Release Date: 25 March 2015

Shenguan Holdings

A New Hope

Ticker: 829.HK

Market Cap: HK$7.6 billion

Recent Price: HK$2.30

Target Price: HK$3.68

Expected Return: 65%

Dividend Yield: 5.1%

Conclusion: Strong Buy

You should have expected us

anon.analytics@neomailbox.net Twitter: @anonanalytics www.anonanalytics.com

Since 2011, Shenguan has been the target of a series of fraud allegations. These allegations have scared off investors and collapsed the Company’s share price.

In reality, Shenguan is a highly profitable company that has been wrongly accused of fraud. We have used SAIC filings, customer disclosures, and irrefutable tax data to independently verify its accounts.

We believe the contents of this report will clear Shenguan of all substantial fraud allegations and renew market interest in its unjustifiably depressed share price.

1

Neither Anonymous Analytics nor its principles is a registered investment advisor or otherwise licensed in any jurisdiction, and the opinions expressed herein should not be construed as investment advice. This report expresses our opinions, which we have based upon publicly available facts and evidence collected and analyzed including our understanding of representations made by the managements of the companies we analyze, all of which we set out in our research reports to support our opinions, all of which we set out herein. We conducted basic research based on public information in a manner than any person could have done if they had been interested in doing so. You can publicly access any piece of evidence cited in this report. All facts, figures, and opinions are as at the last practicable date. This document has been prepared for informational purposes only. This document is not an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. We have made every effort to ensure that all information contained herein that support our opinions is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock or company covered herein or who may otherwise owe any fiduciary duty to the issuer. However, we do not represent that it is accurate or complete and should not be relied on as such, in particular, Shenguan Holdings (“Shenguan” or “the Company”) and insiders, agents, and legal representatives of Shenguan and other entities mentioned herein may be in possession of material non-public information that may be relevant to the matters discussed herein. Do not presume that any person or company mentioned herein has reviewed our report prior to its publication. As evident by the contents of our research and analysis, we expend considerable time and effort to ensure that our research analysis and written materials are complete and accurate, we strive for accuracy and completeness to support our opinions, and we have a good-faith belief in everything we write - but such information is presented “as is,” without warranty of any kind, whether express or implied. All expressions of opinion are subject to change without notice, and we make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such opinions and information or with regard to the results to be obtained from its use, and we makes no representation that we will update any information on this. You should assume that all statements contained herein are our opinion and are not statements of fact – even if certain statements can be perceived as such. That way, we don’t have to sacrifice our (hopefully) entertaining writing style by starting every sentence with “In our opinion” as advised by our team of neurotic and overpriced lawyers. We believe that the publication of our opinions and the underlying facts about the public companies we research is in the public interest, and that publication is justified due to the fact that public investors and the market are connected in a common interest in the true value and share price of the public companies we research. We are exercising our right to express such opinions in a public forum. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume that these types of statements, expectations, and projections may turn out to be incorrect. Anonymous Analytics itself holds no direct or indirect interest or position in any of the securities profiled in this report. However, you should assume that certain of Anonymous Analytics’ research and due diligence contacts, consultants, affiliates, and/or clients may have a long position in the stock or debt of Shenguan and/or options of the stock, and therefore stand to gain substantially in the event that the price of the stock increases. You should further assume that following the distribution of this report, the aforementioned individuals and entities may continue transacting in the securities covered therein, and may be long, short or neutral at any time hereafter regardless of this report’s initial opinions. Don’t be stupid and invest in the public markets unless you are prepared to do your own homework and due diligence.

Disclaimer

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Since 2011, Shenguan has been the target of a series of fraud allegations and questions over the accuracy of its accounts. These regular and repeated accusations have caused investors to steer clear of the Company and triggered a multi-year decline in its share price. Today, shares of Shenguan are trading at all-time lows and valued as a high-probability fraud. However, this report will provide irrefutable proof that Shenguan is a real and highly profitable company, that its accounts are real and independently verifiable, and that the numerous fraud allegations against the Company have been the result of contrived or incomplete research. Our extensive due diligence is based on tax confirmations, SAIC filings, customer verification, and site visits, specifically:

We have obtained tax confirmations which show that Shenguan’s reported gross margins and profits are accurate. These tax confirmations cannot be faked or forged by the Company, and are the silver bullet that completely destroys any further allegations of fraud against Shenguan.

