omniture

Ozner Water Issued Clarification Announcement

Rebuttal to unfounded allegations by certain report
Ozner Water International Limited
2015-03-25 21:51 2994

HONG KONG, March 25, 2015 /PRNewswire/ --

  • Rebuttal to six unfounded allegations by certain report, which are based on the misunderstanding of accounting line items and deliberate misleading statements
  • The Company's major shareholders, including SAIF, Ares, Goldman Sachs and Mr. Xiao Shu (Chairman of the Company) pledged through the form of an announcement not to dispose any of their positions in the Company within 90 days
  • Allegation 1: Exaggeration of sales production and profit is based on misunderstanding of the Company's operation model and accounting line item, if not intentional misleading statements
  • Allegation 2: Speculation on differences in operational results between CGL and Ozner, is deliberately ignoring many fundamental differences between the two companies
  • Allegation 3: Assumptions on alleged material undisclosed related party transactions in the Prospectus are incorrect
  • Allegation 4: Tax records allegedly reflected less net income than reported in the Company's financial statements. It is because of the timing difference in revenue recognition between IFRS and SAIC filings
  • Allegation 5: Incorrect market share data. The rankings from the websites quoted in the Report are based on arbitrary metrics and ranking methodologies. Whereas the Company's market report, submitted by global reputable consulting firm Frost & Sullivan, is based on extensive research using retail sales value as the common metric
  • Allegation 6: The Group's 10-year useful life of water purifying machines allegedly exaggerated profit. The useful life of Ozner's water purifying has been tested by national accredited institutions and 92% of the machines installed as of 2008 remain installed and operate under satisfactory condition

The Board of directors of Ozner Water International Holding Limited ("Ozner" or "the Company", HKEx stock code: 2014) has made a clarification announcement today to refute the unfounded allegations made by a research report (the "Report") issued by Glaucus Research Group against the Company.

The Company has always been committed to full and accurate disclosure of its business operations and financial results to investors on a timely basis. The allegations in the report are unfounded and misleading in the attempt to undermine investors' confidence in the Company. Major shareholders of the Company, namely SAIF, Ares, Goldman Sachs and Mr. Xiao Shu, Chairman of the Company pledged through the form of an announcement to not dispose any of their positions in the Company within 90 days starting from today. The Company may consider share buyback at appropriate time, and reserve its right to take legal action.

The Company's response to the allegations is as follows:

Allegation 1: Exaggeration of sales production and profit

The report assumed that Shangyu Haoran "should have incurred all" production costs of the Group as it was the only manufacturing facility.

This assumption is incorrect: Shangyu Haorun is merely the assembly entity of the Group, responsible for the assembly of water purifying machines from components and raw materials procured by other subsidiaries of the Company. Its cost of sales ("COS") mainly consists of staff costs and production overhead for assembly-related operations, which by no mean could reflect the production cost of the whole Group.

The COS in the consolidated financial statements of the Group consists primarily of the depreciation cost of the installed water purifying water machines. The Group manages the procurement of raw materials and components at the Group level, mainly through Shanghai Haoze and Shaanxi Haoze. Such procurement cost is capitalized as revenue generating assets, which have been disclosed in the Company's IPO prospectus ("Prospectus").

The report also mentioned that the rental income reported in the SAIC filings did not tie to the rental income of water purifying machines disclosed in the Prospectus, and thus challenged the Company's business scale. The difference is in fact due to the difference of accounting between IFRS and SAIC filings. According to IFRS, rental income was recognized on a monthly basis over the one-year lease term, i.e. recognition upon rendering service; whereas rental income reported to the local tax bureau in SAIC filings was recognized when relevant invoices were issued. The Company typically issues invoices to principal distributors at the end of lease terms, i.e. recognized later than the accounting recognition under IFRS.  As the Company's business was rapidly growing, the difference between recognized rental income under IFRS and that for SAIC filings was more apparent. 

Allegation 2: Differences in operational results between CGL and Ozner

The report alleged that the Company exaggerated the size of the business due to the differences in operational results in spite of the purported similarities of the personnel, technology, product, etc. between the water purification business of Shanghai Comfort under CGL during 2009-2012 and that of Ozner.

The report took a part for the whole and ignored many fundamental differences between the two companies. There are significant differences between the two operations, including: business focus, amount of capital invested, expansion of geographic reach and distributor network, the number of water purifying machines installed, board management and expertise, among others.

