed solely on the New Zealand Stock Exchange."

The company is "evaluating the options available" and a departure from these shores must rate highly as an option.

Mr MacCormick and Mr Yan note their optimistic comments in the previous report were proved wrong by the major events of the past year.

"We have every reason to believe that the current financial year will prove to be one in which the company gain makes considerable strides in creating wealth for shareholders," they conclude.

Perhaps they should have added, "unless something else happens."

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Web: www.mcewen.co.nz, email: davidm@mcewen.co.nz

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