We have corroborating evidence based on SAIC filings and independent disclosures by Shenguan’s largest customer that its reported revenue is accurate. We also learned through industry interviews that Shenguan is the preferred supplier of collagen casings to China’s largest pork companies, including WH Group, Yurun, and Jinlui.

Site visits to Shenguan’s three production bases show large, well-maintained facilities with bustling activity. Our team observed substantial cargo activity and worker presence during their observation. Locals described Shenguan as a very profitable company that’s always looking for workers and runs three shifts a day to meet demand.

Despite similar growth profiles, Shenguan trades at 10.6x 2015 earnings while its closest global competitors trade at 20x. This unjustifiable discount is based on an entirely false market assumption that Shenguan must be a fraud because it is so profitable. Given the evidence presented in this report, we believe Shenguan will be cleared of all substantial fraud allegations, and we expect the current discount to disappear as Shenguan begins to trade more in-line with its global peers. Even assuming a 17x multiple on 2015 earnings, we value Shenguan at HK$3.68 per share. This implies 60% upside to the current share price of HK$2.30. In addition, shareholders are rewarded with a 5% dividend yield for a total return of 65%.

Executive Summary

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Shenguan Holdings (829.HK) is the largest manufacturer of edible collagen sausage casings in China. In 2009, the Company raised HK$1.2 billion (US$148M) through a Hong Kong listing. Over the course of the following two years, its share price rose nearly 300% and finally peaked in 2011. Since then, a series of fraud allegations and questions over its accounting have hit the Company. 1,2,3 For its part, Management has consistently done a tragically poor job of defending the Company, and consequently, Shenguan’s share price has experienced a multi-year decline from which it has never recovered:

Source: Google Finance

Shenguan has always been an easy fraud target. In no small part, Management has brought criticism on itself thanks to the Company’s poor operational disclosures and unsophisticated market communication. Like most Chinese companies, Management has been slow to inherit the responsibilities of transparency and proper corporate communication that come with being a public company. But perhaps the singular and most obvious reason Shenguan has consistently fallen victim to fraud allegations are its financial statements. Among other curiosities, Shenguan reports gross margins of 60% and net margins of 45%, which intuitively defy belief for a company engaged in sausage casings. We know from experience how suspicious Shenguan’s reported margins look. Two years ago, they were the trigger that led us to investigate the Company for fraud. But after extensive due diligence we came away with the surprising conclusion that Shenguan is a real company and its reported financial information can be independently verified. Since that time, Shenguan has only experienced more fraud allegations. Today, its share price is at an all-time low and doubts over the Company are at an all-time high. Given the immense suspicion facing the Company, we decided to publish the results of our due diligence findings which will not only exonerate Shenguan, but also show why it is a real and deeply undervalued company.

1 http://asiavalueinvesting.blogspot.ca/2011/07/shenguan-holdings-group-tkr-829-hk.html

2 http://www.citics.com.hk/file%5Cresearch%5C777_CSI%20Equity%20Daily%204%20Feb%2013.pdf

3 http://www.emersonanalytics.co/downloads/Shenguan-HK_0829-StrongSell.pdf

Introduction

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Fraud accusation #1: Shenguan has substantially inflated its gross margins and profitability. Without doubt, Shenguan’s reported margins have invited the most suspicion and controversy over the years. This is understandable – Shenguan operates in the unexciting business of sausage casings, yet reports gross margins averaging 60% and net margins averaging 45%. Prior to our research, we were highly skeptical of these margins. Furthermore, we know that any report on Shenguan needs to address the accuracy of these margins head-on. First, we would like to note that 60% gross margins are not entirely unheard of in the sausage casing industry. Shenguan’s closest global peers are UK-based Devro and Spain-based Viscofan. Among the three, Viscofan reports the highest gross margins, followed by Shenguan and then Devro:

