Glaucus Research Real Nutri HK 2010 Strong Sell Oct 21 2015

May you live in interesting times.
- Robert Kennedy
THIS RESEARCH REPORT EXPRESSES SOLELY OUR OPINIONS. Use Glaucus Research Group California, LLCs research opinions at your own risk. This is not
investment advice nor should it be construed as such. You should do your own research and due diligence before making any investment decisions with respect to the
securities covered herein. We have a short interest in Real Nutris stock and therefore stand to realize significant gains in the event that the price of such instruments
declines. Please refer to our full disclaimer located on the last page of this report.
COMPANY: Real Nutriceutical Group Limited HK: 2010

INDUSTRY: Nutritional Supplements
Recommendation:
Strong Sell
Price (as of
10/20/2015):
HKD: 1.09
Real Nutriceutical Group Limited (2010.HK) (Real Nutri or the Company) produces and sells
nutritional supplements and health drinks, primarily amino acid-based tablets and liquids. In this
report we present publicly available evidence, including PRC government filings, tax rankings, and
the results of retail channel checks, which in our opinion, indicate that Real Nutris sales and net
income are substantially less than reported to investors and regulators in the Companys Hong
Kong filings. We believe that much like China Medical Technologies (NASDAQ: CMEDY) and
China Lumena (HK: 0067), Real Nutris equity is worth HKD 0.00 and trading of its stock should
be halted to protect future investors from further losses and hopefully provide a modicum of recovery
for creditors.
1.
PRC Government Filings Indicate Revenues 84% Less than Reported. According to Real
Nutris HKEX filings, its two primary operating subsidiaries, Wuxi Ruinian Industry &
Commerce Co., Limited (Ruinian Industry) and Wuxi Zhenqian Bio-Technology (Wuxi
Biotech), generated RMB 5.1 billion in revenues from 2011-2013. Yet Publicly available
filings from the Ministry of Commerce (Mofcom) show that the two subsidiaries, which
together account for over 90% of the Companys reported revenues and profits, only generated
RMB 839 million in combined revenues from 2011-2013, 84% less than reported to Hong
Kong investors and regulators. Mofcom filings also show that rather than generate RMB 1.97
billion in operating profits from 2011-2013 (as reported), Real Nutris primary operating
subsidiaries only generated RMB 26 million in operating profits over that period, which is
99% less than reported in HKEX filings. In our opinion, this is conclusive evidence that Real
Nutri has massively fabricated its reported revenues and profits.
2.
PRC Government Tax Rankings Indicate Net Income a Fraction of Reported Figures. If
Real Nutris Hong Kong financials are true, we estimate that Real Nutris primary operating
subsidiary, Ruinian Industry, whose headquarters and production base are located in Binhu
district, Wuxi city, in the province of Jiangsu, should have paid RMB 351 million in taxes in
2013 and RMB 344 million in taxes in 2012 (income and VAT). Yet the Binhu district
government released a report regarding its 2013 tax base, implying that only two companies,
Sino Swede Pharmaceutical Co., Ltd (SSPC) and Koso (Wuxi) Co., Ltd. (Koso), paid over
RMB 100 million in taxes in 2013. If Real Nutris reported financials are true, Ruinian Industry
should have paid well over RMB 100 million in taxes. Ruinian Industrys omission from the
Binhu districts 2013 tax report suggests that Real Nutri did not pay the amount of taxes that it
claims (and thus generates far less net income than it claims) in its public filings.
3.
We Meet Again, Mr. Poon. Real Nutris CFO, Mr. Poon Yick Pang, served as the director of
finance for China Medical Technologies (CMED), a US-listed company which Glaucus
exposed as a massive fraud in 2011. After CMED collapsed following our report, Real Nutri
tried to conceal Mr. Poons connection to the disgraced firm. Mr. Poon was CMEDs director of
finance during a period when CMED engaged in a fraudulent acquisition to secretly transfer
shareholder money to its Chairman. He was also CMEDs director of finance when CMED filed
false financial statements which deliberately inflated the Companys reported sales and profits.
In our opinion, Real Nutri is perpetuating a similar fraud on the market, and the fact that it
employs a disgraced CFO who would likely be behind bars in the United States only confirms
our opinions.
Market Cap:
HKD: 2.14 billion
Daily Volume:
15.34 million
shares (avg. 3mo)
Price Target:
HKD: 0.00
Real Nutriceutical Group Limited HK: 2010
www.glaucusresearch.com
4.
Customers as Undisclosed Related Parties. In its prospectus, Real Nutri claimed that two of its five largest customers, distributors
Wuxi Lianren Trading Co., Ltd. (Lianren) and Wuxi Zongwei Logistics co., Ltd. (Wuxi Logistics), were independent third
parties. But evidence suggests that both customers are in fact related parties controlled by Real Nutris Chairman Wang Fucai.
First, Lianren recently posted job listings on university websites in which it claimed to be a subsidiary of the Company. Second,
Wuxi Logistics shares an address with a subsidiary of the Company. In addition, records from a recent PRC lawsuit state that Wuxi
Logistics shareholder is also an employee of Ruinian Zhiye, a company owned by the Companys Chairman. In our opinion, such
compelling evidence indicates that both supposedly independent customers are indeed undisclosed related parties, a clear violation
of Hong Kong listing rules and a material misrepresentation to investors and regulators.
5.
On Site Due Diligence Confirms Exaggerated Retail Presence. In an effort to channel check the Companys retail footprint, an
independent investigator visited 59 retailers (supermarkets and drug stores) and nine Company stores. The results suggest the
Companys retail footprint is much smaller than advertised.
6.
a.
Retail Store Count Likely Fabricated. The Company claims to operate over 200 retail stores as of December 31, 2014.
However, an independent investigator visited nine reported locations in three provinces, and found only three retail stores that
were open and operating. The investigator took photographs of the non-operating locations, one of which still bore the Company
logo but was closed. Other locations were either closed or contained other retail stores (e.g. liquor stores) not affiliated with the
Company. Although a small sample size, we believe that this on-site due diligence indicates that the Company is likely
exaggerating its retail store count.
b.
Real Nutris Products Either Absent or Limited at Many Retailers. An investigator also visited 43 supermarkets at which the
Company claims to sell products (including Wal-Mart, RT-Mart, Auchan, Vanguard and Suguo). Only 26 stores were actually
selling the Companys products (60%). Of those selling Ruinian branded products, in many cases, the Companys shelf presence
was either sub-optimal (bottom shelf) or limited (one product). Of the 16 drug stores visited (LBX, Nepstar and Guosheng), the
investigator found the Companys products for sale at only one drug store (6%), suggesting that the Company has significantly
exaggerated its penetration of this retail channel.
Reported Expenditures Simply Not Credible. In our opinion, a number of Real Nutris reported expenditures appear highly
dubious and suggest that the Company is straining to whitewash fake sales either through fabricated expenses, capital expenditures,
acquisitions and cash balances.
a.
Advertising Expenses. Real Nutri claims to have spent over RMB 1 billion on advertising expenses over the last three years,
amounting to approximately 18% of its revenues over this period. If true, Real Nutri would be among the top thirty advertising
spenders of A-share companies, alongside popular national brands such as Unicom and Yanjing Beer. This is simply not credible.
Real Nutris ad spending also exceeds (on an absolute and relative basis) the most popular dietary supplement brands as ranked
by the PRCs national bureau of statistics, companies such as By-Health who have spent 50% less on advertising and have