Allegation 3: Undisclosed related party transaction

The report alleged that there were undisclosed related party transactions given that Mr. Xiao Jianping, a director of one of the Group's subsidiaries, is also a shareholder of Shanghai Haoyang.

As disclosed in the Prospectus, Mr. Xiao Jianping was independent third party to the Group at the time the Haoyang Sub-Contract Arrangement was executed. Subsequent to the execution of the Haoyang Sub-Contract Arrangement, the Group appointed Mr. Xiao Jianping as a director of Shanghai Haorun Environmental Works Co., Ltd., one of the Company's subsidiaries, for the purposes of preventing him from carrying on any competing business with the Group. He is not a director nor a shareholder of the Company at the listed level as alleged by the Report. He also does not play a key managerial role in or have significant decision power over the Group's overall business. Per IFRS and the Listing Rules, the Haoyang Sub-Contract Arrangement was not a related party transaction and was not required to be disclosed in the Prospectus as a connected transaction.

Allegation 4: Tax records reflected less net income than reported

The Report quoted tax records from the Shangyu Haorun and alleged that the Company overstated its income as the tax records showed less net income than appeared in the Company's financial statements.

Shangyu Haorun is in charge of machine assembly and is not a principal revenue generating entity of the Group.  It should not be used as a proxy for analyzing the Group's revenue generation capacity and tax payment obligations. As explained for the first allegation, there is a timing difference in revenue recognition under SAIC filings and under IFRS. On the cost side, there is minimal timing difference between COS and expense recognized under SAIC filings and under IFRS. Such timing differences for revenue recognition vs. cost and expenses recognition leads to apparent difference in profit before tax, especially during the rapid expansion of the Company's business. 

Allegation 5:  Incorrect market share data

The Report quoted six surveys and alleged that Ozner is not ranked as a top 10 company in any of them. Ozner is also not ranked in as a top 10 brand in the Taobao and Tmall websites.

The rankings from the websites quoted in the Report are largely based on brand awareness or perception by customers. The quoted rankings conflict each other and lack clear explanation for their ranking methodologies. The Group operates under a lease and service business model and is intrinsically different from the sale-of-product business model used by traditional home appliance companies. The Company has been focusing on building its distribution network and has not used Tmall or Taobao as its key sales channel. Instead, such channels are used for the purpose of product display and brand promotion.

The market survey in the Prospectus, submitted by global reputable consulting firm Frost & Sullivan, is based on extensive research using retail sales value as a common metric.

Allegation 6:  Ten-year depreciation policy for water purifying machines

The Group applies a ten-year depreciation policy for its water purifying machines.

Ozner's water purifying machines are tailor designed for rental services and have a useful life of 12 years, as confirmed by national accredited institutions. Approximately 92% of the machines installed as of 2008 remain installed at end users' premises and operate in satisfactory condition. The Board of Directors believes the 10-year depreciation policy is appropriate.

Mr. Xiao Shu, Chairman and CEO of Ozner, says, "The entity that issued the Report has taken a short position in the shares of the Company and stands to realize significant gains in the event that the price of the Company's shares declines. Fortunately the unfounded allegations have not affected our major shareholders' confidence in us. Our investors should rest assured that we will continue to commit to transparent information disclosure. Going forward, Ozner will continue to focus on business development and repay our shareholders with excellent performance."

About Ozner Water International Limited

Ozner, as a leading drinking water solution provider in China, is a high-tech company focusing on R&D, manufacturing and leasing of water purifier.  With superior proprietary technologies, our state-of-the-art purifiers produce high quality purified drinking water. We provide air sanitization services as well. We attribute our success also to the breakthrough "water purification lease and service" model, which revolutionized the conventional equipment-selling model. Incorporating Internet/Cloud technology, our proprietary logistics, warehousing, technician and service teams keep providing top-notch post-sales service to end users. The company generates revenue from annual service fees during the whole product life cycle, ensuring steady cash inflow and strong profitability. Ozner serves approximately 660k accounts customer. Managing more than 2,000 distributors, our proprietary post-sales team provides installation and maintenance services to customers in more than 150 cities in 30 provinces in China (excl. Tibet only).

Source: Ozner Water International Limited
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