Exhibit 1 Peer Gross Margin Comparison

Source: Company reports

One of the explanations for these margins is the fact that the core raw material for collage casings is cattle inner skins. These skins have limited alternative uses, which gives large casing producers like Shenguan considerable bargaining power over fragmented suppliers. Accordingly, high gross margins are not entirely unusual for the industry. In any case, given the central role that these gross margins play in fraud allegations against Shenguan, we have done more than simple peer analysis. We have obtained tax documentation that irrefutably proves that the Company’s reported margins and profits are accurate. This tax documentation will not only independently verify Shenguan’s financial information, it is also the silver bullet that completely destroys any further allegations of fraud against the Company.

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2010 2011 2012 2013 2014

Shenguan Viscofan Devro

Gross Margin and Profit Confirmation

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Tax Payments: the Silver Bullet Shenguan has three production factories, all based in Guangxi Autonomous Region. Each year, the government releases a tax list of the top tax-paying companies in the region. In 2012, Shenguan was ranked the 18th highest taxpayer in Guangxi. In 2013, Shenguan was ranked 24th: 2012 Tax List

Source: http://bs.gxgs.gov.cn/art/2013/6/6/art_100538_233743.html & http://gxrb.gxnews.com.cn/html/2014-01/18/content_924160.htm

As background, Guangxi’s GDP in 2014 was approximately US$250 billion4 which is comparable to the GDP of Finland. In that sense, being ranked as one of the top tax-payers in the region is a no small accomplishment. Unfortunately, the tax lists only provide the names of the companies and their relative rankings, but not the amount of taxes actually paid. However, we can extrapolate how much in taxes Shenguan paid in 2012 and 2013 by comparing its placement on the list with other companies on the list that also disclose tax information.

4

https://www.dbresearch.com/servlet/reweb2.ReWEB?addmenu=false&document=PROD0000000000247521&rdShowArchivedDocus=true&rwnode=DBR_INTERNET_EN-PROD$RMLCHPM&rwobj=ReDisplay.Start.class&rwsite=DBR_INTERNET_EN-PROD

2013 Tax List

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2012 Tax Payments In China, there are two major taxes:

1. A 17% VAT (Value Added Tax) is paid on sales less cost of goods sold (gross profit),5 and 2. Income tax on pre-tax earnings.

For Shenguan’s 2012 reported gross margins and net profit to be accurate, the Company should have paid approximately RMB338 million in national taxes that year, consisting of:

RMB163 million in VAT (17% of RMB959 million in gross profit reported in 2012), plus

RMB175 million in income tax paid, as per Shenguan’s 2012 cash flow statement6 To confirm payment, we can benchmark Shenguan against Bank of Liuzhou. Bank of Liuzhou is ranked closely behind Shenguan at 22nd on the 2012 tax list, and publishes annual financial information including its tax payments. Below, we present Bank of Liuzhou’s cash flow statement for 2012, which show that the Bank paid RMB360 million in total taxes (VAT + income tax + minor taxes):

Source: Bank of Luizhou 2012 annual report

The RMB360 million in taxes reported by Bank of Liuzhou and its placement on the list is consistent with the estimated RMB338 million in taxes we would have expected Shenguan to pay if its financial information for 2012 were accurate. So far, so good.

5 There are usually some adjustments made to gross profit, but for our purposes we are keeping it simple.

6 http://www.hkexnews.hk/listedco/listconews/SEHK/2013/0411/LTN20130411390.pdf pg. 48

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2013 Tax Payments Using the same process, we can also corroborate Shenguan’s reported gross margins and net profit for 2013. Based on its reported financial results, Shenguan should have paid approximately RMB345 million in national taxes, consisting of:

RMB164 million in VAT (17% of RMB967 million in gross profit reported in 2013), plus

RMB181 million in income tax paid, as per Shenguan’s 2013 cash flow statement7 To confirm payment, we can benchmark Shenguan against Liuzhou Steel, which was ranked 26th on the 2013 tax list. Below, we present Liuzhou Steel’s cash flow statement for 2013, which shows that it paid RMB348 million in total taxes (VAT + income tax + minor taxes):