launched campaigns with sports celebrities such as Yao Ming. Real Nutri spends so much more than other dietary supplement
brands, yet is comparatively obscure and has little to show for such spending in the form of endorsements. Ultimately, such
spending is hardly credible, and corroborates filings and tax rankings which suggest that Real Nutris operating business is
substantially smaller than it claims.
b.
Questionable Capital Expenditures. In 2013, a local media article alleged that Real Nutri has exaggerated the value of its
property, plant and equipment. We agree. Real Nutri reportedly spent RMB 1.5 billion on capex from 2011-2014, which was
so significant that it accounted for 75% of cash flow generated from operations over that time. Despite such spending, Real
Nutris revenue only increased RMB 705 million during that period. Likewise, its return on assets plummeted from 17.0% to
9.8% and its fixed asset turnover ratio sank from 2.17x to an abysmal 1.06x. Measured both on an absolute and relative basis,
Real Nutris returns on its reported capital expenditures are so poor that such reported spending simply appears fabricated.
c.
Mystery of Advanced Technical Know-How. Since its IPO, Real Nutri has carried a mysterious balance sheet tem labelled
advance payment for acquisition of technical know-how, which has ballooned from RMB 27 million in 2009 to RMB 112
million at FYE 2014. Few details are provided, except that the know-how has been waiting since 2009 to be licensed by
the PRC government. We are highly suspicious of this reported purchase. Why does Real Nutri have to commit over RMB
100 million in capital today to secure an unlicensed technique? Real Nutri makes supplements, not rockets.
d.
Sham Acquisition. On 29 Jun 2014, Real Nutri announced the acquisition of 60% Magic Galaxy Worldwide Limited (Magic
Galaxy), the sole shareholder of a PRC-based pharmaceutical company which produces eye drops, for an aggregate
consideration of RMB 200 million. The Company told investors that the acquired business generated a net profit of RMB ~35
million in 2014 and held RMB 267 million in patents. Yet, publicly available Mofcom filings indicate that the sole operating
subsidiary of Magic Galaxy reported a net loss in 2014, and held only RMB 14 million in intangible assets at FYE 2014,
suggesting that Real Nutri massively exaggerated the profitability and value of the acquired business.
7.
Retail Sales Data Indicates Real Nutri Fabricated Reported Sales. CMH, a subsidiary of SinoHealth, is a leading
independent market research firm, specializing in the healthcare sector. CMH employs a monitoring system to track the
sales of nutritional supplements (through pharmacies and drug stores) to consumers in China and compiles the data into
annual rankings of the best-selling nutritional supplements and products.
a.
Real Nutris Sales a Fraction of By-Healths. CMHs ranking of the top-twenty selling health and nutritional products
of 2013 did not include any of Real Nutris products. By contrast, By-Health (SHZ: 300146), which reported total sales
in 2013 of only RMB 1.5 billion (compared to Real Nutris reported RMB 1.9 billion in sales that year), has seven
nutritional products on CMHs lists (ranked 1, 2, 6, 7, 11, 15 and 19). By-Health, a direct competitor, reports
significantly lower sales than Real Nutri. Its ubiquity on the 2013 CMH rankings, and Real Nutris stark absence,
corroborates the rest of the evidence in this report showing that Real Nutri is massively overstating its sales.
b.
CMH Rankings Indicate Sales of Flagship Product Exaggerated in 2013. CMH reported that the 20th ranked product
on its 2013 list had RMB 216 million in retail sales. We estimate that Real Nutris flagship product should have generated
at least RMB 339 million in retail sales in 2013 through drug stores and pharmacies. But it did not make CMHs list of
top twenty, the threshold for which was RMB 216 million, implying Real Nutri has exaggerated sales of its flagship
product.
8.
Real Nutris Supposed Efficiency Almost Impossible. Real Nutri reported RMB 2.17 million of revenue per employee
in 2013, which significantly exceeds the revenues-per-employee reported by its peers, including By-Health (RMB 0.85
million per employee), Jiao Da Onlly (0.54 million per employee) and Tai Tai (RMB 0.87 million per employee). A large
discrepancy in revenues-per-employee was a key clue in our investigation revealing that China Metal Recycling (report
available here) was fabricating its reported financials. Like CMR, Real Nutris reported productivity is an outlier and, in
our opinion, further evidence that its financials are fabricated.
9.
Inexplicable Short Term Borrowings. Real Nutri has historically claimed a large cash balance, exceeding RMB 1.3
billion in each of the last three FYs (2012-2014). Despite excessive cash reserves, the Company has also reportedly taken
short term loans of RMB 195 million, RMB 435 million and RMB 884 million, at an implied interest rate of 12.0%, 5.9%
and 4.2% in 2012, 2013 and 2014, respectively. Why would a Company with such a healthy cash balance take out short
term loans, especially at interest rates far exceeding the rate received for the Companys existing bank balances? We suspect
that the Companys reported cash reserves, like its reported revenues and profits, are significantly overstated, which explains
why Real Nutri needs to engage in short term borrowing a higher interest rates to make up the short-fall and fund its
continuing operations.
10. Serial Capital Raiser and the Illusion of Dividends. Despite reporting substantial profits (EBTIDA margins of 40-45%
2010-2014), Real Nutri is a serial capital raiser because such profits are spent on dubious capital expenditures and
acquisitions of questionable value. Its supposedly generous dividend policy is therefore something of an illusion, because
such dividends are paid by funds raised from the capital markets and not from cash generated by the business. Since 2010,
the Company has raised RMB 2 billion in proceeds, of which it has declared dividends of RMB ~296 million (~13% of
capital raised).
11. Chinese SOE Quietly Cashed Out At a Loss. In May 2013, Newport Consulting Limited, now owned by China
Shipbuilding (an SOE), subscribed to RMB 200 million of convertible bonds issued by the Company. Trouble followed.
First, China Shipbuilding elected not to exercise its option to purchase a 2 nd tranche of bonds worth RMB 400 million.
Then, in July 2015, China Shipbuilding elected to convert its bonds at HKD 3.00 when the Companys shares were trading
at, or below, HKD 2.00. Following conversion, the SOE promptly assigned its shares to a third party. The decision to
realize a significant loss by converting at a strike price 50% above the last traded price of the shares is inexplicable and
irrational unless the SOE wanted (desperately) to exit its position.
12. Valuation. We believe that the most appropriate comparison to Real Nutri is CMED, the US-listed company which
defrauded investors and creditors by fabricating its reported financial performance. When we alerted the market to CMEDs
malfeasance, CMEDs management went dark and absconded with the assets, leaving shareholders and creditors almost
nothing to recover. In our opinion, there is a wealth of clear and convincing evidence that Real Nutris sales are 84% less
than reported and that its net income is 99% less than reported to investors and regulators in the Companys Hong
Kong filings. This gives us ample reason to doubt the authenticity of the Companys reported RMB 2.4 billion cash balance.
Despite a supposedly healthy cash balance, Real Nutri has taken on short-term debt of RMB 884 million, which would be
senior to any shareholder recovery. Ultimately, we believe that much like China Medical Technologies (NASDAQ:
CMEDY) and China Lumena (HK: 0067), Real Nutris equity is worth HKD 0.00 and trading of its stock should be halted
to protect future investors from further losses and hopefully provide a modicum of recovery for creditors.
PRC GOVERNMENT FILINGS INDICATE REVENUES 84% LESS THAN REPORTED

