Measuring Profits in China

http://dealbook.blogs.nytimes.com/2009/08/17/another-view-shanghai-ed-profits/?emc=eta1

Generally Accepted Accounting Principles (GAAP!) are not generally accepted in China. This is partly because the Chinese have their own accounting rules and partly because "...rules are for breaking." This is a perspective that Andrew Ross Sorkin conveys (attached) after his discussions with Mark Dixon, an M&A advisor with "the1.com." Dixon was hired to decide how much a buyer should pay for a business in China. For Dixon, this meant first calculating an accurate profit for the target company, its so-called "normalized" profit.

That's where the problems started: as Sorkin points out, "One can hardly call something 'normal' when it doesn't normally happen." What Dixon went thru to get to normalized profit, or what he ended up calling "Profit X", involved a formula:

Profit X, or normalized after-tax profit=

The amount of after-tax profit reported to the government

+ Revenues received off the books to avoid paying revenue tax and to reduce corporation tax

+ Revenues from invoices pushed into the next period in order to delay paying revenue tax in the current period

- Revenues from invoices delayed from the prior period into the current period for the same reason

(Plus or minus 8 more categories to get to a real net!)

Dixon eventually got to a real net profit and created a net profit multiple for a potential purchase price and it's a story worth reading.

But, one wonders about potential acquisitions on a much larger scale like the Coca Cola offer for Huiyuan Juice which Chinese authorities ruled against in March of this year. Coke's offer of $2.4 billion would have put that acquisition as the largest ever by any company in the history of China. People who were in a position to know felt that Coke was offering way too much even though Huiyuan held a dominant market position in its space (40% of the pure juice sector).

One wonders how the Coke people figured out Huiyuan's real net profits.

On Coke's side of things, they announced after the transaction did not go thru, that they would spend roughly the amount that they proposed for Huiyuan on their "China" capital investments anyway. Many think that that announcement does not bode well for Huiyuan's market share.

One wonders about those China profits.