Source: Luizhou Steel 2013 annual report

Once again, the RMB348 million in taxes reported by Liuzhou Steel is consistent with the estimated RMB345 million we would have expected Shenguan to pay if its financial statements for 2013 were accurate. This analysis is irrefutable proof that Shenguan’s reported gross margins and profits are true and accurate. And just to be clear: It is extremely difficult to fake tax payments. 8 If Shenguan was engaged in a fraud to overstate its profitability, it would have to voluntarily pay hundreds of millions of RMB to the Guangxi government each year to maintain its tax-payer status. Such a scam would be prohibitively expensive to sustain and makes no economic sense.

7 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0410/LTN201404101064.pdf pg. 47

8 We used similar tax confirmation as the primary evidence in our successful exposé of Tianhe Chemicals (1619.HK)

last year. Since then, the stock is down ~50% and has lost US$4 billion in market value.

8

Fraud accusation #2: Shenguan has exaggerated its revenue. While the tax confirmation is proof enough on its own, we want to address other accusations against Shenguan, including concerns over inflated revenue. Historically, natural (gut) casings have been used in the production of sausages in China. With the advent of collagen casings, China’s sausage producers are switching from gut casings. Collagen casings have the added properties of improved hygiene, ease of storage and consistency.9 Furthermore, collagen casings can be machine-filled, whereas gut casings are filled manually, making them more labor-intensive. Since 2002, China’s collagen casing market has grown by an estimated 40% per year.10 As China’s undisputed industry leader, Shenguan has been the primary beneficiary of this growth:

Exhibit 2 Shenguan Revenue (RMB millions)

Source: Company annual reports

To corroborate this reported revenue, we pulled Shenguan’s most recently available SAIC filings11 and compared them to the regulatory filings the Company submitted to the Hong Kong Stock Exchange. Historically, material discrepancies between SAIC filings and regulatory filings have been a warning sign of fraud. In this case, Shenguan’s SAIC income statements for 2011 and 2012 matched the revenue and profit numbers in its Hong Kong regulatory filings:

9 http://www.devro.com/uploads/tx_sbdownloader/Case_for_collagen.pdf

10 Devro annual report 2013, pg. 22

11 By way of background, Chinese companies are required to file annual financial and business information with the

State Administration for Industry and Commerce (SAIC). SAIC filings are public documents.

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1,800

2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenue Confirmation

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Shengaun SAIC Income Statement 2011/2012

Source: SAIC filings

Shenguan Annual Report

Source: Company’s 2013 annual report

These corroborating SAIC filings further authenticate Shenguan’s revenue. However, we note that the problem with solely relying on SAIC confirmation is that fraudsters often fabricate their SAIC filings to match their regulatory filings. For this reason, we also verified the revenue figures through customer confirmation.

10

Fraud accusation #3: Shenguan has overstated sales to its largest customer. Each year as part of its annual disclosures, Shenguan reports percentage of sales to its largest customer. Shenguan’s largest customer since its IPO has been Shuanghui Group, 12 which was renamed WH Group last year in preparation for its own IPO. After its acquisition of Smithfield in 2013, WH Group became the world’s largest pork company, and listed on the Hong Kong Stock Exchange (288.HK) last year. In its IPO prospectus, WH Group disclosed the amount of raw materials purchased from its largest supplier in each of 2011, 2012, and 2013.13 Sources tell us that WH Group’s largest supplier was Shenguan 2012, and we believe it was also the largest supplier in 2011. As presented in Exhibit 3, we used this information to corroborate Shenguan’s sales claims: Exhibit 3 Shenguan Sales vs WH Group purchase (In RMB millions)

2011 2012 2013

Shenguan total revenue 1,502 1,649 1,655

Sales to WH Group (%) 33.2% 30.8% 30.8%

Shenguan - reported sales to largest customer 499 508 510

WH Group - reported purchase from largest supplier 513 509 673

Difference (%) -2.8% -0.2% -32.0%

Source: company filings, slight differences due to FX conversion.