Real Nutris PRC government filings indicate that the Company has massively exaggerated its revenues,
profits and the scale of its operating business to Hong Kong investors and regulators.
Wholly foreign owned enterprises (WFOE) are required by law to submit annual reports to Chinas
Ministry of Commerce (Mofcom). Pursuant to Article 62 of the PRCs Detailed Rules for the
Implementation of the Law on Wholly Foreign Owned Enterprises, a WFOEs annual filings with Mofcom
are required to include audited financial statements (income statements, balance sheets and cash flow
statements), as well as basic corporate information and a summary of registered and paid-in capital
contributions. Like SAIC filings, Mofcom filings are publicly available and can be obtained for diligence
purposes.
Source: http://www.mofcom.gov.cn/article/b/f/201202/20120207989274.shtml
According to Real Nutris HKEX filings, its primary operating subsidiary, Wuxi Ruinian Industry &
Commerce Co., Limited (Ruinian Industry) generated RMB 3.9 billion in revenues from 2011-2013.
Ruinian Industry accounted for 71% of the Companys reported revenues over the three-year period.
Yet, according to publicly available Mofcom files, submitted by Ruinian Industry to the PRC government
pursuant to statutory requirements, Real Nutris primary operating subsidiary only generated RMB 790
million in revenues from 2011-2013, 80% less than reported.
Ruinian Industry Revenues: Mofcom Financials vs. Reported

RMB'000
2011
2012
Reported Revenues
1,280,069
Mofcom Financials
% Difference
2013
Total
1,252,441
1,368,778
3,901,288
311,238
226,487
252,414
790,140
-76%
-82%
-82%
-80%
Source: Ruinian Industry Mofcom Filings; Real Nutri Annual Reports
Source: 2013 Mofcom Filings Ruinian Industry
Source: 2012 Mofcom Filings Ruinian Industry

Just as important, Mofcom filings also show that Ruinian Industry is significantly less profitable than the
Company claims in its HKEX filings. Real Nutri reported that Ruinian Industry generated approximately
RMB 1.7 billion in operating profits from 2011-2013 (82% of the Companys reported operating profits
during that period). However, Mofcom filings show that the primary operating subsidiary barely broke
even, generating only RMB 32.2 million in operating profits over that period. This was 98% less than the
profits reported to Hong Kong investors and regulators.
Ruinian Industry Operating Profit: Mofcom Financials vs. Reported

RMB'000
Estimated Operating Profit
Mofcom Financials
% Difference
2011
2012
2013
Total
620,890
535,918
565,479
1,722,287
13,195
13,356
5,677
32,228
-98%
-98%
-99%
-98%
Source: Ruinian Industry Mofcom Filings; Real Nutri Annual Reports
Mofcom filings for Real Nutris secondary operating subsidiary show the same pattern. The Companys
HKEX filings report that Wuxi Zhenqian Bio-Technology (Wuxi Biotech), generated RMB 1.2 billion in
revenues from 2011-2013, which accounted for 22% of the Companys reported revenues over that period.
Yet Mofcom filings indicate that Wuxi Biotech did not generate any revenues in 2011, and that it generated
only RMB 49 million in revenues in 2012-2013, an aggregate of 96% less than reported by the
Company.
Wuxi Biotech Revenues: Mofcom Financials vs. Reported
RMB'000
2011
2012
2013
Reported Revenues
410,351
389,424
408,591
1,208,366
3,419
45,645
49,064
-100%
-99%
-89%
-96%
Mofcom Financials
% Difference
Total
Source: Wuxi Biotech Mofcom Filings; Real Nutri Annual Reports
Source: 2013 Mofcom Filings Wuxi Biotech
Source: 2012 Mofcom Filings Wuxi Biotech

Furthermore, Real Nutri reported that Wuxi Biotech generated RMB 245.9 million in estimated operating
profits from 2011-2013, which accounted for 12% of the Companys total operating profits during that
time. However, Mofcom filings show that Wuxi Biotech generated a RMB 6 million loss over that
period.
Wuxi Biotech Operating Profit: Mofcom Financials vs. Reported
RMB'000
2011
2012
2013
Total
94,585
73,238
78,086
245,909
Mofcom Financials
(3,253)
(5,457)
2,648
(6,062)
-103%
-107%
-97%
-102%
% Difference
Source: Wuxi Biotech Mofcom Filings; Real Nutri Annual Reports
Mofcom filings indicate that Wuxi Biotechs operating profits were 102% less than reported to Hong Kong
investors and regulators from 2011-2013.
On aggregate, Real Nutri reported that its two primary operating subsidiaries, Ruinian Industry and Wuxi
Biotech, generated RMB 5.1 billion in revenues from 2011-2013. Yet Mofcom filings show that the
subsidiaries, which together account for over 90% of the Companys reported revenues, only generated
RMB 839 million in combined revenues from 2011-2013, 84% less than reported to Hong Kong
investors and regulators.
Aggregate Revenues: Mofcom vs. Reported
RMB'000
2011
2012
2013
Total
Reported Revenues
1,690,420
1,641,865
1,777,369
5,109,654
Mofcom Financials
311,238
229,906
298,059
839,203
% Difference
-82%
-86%
-83%
-84%
Sources: Mofcom Filings for Ruinian Industry and Wuxi Biotech; Real Nutri
Annual Reports
Mofcom filings also show that rather than generate RMB 1.97 billion in operating profits from 2011-2013,
Real Nutris primary operating subsidiaries only generated RMB 26 million in cumulative operating
profits over that period, which is 99% less than reported in HKEX filings.
Aggregate Operating Profit: Mofcom vs. Reported
RMB'000
2011
2012
2013
715,475
609,155
643,565
1,968,196
9,942
7,900
8,325
26,166
Mofcom Financials
Total
% Difference
-99%
-99%
-99%
-99%
Sources: Mofcom Filings for Ruinian Industry and Wuxi Biotech; Real Nutri
Annual Reports
In our opinion, this is conclusive evidence that Real Nutri massively fabricated its reported revenues and
profits.
TAX RANKINGS INDICATE NET INCOME A FRACTION OF REPORTED FIGURES

A 2013 tax report by the Binhu district government indicates that the Company is paying far less tax than
it claims, suggesting that the Companys net income is a fraction of the figure reported to Hong Kong
investors and regulators.
Real Nutri sells products in three segments: health and nutritional supplements, health drinks and
pharmaceutical products. According to the Companys annual reports, its health and nutritional
supplements segment accounts for ~70% of the Companys revenues and ~80% of its gross profits in FYs
2011-2014.
Real Nutri Segment Breakdown: Revenues and Gross Profits
Revenues
RMB mm
2011
Health and nutritional supplements