As we can see, Shenguan’s disclosed sales to WH Group are consistent with WH Group’s disclosed purchases from its largest supplier in 2011 and 2012. This independent verification shows Shenguan’s reported sales to its biggest customer are accurate. We note that in 2013, WH Group’s purchase figures from its largest supplier are higher than the sales figures reported by Shenguan. We suspect that after the Smithfield acquisition in 2013, the ranking of WH Group’s largest supplier changed. In any case, given that Shenguan’s sales to WH Group match WH Group’s disclosed purchases in 2011 and 2012, it is obvious that Shenguan is not overstating these sales. Taking it a step further, we learned through interviews with former WH Group employees that Shenguan is the top collagen casing supplier to WH Group and supplies it with most of its collagen

12

http://www.hkexnews.hk/listedco/listconews/SEHK/2009/0930/LTN20090930023.PDF pg. 82 13

http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0415/LTN20140415117.PDF pg. 5

Largest Customer Confirmation

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casing. These sources believed that Shenguan can charge customers a premium for its products due to higher quality standards. We also learned through interviews that Shenguan is the preferred supplier to other large meat producers, namely Yurun and Jinlui. Having confirmed that Shenguan’s reported sales to WH Group are accurate, we are confident that the Company’s total reported sales are also accurate (notwithstanding the aforementioned tax proof). Between 2008 and 2014, sales to WH Group have accounted for approximately 30-40% of total Company sales:

Exhibit 4 Shenguan Revenue Composition

Source: Company filings

There are two take-aways from this graph: First, it’s important to note that prior to the Smithfield acquisition, WH Group accounted for approximately 5% of the pork market in China,14 yet contributes to over one-third of Shenguan’s total sales. If Management was overstating Company revenue, then sales to WH Group would likely represent far less than the current mix. For example, Management could inflate sales and justify it by claiming that since WH Group represents 5% of the pork market, it also represents 5% of total sales. It could even point to the fact that there are other uses for collagen casing, such as chicken and beef sausages. Second, if Shenguan was overstating its revenue, it is likely that total company sales would grow faster than sales to WH Group. However, sales to WH Group have remained relatively stable since 2008.

14

http://usa.chinadaily.com.cn/business/2013-05/31/content_16549492.htm

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2006 2007 2008 2009 2010 2011 2012 2013 2014

WH Group sales All other sales

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As a final test, we conducted site visits to Shenguan’s three production facilities located in the Guangxi towns of Fudian, Sifu, and Wangfu. Our site visits showed large, well maintained facilities with bustling activity.

Wangfu Production Site Wangfu is Shenguan’s largest production facility and we sent a team to observe the facility on a Saturday morning. Our team witnessed several full buses transporting employees to the site, as well as additional workers coming in by scooter. We learned that the facility is so busy that it operates three shifts a day. Furthermore, our team saw numerous cargo trucks coming in and out of the facility:

Massive production facility

Three of the buses transporting workers to the facility in the morning

Site Visits

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Sifu Production Site The Sifu facility is almost as big as the one in Wangfu, consisting of one long row of new, large buildings. Our team visited the facility twice, and each time saw numerous trucks coming in and out. One of our contacts also had a memorable conversation with the security guard at the facility: the security guard was a humble man who was quite proud of working for Shenguan. He even suggested our contact apply for a job there because it was a very profitable company always in need of employees.

In a separate conversation, a local taxi driver told our contact that he had a relative working at Shenguan, and that it was a good company and highly profitable.

Property entrance sign

Outside facility

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Fudian Production Site The Fudian facility is the smallest of Shenguan’s three production facilities. It was built near the main road which makes it impossible to expand the site. But despite its smaller size, our team still saw ample commercial and employee activity.