%
Health drinks
%
Pharmaceutical products
%
Total
2012
Segment Results (Gross Profit)
2013
2014
2011
2012
2013
2014
1,280
1,252
1,369
1,438
1,035
1,001
1,065
1,126
72%
71%
72%
70%
81%
83%
82%
78%
410
389
409
451
158
137
147
230
23%
22%
21%
22%
12%
11%
11%
16%
99
113
126
173
86
75
83
91
6%
6%
7%
8%
7%
6%
6%
6%
1,790
1,755
1,903
2,062
1,279
1,212
1,294
1,446
According to the Companys IPO prospectus and subsequent annual reports, Real Nutris health and
nutritional supplements business is conducted through its primary operating subsidiary Ruinian Industry
(Wuxi Ruinian Industry & Commerce Co., Ltd.) (Ruinian Industry), which is located (along with its
manufacturing facility) in Binhu district, Jiangsu province. 1
0F
Given that Ruinian Industry accounts for 82% of the Companys operating profit, we estimate that the
subsidiary paid at least RMB 170 million in income taxes and RMB 181 million VAT for a total of RMB
351 million in 2013.
Real Nutriceutical Reported Taxes Paid
RMB mm
Real Nutriceutical
Real Nutri. Total Reported Income Tax
Real Nutri. Total Estimated VAT Tax
Ruinian Subsidiary
Ruinian Indutry Operating Profit Percentage
Estimated Income Tax for Ruinian Industry
Estimated VAT Tax for Ruinian Industry
Total Estimated Tax for Ruinian Industry
2010
2011
2012
2013
176
168
223
217
211
206
207
220
81%
142
136
278
81%
180
176
356
83%
174
170
344
82%
170
181
351
Source: Real Nutriceutical Public Filings; Glaucus Calculation

Despite supposedly paying over RMB 351 million in taxes in 2013, Ruinian Industry was conspicuously
omitted from a prominent government tax list. The Binhu district government released a report regarding
its 2013 tax base, stating that the district collected RMB 4.03 billion in taxes from manufacturing (including
the production of pharmaceutical products). The report highlighted that only two companies, Sino Swede
1
Company Prospectus, p. 81; V-5, I-2; 2014 Annual Report, p. 106.
10
Pharmaceutical Co., Ltd (SSPC) and Koso (Wuxi) Co., Ltd. (Koso), paid over RMB 100 million in
taxes in 2013.
Stable growth of fiscal income: The total annual fiscal income reached RMB14.6bn,
growth of 4.3%. Public fiscal budget income was RMB7.65bn, growth of 5.9%. Tax income
from manufacturing reached RMB4.03bn while two enterprises namely SPCC and Koso
paid over RMB100m of tax
Source:
http://www.wxbh.gov.cn/bhmh/sitePages/subPages/1360019001484500.html?sourceChannelId=197&did
=337878
If Real Nutris reported financials are true, then primary operating subsidiary Ruinian Industry, located in
Binhu district, should have paid an estimated RMB 351 million in taxes in 2013 (VAT plus income taxes).
Such amounts far exceed the ~RMB 100 million in taxes paid by Koso and SSPC, and should therefore
have been highlighted in the Binhu districts 2013 tax report. Yet the district governments report omits
Ruinian Industry as a significant tax payer, indicating that the subsidiary pays far less taxes than it claims.
To put in context Ruinian Industrys purported contribution, if Real Nutris Hong Kong filings are true,
then we estimate that Ruinian Industrys tax contributions should accounted for approximately 8.7% of the
Binhu districts total tax revenues from manufacturing. It would be a much larger contributor to the
districts tax revenues than either Koso or SSPC.
Binhu District's Biggest Tax Payer?
RMB mm
Binhu District Total Tax Income From Manufacturing
Ruinian Industry Est. VAT
Ruinian Industry Est. Income Tax
Ruinian Industry Total Est. Tax
% Contribution
2013
4,030
181
170
351
8.7%
In our opinion, the omission of Ruinian Industry from the district tax report indicates that Real Nutri pays
far less in taxes than it claims, meaning its net income is actually a small fraction of the net income figure
reported to Hong Kong investors and regulators.
11
WE MEET AGAIN, MR. POON

In December 2011, we alerted investors that a US-listed company, China Medical Technologies
(NASDAQ: CMEDY) (CMED), was defrauding its investors by fabricating its reported financial
performance. We presented a comprehensive report outlining the fraud, including evidence that CMEDs
insiders had embezzled money from the company. Investors may recall that shortly thereafter, CMED went
dark, wiping out 100% of shareholder equity and leaving bond holders with $426 million in unpaid
debt. CMED filed for bankruptcy in August 2012 and was subsequently liquidated. 2 Today, CMED serves
as a cautionary tale for investors who put their faith in the wrong people.
1F
One of those people is back. Real Nutris Chief Financial Officer, Mr. Poon Yick Pang, Philip, just happens
to have been CMEDs director of finance from 2007 through 2008.
Source: 2010 Annual report, p. 27.

After we exposed CMED for a fraud, Real Nutri tried to hide Mr. Poons connection to the disgraced
company. In Real Nutris 2012 annual report, Real Nutri deliberately omitted from Mr. Poons biography
any mention of CMED or his time there.
Source: 2012 Annual report, p. 29.

Mr. Poon was CMEDs director of finance in 2007 and 2008, meaning his tenure coincided with a
fraudulent acquisition of a shell company from a party secretly related to CMEDs Chairman. 3 We also
believe, and subsequent events support, that during this time, CMED filed false financial statements which
deliberately inflated the Companys reported sales and profits.
2F
In our opinion, Real Nutri is perpetuating a similar fraud on the market, and the fact that it employs a
disgraced CFO who would be behind bars in the United States only confirms our opinions.
http://www.bloomberg.com/news/articles/2012-08-31/china-medical-technologies-files-chapter-15-bankruptcy
https://glaucusresearch.com/wp-content/uploads/downloads/2011/12/GlaucusResearch-China_Medical-CMEDStrong_Sell_December_6_2011.pdf
3
12
CUSTOMERS ARE UNDISCLOSED RELATED PARTIES

In its prospectus, Real Nutri claimed that two of its five largest customers, distributors Wuxi Lianren
Trading Co., Ltd. (Lianren) and Wuxi Zongwei Logistics co., Ltd. (Wuxi Logistics), were independent
third parties.
Source: Real Nutriceutical Propectus, p. 147
1) Lianren
Yet evidence suggests that both major customers are in fact undisclosed related parties. First, in two job
postings on university websites, one from 2014, Lianren advertises itself as a subsidiary of Real Nutri.
Source: http://life-phar.njtech.edu.cn/view.asp?id=6706&class=850
13
Source: http://bys.ujs.edu.cn/home/company_show/com_id/1672
The above job postings by a supposedly independent customer, Lianren, show clearly that the distributor
considers itself a subsidiary of the Company.
2) Wuxi Logistics
Evidence suggests that a second major customer, Wuxi Logistics, is also an undisclosed related party, as
its registered address is identical to Company subsidiary Wuxi Ruinian Pharmaceutical Co., Ltd. (Ruinian
Pharmaceutical). Both are registered at No. 102 Furongzhong No. 2 Road, Xishan Economic
Development Area, Wuxi.
Source: http://gsxt.saic.gov.cn/
14
Source: http://www.ganji.com/gongsi/28116338/
Source: http://gsxt.saic.gov.cn/
15
In addition, a ruling from a PRC court dated June 29, 2015, and released on a PRC government website on
July 16, 2015, states one of Wuxi Logistics primary shareholders, Fan Xijuan, is also a current employee
Ruinian Zhiye, which is owned by Chairman Wang Fucai.
Source: http://caseshare.cn/full/126159159.html
Ultimately, Lianren is holding itself out a subsidiary of the Company to university recruits and Wuxi
Logistics not only shares a registered address with a Company subsidiary, but also its shareholder is a
current employee of a business owned by Chairman Wang Fucai.
In our opinion, the evidence indicates that both supposedly independent customers are in fact undisclosed
related parties. We believe that this is another clear violation of Hong Kong listing rules and a material
misrepresentation to Hong Kong investors and regulators.
16
ON SITE DUE DILIGENCE CONFIRMS EXAGERRATED RETAIL PRESENCE