Front gate Truck leaving the facility

Long row of employee scooters

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Since 2011, Shenguan has lived under a cloud of doubt and suspicion that has forced the market to dismiss the Company and value its shares as a high-probability fraud. Shenguan’s closest global competitors are London-based Devro and Spain-based Viscofan, both of which specialize in collagen casing. Shenguan trades at a substantial discount to both these peers:

Exhibit 5

Share Price

Market Cap

Rev Growth EPS Growth ROE

P/E

Ticker (local) (US$ mm) 2015E 2015E Current 2015E Yield

Viscofan VIS.SM € 57.74 2,981 13.7% 11.5% 19.4% 35.6 23.2 2.0%

Devro DVO.LSE £288.00 737 1.7% 12.6% 3.0% 19.2 16.8 3.4%

Average 7.7% 12.0% 11.2% 27.4 20.0 2.7%

Shenguan 829.HK HK$2.30 976 3.1% 4.8% 20.7% 11.2 10.6 5.1%

Source: Bloomberg

Based on consensus estimates, Shenguan is trading at 10.6x 2015 earnings. In contrast, Devro and Viscofan trade at an average of 20x 2015 earnings, which represent a near 100% premium. Clearly, having spent the last four years being accused of fraud has done little to help Shenguan’s valuation. Considering our extensive due diligence, the current discount is excessive and has no fundamental basis other than misplaced fear. Given their comparable size, we believe Shenguan should be valued similar to Devro. Assuming a 17x multiple on 2015 earnings would values Shenguan at HK$3.68 per share. With a 5% dividend yield, this implies 65% upside to the current share price of HK$2.30. Admitted, Shenguan’s 2015 estimated earnings growth is below Devro (although everything else is higher). However, there are several reasons we believe Shenguan to be the better company. First, Shenguan has a dominant, near-monopoly position in China’s collagen casing market. And while there has been a lull in collagen casing growth over the last two years, the longer-term trend is secular. China’s per-capita protein consumption is less than 60% of the developed world,15 giving the industry ample room for growth and making it the fastest growing market for collagen casings.16 For this reason, competitors have been trying to break into China for years with limited success.17 Through industry interviews, we learned that Shenguan has established relationships with China’s leading sausage producers. Shenguan has developed customized products for its customers and is deeply integrated with its customers’ production lines. Furthermore, casings are only a fraction of the

15

http://www.uwa.edu.au/__data/assets/pdf_file/0009/85437/Animal-Protein-Keogh.pdf 16

http://www.devro.com/uploads/tx_sbdownloader/Case_for_collagen.pdf pg. 21 17

http://www.globalmeatnews.com/Industry-Markets/Casings-China-growth-drives-global-market

Valuation

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sausage production cost, which gives sausage producers no incentive to change casing supplier once it has been certified and fully integrated into the production process. These immense barriers have proven difficult for foreign competitors to overcome. For example, Devro has been operating in China since the early 1990s, but still has no discernable market share to speak of.18 Furthermore, in its pursuit of growth, Devro has burned through both its balance sheet and cash flow. We believe that Shenguan is in a far superior financial position relative to Devro, and will have little trouble maintaining and growing its market monopoly in China.

Cash Flow and Balance Sheet Analysis The following tables present the free cash flow generated by Shenguan, Devro, and Viscofan in 2012, 2013, and 2014:

Cash Flow Analysis (US$ millions)

Shenguan 2012 2013 2014

Operating cash flow 121 76 46

Capex (53) (32) (10)

Free cash flow 68 44 36

Devro 2012 2013 2014

Operating cash flow 69 59 60

Capex (55) (56) (87)

Free cash flow 15 3 (27)

Viscofan 2012 2013 2014

Operating cash flow 136 165 152

Capex (90) (131) (77)

Free cash flow 46 35 75

Source: Company annual reports

Over the last three years, Shenguan has consistently generated free cash flow levels similar to Viscofan, and far more than Devro. What makes this achievement all the more impressive is that Viscofan is three times larger than Shenguan in terms of revenue and market value. Meanwhile, Devro is similar in size to Shenguan but struggles to generate any free cash flow.