On-site channel checks of the Companys retail presence, both at Real Nutri stores and third party
distributors through which Real Nutri claims to sell its products, suggest that the Companys retail footprint
is far smaller than it claims.
The results of the investigation suggest, at least in terms of shelf space and in-store presence, that Ruinian
does not appear to be a leading brand. This in turn corroborates the Mofcom filings, tax-lists, brandrankings and other evidence in this report, indicating that the Company has fabricated its reported sales.
1) Retail Store Count Likely Exaggerated
As of December 31, 2014, Real Nutri claimed that there were around 200 Real Nutri Health Stores which
together contributed revenue of RMB 239.5 million in the year. 4 We believe that the Company has likely
exaggerated the number of stores.
3F
In order to get a more complete understanding of the Companys retail presence, an independent
investigator visited nine reported Real Nutri locations in four provinces (Shanghai, Zhejiang, Jiangsu and
Shangdong). The investigator found only 3 working Real Nutri stores.
No. of stores No. of Stores

visited
in Operation
Real Nutri Retail Stores

Ruinian store
Shanghai
Hangzhou
Nanjing/Wuxi
Total
Province
Shanghai
Zhejiang
Jiangsu
2
1
6
9
1
0
2
3
% of Stores
Operating
50%
0%
33%
33%
The investigator took photos to document closed or non-operational stores. For example, at the address
for the Nanjing, Jiangsu (Bai Xia Qu store), Real Nutris name was still on the store but it was closed.
Source: Investigator Photo September 2015
2014 Annual Report, p. 6.
17
At the address for the Liu He Qu store in Nanjing, Jiangsu, the investigator found no Real Nutri store.
Instead, the store at the address was selling liquor.

At the location of another former Real Nutri store in Hangzhou, Zhejiang (1572, Nanhuan Road, Xiaoshan
District, Hangzhou), the investigator found another health store which was not affiliated with Real Nutri.
18
At the store location at No. 36 Yongfeng Road, Wuxi, Jiangsu, a shop appeared to be under construction
but by a firm unrelated to Real Nutri.

Of the nine reported retail locations visited by the investigator, only three (33%) contained fully operating
Real Nutri stores. Other locations still bore the Company name but were closed (permanently, it appears).
Still other locations were either under construction or were occupied by stores unaffiliated with the
Company. Even though this was a small sample size, we believe that this on-site due diligence indicates
that Real Nutri has likely exaggerated its reported retail store count.
2) Products Either Absent or Limited at Many Retailers
The Company sells products through three channels: distributors (which then sell to supermarkets, drug
stores and hospitals), Real Nurti health stores, and an online direct sales platform. 90% of the Companys
reported sales, however, are through distributors.
In an effort to channel check the Companys reported retail presence, an independent investigator visited
59 supermarkets and drug stores in Shanghai, Hangzhou (Zheijiang), Nanjing (Jiangsu) and Jinan
(Shandong) at which Real Nutri claimed to sell its nutritional supplements and other products.
Of the 43 supermarkets visited, including stores of Wal-Mart, Auchan, RT-Mart, Vanguard and Suguo (all
retailers through which Real Nutri claims to sell its products), the investigator found Real Nutris products
for sale at 26 supermarkets. In other words, only 60% of the supermarkets visited sold the Companys
products.
Real Nutris retail presence at drug stores was even worse. The Company claims to sell its products through
drug store chains including LBX, Nepstar and Guosheng, but of the 16 drug stores visited, only one Nepstar
drugstore was actually selling its products.
19
Status of Ruinian claimed distributors carrying Ruinian products

No. of stores No. of stores that Sold
Distributor
visited
Ruinian Products
Supermarket
43
26
% stores that
have Ruinian
60%
RT-Mart
19
12
63%
Auchan
40%
Wal-Mart
12
75%
Vanguard
0%
Suguo
100%
Drug store
16
6%
LBX
0%
Nepstar
17%
Guosheng
0%
59
27
46%
Total claimed distributors visited
Source: Independent Investigater Report

Source: September 2015 In-Store Channel Check
The Company has claimed to sell its products through Auchan supermarkets in Jiangsu and Zhejiang since
2011. But of the five Auchan stores visited by the investigator, only two (40%) actually carried Real Nutris
products. For example, the Auchan supermarket in Shanghai did not:
20
Since 2011, the Company has claimed to sell its products through RT-Mart (Jiangsu and Zhejiang). Of the
5 RT-Marts visited by the investigator in Jiangsu and Zhejiang, only 3 carried Ruinian branded products.
For example, the RT-Mart in Nanjing did sell them, but the Companys shelf space was less than ideal.
Jiao Da Onlly
Ruinian
Tai Tai Pharm

Jiao Da Onlly
21
However, 37% of RT-Marts visited did not carry the Companys products, including the RT-Mart in
Hangzhou:
22
All three of the Suguo supermarkets visited by the investigator carried Ruinian-branded products, but in
certain cases they were again placed on the lower shelfs, as was the case at the Suguo in Nanjing, Jiangsu.

The Companys retail presence was far more limited at drug stores. Since 2011, the Company has claimed
to sell its products through the Nanjing Guosheng Pharmacy. But neither Guosheng location visited by the
investigator was carrying the Companys products:

23
Similarly, the Company has claimed since 2012 to sell through Laobaixin Pharamcy Chain (LBX), yet
of the eight LBX stores visited by the investigator, none carried the Companys products:
Laobaixin Shanghai
Jiao Da Onlly

The Company disclosed in its 2010 annual report that it had begun selling through Nepstar Chain
Drugstores, yet of the six visited, only one carried the Companys products.
Nepstar Hangzhou Carries Ruinians Products

24
The Nepstar in Nanjing, Jiangsu, and four other Nepstar stores did not carry the Companys products:

Of the 43 supermarkets visited and photographed by the investigator, 60% (26) carried Ruinian branded
products, although in many cases relegated them to lower shelves indicative of less popular products. The
shelf placement of Ruinians products was also poor relative to other brands such as By-Health and
Hongfuloi.
The following graphs represent the shelf area devoted to Real Nutris products as compared to other leading
brands. This data is based on the observations of the independent investigator during the September 2015
retail channel checks. In general, the investigator observed that the Ruinian branded products occupy far
less shelf space than other dietary supplement brands.
Shelf Area in Supermarket Stores: Other brands vs. Ruinian
Shelf 5.2
Area
in Supermarket Stores:
By-health*
x
Other
brands vs. Ruinian
Hongfuloi
3.4 x
6.0 x
Chueun
2.5 x
5.2 x
NBJ+GP
2.0 x
5.0 x
CPT
1.5 x
Ruinian
1.0 x
4.0 x
3.4 x
HPSON
3.0 x
2.5 x
2.0 x
2.0 x
1.5 x
1.0 x
1.0 x
By-health* Hongfuloi
Chueun
NBJ+GP
CPT
Ruinian
HPSON
*Except the calculation of normal shelf area here, By-health also has
exclusive brand shelves in most stores.
Source: Investigator site visits
25
Shelf Area in OTC Drug Stores: Other brands vs. Ruinian

Shelf Area in OTC
Drug Stores: Other brands vs.
By-health
27.4x
Ruinian
Chueun
3.2x
30
NBJ+GP
2.5x
27.4x
Hongfuloi
2.3x
25
Ruinian
1.0x
HPSON
1.0x
20
CPT
15
10
3.2x
2.5x
2.3x
1.0x
1.0x
0
By-health
Chueun
NBJ+GP
Hongfuloi
Ruinian
HPSON
CPT
Source: Investigator site visits
The investigator also noticed that in general, Ruinian-branded products received far poorer shelf placement
in supermarkets than its competitors. The following table, compiled based on observations by the
investigator at supermarkets visited, summarizes the observed shelf placement of Ruinian-branded products
relative to other leading brands.
Shelf Location Ratings: Supermarket Stores
Brand
Description
By-health
By-health usually covers all floors or middle area of a

shelf in most stores. It has exclusive brand shelves in
many supermarket chain stores.
In most stores, this brand covers all floors or the
middle area of a shelf.
It mostly covers all floors or middle and above middle
area of a shelf.
In most stores carrying this brand, it covers middle
area and below middle area of a shelf.
It usually covers below middle area or above middle
area of a shelf.
In most stores, Ruinian is placed on floors below
middle area, which is the worst shelf location.
NBJ+GP
Hongfuloi
CPT
Chueun
Ruinian
HPSON
Wasn't found in stores that we visited
Rating: Score 1
(very poor) - 5
5
5
4
3
2
1
n.a.
Source: Investigator site visit and analysis
Ultimately, the on-site channel checks present a small sample size by which to measure the Companys
retail footprint. But even this limited survey suggests that the Companys retail footprint is significantly
smaller than the Company claims, which supports other evidence presented in this report (such as the
Mofcom filings, tax lists, brand rankings and financial statement analytics) indicating that the Companys
sales are far smaller than it reports in its HKEX filings.
26
REPORTED SPENDING SIMPLY NOT CREDIBLE

A business that fabricates sales faces a tricky problem. Fake sales necessitate commensurate expenses.
Fake sales also produce fake profits, and such fabricated profits must be accounted for on the balance sheet
either in the form of a fabricated acquisitions, capital expenditures and/or fake cash balances.
In our opinion, a number of Real Nutris reported expenditures appear highly dubious and suggest that the
Company is straining to whitewash fake sales either through fabricated expenses, acquisitions, capital
expenditures or cash balances.
1) Advertising Expenses Simply Not Credible
Real Nutris reported advertising expenses are a fiscal black hole. The Companys spending is unusually
high on both an absolute and relative basis when compared to other nutritional supplement and health drink
companies. Yet the Company has comparatively little to show for such enormous expenses.
Real Nutri claimed that it spent RMB 320 million, RMB 348 million and RMB 346 million on advertising
expenses in 2014, 2013 and 2012, respectively, which amounted to 16%, 18% and 20% of the Companys
reported revenues in those years. In aggregate, Real Nutri claims to have spent a staggering RMB 1 billion
on advertising expenses over the last three years, an amount which would put it on par with Chinas
most famous brands and easily exceeds the advertising expenses of other, much more well-known, dietary
supplement brands.
To put Real Nutris absurd advertising expenses into context, if true, Real Nutri would be among the top
30 spenders on advertising of all Chinese companies listed on the Shanghai and Shenzhen exchanges:
Source: 2012 Advertising Expenditure Rankings

Not surprisingly, the biggest spenders on advertising in the list above are some of Chinas most well-known
brands: China Unicom, BYD and Yanjing Beer. By comparison, Real Nutri is a regional brand with a
presence in Eastern China. Is it credible that its reported advertising footprint matches some of Chinas
most popular national brands? We think not.
27
Similarly, Real Nutris reported advertising expenses easily dwarf some of the most well-known companies
in the dietary supplement and nutrition business. The following list, compiled by Chinas National Bureau
of Statistics, ranks PRC-based dietary supplement by brand awareness. By-health (; SZ: 300146)
is ranked #1 overall, and Tai Tai Pharmaceutical ( a.k.a. ; SH: 600380) is ranked #8.
Real Nutri is not even ranked.
Source: http://news.xinhuanet.com/yuqing/2015-03/11/c_127569515.htm
28
Even though Real Nutri is not ranked on the National Bureau of Statistics list of top dietary supplement
brands, it supposedly spends much more on advertising (on an absolute basis and as a percentage of
revenues) then its more well-known competitors.
As shown above, the top brands compiled by National Bureau of Statistics of PRC spend less than 10% of
the revenue on advertising. Real Nutri, a less well-known regional brand, claims to have spent 2x more
than By-Health, 17x more than Jia Da Onlly and 7x more than Tai Tai on advertising in 2014.
Such reported spending is simply not credible. Even though it spends less than half the amount of Real
Nutri on advertising, By-Health is a nationally recognized brand that has marshalled advertising campaigns
led by famous athletes such as Yao Ming.
By-Health Advertisement
Comparatively, what does Real Nutri have to show for RMB 1 billion in advertising expenses over the last
three years? Real Nutri spends much more than other dietary supplement brands, yet is comparatively
obscure and has little to show for such spending in the form of endorsements or brand awareness.
29
We do not believe that such reported expenses are credible, rather we believe that such expenses are a
convenient black hole on the Companys income statement to swallow some of its fabricated profits.
2) Questionable Capital Expenditures
Despite aggregate capital expenditures exceeding RMB 1.5 billion since 2011, the return on such spending
is so unquestionably abysmal that we believe its reported capital expenditures have been fabricated to mask
inflated sales and profits.
According to its public filings, Real Nutri has reportedly spent RMB 330 million, RMB 305 million, RMB
452 million and RMB 459 million on capital expenditure in 2011, 2012, 2013 and 2014, respectively. Such
capital expenditures are so significant that they account for 78%, 88%, 72% and 71% of the
Companys reported cash flows from operations during those years.
The returns on such spending have been dismal. From 2011 through 2014, the Companys aggregate capital
expenditures were RMB 1.5 billion, while revenue increased by only RMB 705 million during that four
year period. In other words, the Companys reported capital spending was double the increase in its
revenue over the last four years. Put simply, despite such massive expenditures, Real Nutri has little to
show for it.
The inefficacy of Real Nutris spending is obvious. Not only did aggregate capital expenditures exceed the
increase in revenue from 2011 through 2014, but its return on assets steadily deteriorated from 17% in 2011
to 9.8% in 2014. This is not the only indicator that Real Nutri is getting little in return for such massive
reported expenditures.
Real Nutris fixed asset turnover ratio, a measurement of the return on capital expenditures, steadily
declined from 2.17x in 2011 to an abysmal 1.06x in 2014. Compare Real Nutris returns to the fixed asset
turnover ratio of By-Health, which has steadily remained between 2.56x and 3.11x over the last four years.
By contrast, Real Nutris reported returns on its massive reported capital expenditures are so abysmal that
in our opinion, such spending appears obviously fabricated.
A detailed analysis of the Companys reported capital spending corroborates the previous public
accusations of fraud, and in our opinion, Real Nutris returns on its reported spending are so abysmal, on
both an absolute basis and relative to its peers such as By-Health, that the spending appears fabricated to
offset fabricated profits.
30
3) The Mystery of Advanced Technical Know-How