18

Annual report 2013, pg. 22

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Looking at balance sheet strength, Shenguan’s cash generating abilities have provided it with a strong financial base. Shenguan is by far the least levered among its global peers, having managed to expand operations through internally generated funds, while paying robust dividends with a payout ratio averaging more than 50%. Gearing Ratio (net debt/equity)

Source: 2014 results

Future Growth Driver With near-total control of China’s collagen casing market, this year Shenguan turned its attention to collagen applications in cosmetics, face masks, and other consumer products.19 Shenguan has extensive technical expertise in the field and will likely be able to deliver higher quality technologically advanced small-molecule collagen than many other Chinese cosmetics suppliers. Collagen for cosmetics and pharmaceuticals is a rapidly growing RMB4 billion market20 in China and industry players are rewarded with huge valuation premiums. For example, Baotou Dongbao Biotech, a small, publically traded collagen company (300239.SZ), is valued at 83x forward earnings. It’s still early days and we expect this new line of business to take one to two years to properly scale. But the potential here is substantial and is the next logical step for Shenguan.

19

http://www.hkexnews.hk/listedco/listconews/SEHK/2015/0320/LTN20150320874.pdf pg. 21 20

http://www.cb.com.cn/info/2011_0520/211067.html

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16.5%

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Shenguan

Viscofan

Devro

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Through a combination of tax confirmations, SAIC filings, customer verification, and site visits, this report has provided clear and irrefutable proof that Shenguan operates a very real business, and its reported financial statements are accurate and can be independently verified. Since 2011, Shenguan has consistently had its accounts questioned, which has caused the market to value its shares as a high-probability fraud. However, our extensive due diligence shows that the numerous fraud allegations against Shenguan are based on contrived or incomplete research. Shenguan trades at 10.6x 2015 earnings while its closest global competitors trade at 20x. This discount has no fundamental rationale considering that Shenguan has superior cash generating abilities, a stronger balance sheet, and a considerably higher dividend yield than both Devro and Viscofan. Given the evidence presented in this report, we expect this discount to narrow as fraud concerns fade from the market and investors renew their interest in the Company. To reiterate, we value Shenguan at 17x multiple on 2015 earnings. This values Shenguan at HK$3.68 per share, which implies 60% upside to the current share price of HK$2.30. In addition, shareholders are rewarded with a 5% dividend yield for a total return of 65%.

Conclusion: Strong Buy Expected Return: 65%

Conclusion

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Dear Ms. Zhou, Over the last four years, it must have been frustrating operating under the constant suspicion of fraud and helplessly watching your share price collapse. We hope that this report will represent a new beginning for your Company, as we expect the market to view Shenguan with renewed interest. However, you should not make the mistake of thinking that just because you have been exonerated of wrong-doing, you have done nothing wrong. Taking Shenguan public was a choice you made. With that choice come the responsibilities of transparency and open communication. So far, the Board and Management have shown abject failure in these areas. Your financial reports lack substance and are bereft of detail. You have given investors ample reason to doubt your Company. Vague excuses like “commercially sensitive”21 and “trade secrets”22 are not viable justifications for omitting relevant information from your shareholders. Chinese companies no longer have the luxury of being opaque. We don’t live in that world anymore. But you can help change that by leading your peers to better corporate governance through example. Shenguan is not engaged in sophisticated R&D or in national defense. You make sausage casings. If you can’t be more open with your shareholders, then what chance does the rest of China Inc. have? You have recently shown an interest in broadening the shareholder and capital base of the Company.23 We suggest the easiest way to achieve this goal is by increasing reverse roadshows, offering site visits, customer testimony, and providing expanded access to select corporate records, particularly taxes paid. Shares of Shenguan are unjustifiably depressed and your enviable problem is one of poor communication rather than one of poor business operations. Greater transparency will lead to substantial value creation as investors gain confidence in your Company. As majority shareholder, surely you have no interest in watching Shenguan’s extreme undervaluation persist. We hope that you take this report as a new chapter in your Company. With your leadership, we look forward to watching Shenguan return to its glory days. Yours truly, -Anonymous Analytics

21

http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0926/LTN20140926699.pdf pg. 4 22

http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0926/LTN20140926699.pdf pg. 3 23

http://www.hkexnews.hk/listedco/listconews/SEHK/2015/0212/LTN20150212656.pdf pg. 7

Open Letter to Chairwoman Zhou Yaxian

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