Since its IPO, Real Nutri has carried a mysterious and inexplicable line item on its balance sheet: advance
payments for acquisition of technical know-how. 5 This balance has increased from RMB 27 million
at the time of the Companys IPO to over RMB 100 million since 2011.
4F
Reported Advance Payments for Acquisition of Technical Know-how

RMB mm
2008
2009
2010
2011
Advance payments for acquisition of
27
66
175
technical knowhow
Increase (decrease) in Technical
27
39
109
knowhow
Source: Real Nutriceutical Public Filings
2012
2013
2014
162
156
112
(13)
(6)
(44)
Real Nutri gives little detail on the nature of this advanced know-how, but every year it states that it
expects to be granted a license by the PRC government which will enable the Company to complete the
acquisition. Each year, the expected date for obtaining the license keeps getting pushed back, all the while
the balance of advanced payments grows. Meanwhile, Real Nutri never tells investors from whom it is
purchasing such know-how or why exactly it is required to pay in advance for an unlicensed and
presumably unpatented process.
Source: Real Nutriceutical Prospectus p. I-37.
Source: Real Nutriceutical 2009 Annual Report, p. 81.
E.g., 2013 Annual Report, p. 84, 2014 Annual Report, p. 89.
31

We are highly suspicious of this reported balance sheet item. Real Nutri does not build rockets or make
electric cars. It makes dietary supplements. What possible advanced know-how could it be purchasing
which requires a RMB 100 million in deposits so many years in advance? Real Nutri is not purchasing
protected intellectual property, such as a patented formula. Nor is it purchasing a brand or product line.
Why does the Chinese government not license the technical process? Why does Real Nutri have to commit
capital today, for an unlicensed, presumably unpatented technique which has not come to fruition in six
years?
In our opinion, this balance sheet item appears simply fabricated, a sham category of expenditures designed
to mask fabricated profits.
32
4) Sham Acquisition
On 29 Jun 2014, Real Nutri announced the acquisition of 60% Magic Galaxy Worldwide Limited (Magic
Galaxy), 6 a PRC-based pharmaceutical company which produced eye drops, for an aggregate
consideration of RMB 200 million. 7 The Company implied to investors that the acquired business
generated a net profit of RMB ~35 million in 2014. 8 Publicly available government records indicate that
this acquisition was a sham.
5F
6F
7F
Mofcom filings show that Magic Galaxys only operating subsidiary, Anhui Province Shuangke
Pharmaceutical Company Limited (), generated a net loss in 2014 (and not a
RMB 35 million profit as claimed). 9
8F
Anhui Province Shuangke Pharmaceutical Co., Ltd.

Unit: RMB
Beginning Balance
Ending Balance
Current Assets
Non-current Assets
Current Liabilities
Non-current Liabilities
Retained Earnings
Source: 2014 Mofcom Filings Anhui Province Shuangke Pharmaceutical

In our opinion, the Mofcom filings provide conclusive evidence that the reported profitability of the
acquisition was fabricated. But there is more.
http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0721/LTN20140721143.pdf
8 ~RMB35m was estimated by the profit allocated to non-controlling interests in annual report 2014 P. 108. Because the
acquisition was held in mid-2014, the profit is aggregated by the formula: (RMB7m x 2)/0.4 = RMB35m.
9 Transfer pricing or offshore transaction arrangements cannot account for the missing profit because according to the Companys
annual report, the business is described sales and manufacturing of high end eye drop products in the PRC and had no offshore
operations. 2014 Annual Report, p. 102.
7
33
The Company claimed that the acquired target carried RMB 306 million in intangible assets on its balance
sheet, RMB 267 million of which was recorded as a PRC patent associated with the production and
manufacture of eye-drops.
Source: 2014 Annual Report, p. 102
Source: 2014 Annual Report, p. 88

34
Mofcom filings of the acquired operating subsidiary show non-current assets at FYE 2014 of only RMB 14
million. This is substantially less than the RMB 306 million in intangible assets that the Company told
investors it was acquiring when it purchased Magic Galaxy.
We believe that this was simply a sham acquisition, designed either to conceal fabricated profits or perhaps
funnel money out of the public company for the secret benefit of insiders. Filings suggest that rather than
purchase a business which generated a RMB 35 million profit, Real Nutri spent RMB 200 million to buy a
money-losing eye drop producer with negligible intangible assets.
It is also highly likely, in our opinion, that, if do not alert the market, Real Nutri will soon announce the
acquisition of the remaining 40% of Magic Galaxy at what we believe to be a massively inflated price.
35
RETAIL SALES DATA INDICATES FABRICATED REPORTED SALES

CMH is a leading independent market research firm, specializing in the healthcare sector. CMH employs
a monitoring system to track the sales of drugs and nutritional supplements to consumers in China and
compiles the data into annual rankings of the best-selling nutritional supplements and products.
The CMH rankings compile data for sales at pharmacies and drug stores throughout China. Based on
conversations with industry experts, we estimate that at least 25-30% of Real Nutris sales are through
pharmacies and drug stores, yet it fails to appear on the CMH rankings.
1) Real Nutris Sales a Fraction of By-Healths
CMH compiled a ranking of the top 20 best-selling healthcare and nutritional supplements in 2013. None
of Real Nutris products, including its supposedly popular amino-acid based supplements, appear on
CMHs rankings.
By contrast, By-Health (SHZ: 300146), which reported total sales in 2013 of only RMB 1.5 billion
(compared to Real Nutris reported RMB 1.9 million in sales that year), has seven nutritional products
on CMHs lists (ranked 1, 2, 6, 7, 11, 15 and 19).
Source: 2013 CMH Supplement Sales Rankings

CMH reports that the cumulative retail value of sales of By-Healths top seven products was RMB 2.6
billion in 2013. By-Healths reported revenue was RMB 1.5 billion, because like Real Nutri, it sells through
a network of third-party distributors who mark up the manufacturing price to the retail price.
To put the CMH data in perspective, By-Health reported RMB 1.5 billion in total sales in 2013, 22% less
than Real Nutri. Yet CMH reported that seven of By-Health products made the top twenty list, compared
to zero from Real Nutri.
36
Reported Revenue Comparison

RMB mm
Real Nutriceutical
By-health
Reported By-health Sales less then Real Nutri
Source: Companies' Public Filings
2012
1,755
1,067
-39%
2013
1,903
1,482
-22%
2014
2,062
1,705
-17%
The ubiquity of By-Healths products on the CMH health product rankings contrasts with the stark absence
of any of Real Nutris products, corroborating the rest of the evidence in this report that Real Nutri is
massively exaggerating its reported sales.
2) CMH Rankings Indicate Sales of Flagship Product Less than RMB 100mm in 2013
CMH reported that the 20th ranked product on its 2013 list had RMB 216 million in total retail sales in
2013. According to the Companys prospectus and annual reports, Real Nutris reported sales from its
flagship product should have significantly exceeded this amount. For the nine months ended September
30, 2009, Real Nutri reported that sales of its Ruinian-branded amino acid-based tablets were RMB 193
million.
Source: Company Prospectus P.218.

Real Nutri has told investors that except for a small drop in 2012, sales of its flagship amino acid-based
tablets increased every year since the IPO.
Source: Company 2009 Annual Report, p. 8.
37

Assuming that sales of Real Nutris flagship product, Ruinian-branded amino acid-based tablets, has grown
at par with the Companys health and nutritional supplement segment since the IPO (a conservative
assumption), expected total sales of its flagship product should have exceeded RMB 542 million in 2013.
Assuming that drug stores and pharmacies account for 25% of its total sales, we estimate that its flagship
product should have generated at least RMB 135 million in sales for the Company through this channel.
But remember that the CMH rankings are based on retail sales, which includes roughly a 1.5x mark-up
from the manufacturing price. Real Nutri primarily sells its products through third party distributors,
meaning its reported sales represent the manufacturing price of its products.
If we estimate that sales of its flagship product generated RMB 135 million in revenues for the Company
in 2013, then we calculate that the retail sales of the flagship product through pharmacies and drug stores
should have been at least RMB 339 million.
Yet CMHs rankings indicate that sales for Real Nutris flagship product do not exceed RMB 216 million
in retail sales at pharmacies and drug stores, implying that the Company has likely exaggerated sales of its
flagship product.
38
Estimated Revenue from Flagship Product of Ruinian-branded

Amino Acid Tablet
RMB mm
2009
2010
2011
2012
2013
Growth %
n/a
44.7%
30.3%
2.2%
9.3%
Estimated revenue
257
372
485
496
542
Source: Real Nutriceutical Public Filings
By our estimation, the CMH sales data indicates that reported sales of Real Nutris flagship product are
exaggerated by at least 57% (likely much, much more), which corroborates the wealth of evidence
presented in this reported supporting the same conclusion.
39
REAL NUTRIS SUPPOSED EFFICIENCY ALMOST IMPOSSIBLE

Real Nutri reported RMB 2.17 million of revenue per employee in 2014, which significantly exceeds the
revenues-per-employee reported by its peers, including By-Health (RMB 0.85 million per employee), Jiao
Da Onlly (0.54 million per employee) and Tai Tai (RMB 0.87 million per employee).
Reported Revenue per Employee - FY2014
RMB mm
Reported Revenue
No. of employees
Rev. per employee
Real Nutri reported productivity above comps
Source: Companies' Public Filings
Real Nutri
2,062
950
2.17
n/a
By-health Jiao Da Onlly

1,705
388
2,017
718
0.85
0.54
2.6x
4.0x
Tai Tai
7,418
8,534
0.87
2.5x
In our experience, when management teams exaggerate sales and growth numbers, they often forget to give
a commensurate boost to other operational metrics such as employee headcount. Thus, productivity ratios
and other efficiency ratios that significantly deviate from the industry standard are often red flags when
accompanied by suspiciously amazing financial performance. Indeed, this was a key clue in our
investigation revealing that China Metal Recycling (CMR) was fabricated its reported financials.
Like CMR, which was halted and liquidated subsequent to a Glaucus report, we believe that Real Nutri
simply forgot to increase its headcount when it inflated its sales figures, as there is no feasible way that
Real Nutri can produce nutritional products four to five times more efficiently than its nearest competitors.
Ultimately, Real Nutris reported productivity is an outlier and further evidence that its financials are
fabricated.
40
INEXPLICABLE SHORT TERM BORROWINGS

Real Nutri has historically claimed a large cash balance, exceeding RMB 1.3 billion in each of the last three
FYs (2012-2014). Despite excessive cash reserves, the Company has also reportedly taken short term loans
of RMB 195 million, RMB 435 million and RMB 884 million, at an implied interest rate of 12.0%, 5.9%
and 4.2% in 2012, 2013 and 2014, respectively.
Why would a Company with such a healthy cash balance take out short term loans, especially at interest
rates far exceeding the rate received for the Companys existing bank balances? We suspect that the
Companys reported cash reserves, like its reported revenues and profits, are significantly overstated, which
explains why Real Nutri needs to engage in short term borrowing a higher interest rates to make up the
short-fall and fund its continuing operations.
41
NEGATIVE FREE CASH FLOW & THE ILLUSION OF DIVIDENDS

We believe that Real Nutri has successfully deflected at least some of the markets suspicion regarding its
financial performance by consistently paying dividends. Indeed, since its IPO, Real Nutri has declared
~RMB 296 million in dividends to shareholders. But a closer look at Real Nutris financials reveal that
such dividends are not paid out of money generated by the business, but from the proceeds of capital raised
from debt and equity holders.
Since 2010, the Company has raised RMB 2 billion in proceeds from the capital markets, of which it has
declared a dividend of roughly RMB 296 million (~13% of capital raised).
The Company consistently generates EBITDA margins of 40-45% and net income margins of 24-30%.
Despite such purported profitability, Real Nutri is still a serial capital raiser, because its cash flows used
in investing (in dubious capital expenditures and acquisitions of questionable authenticity) typically
exceeds reported cash flows from operations. This trend looks set to continue. On October 6, 2015, Real
Nutri announced a HKD $325 million rights issuance, supposedly to fund the proposed acquisition of a
chain of retail drug stores in the PRC.
42
Like CMED and CMR, despite supposedly generating consistent and world-beating profit margins, Real
Nutri is forced to return to the capital markets to raise funds. In our experience, this is a tell-tale sign of
fabricated financial statements.
Real Nutri has so far distributed to investors only 13% of fund raised from the capital markets. Such
dividends are not financed by Real Nutris operating business, and without continuing access to outside
sources of financing, it will be unable to pay them going forward.
43
CHINESE SOE QUIETLY CASHED OUT AT A LOSS

In May 2013, Newport Consulting Limited (Newport) subscribed to RMB 200 million of convertible
bonds issued by the Company. 10 As of October 2014, Newport became a subsidiary of China Shipbuilding,
a PRC-based state owned enterprise (SOE).
9F
Newport subscribed to the first tranche of convertible bonds with the option to subscribe for a second
tranche of bonds, worth RMB 400 million. The long stop date for subscription to the second tranche was
January 22, 2015. China Shipbuilding opted not to exercise its option to acquire the second tranche of
bonds. This is the first red flag, as the Chinese SOE opted not to increase its investment in the Company.
Then, on July 10, 2015, Real Nutri announced that it received a notice from Newport to convert all of its
RMB 200 million worth of convertible bonds to 66.67 million shares (4.33% after dilution) of the Company
at strike price of HK$3.00. 11 Three days prior to the date of the notice, Real Nutris stock traded below
HKD 2.00 and closed at HKD 2.00 on July 10, 2015 (the notice date).
10F
This decision is simply inexplicable unless the SOE desperately wanted to get out of its investment. As a
logical and professional investor, given that Real Nutris stock had been trading below HK$3.00 since June
5, 2015, with average daily volume of 21.6 million shares in June 2015, it makes no sense to convert the
bonds at a 50% premium to the last traded price. In exchange, the SOE could have accumulated the same
number of shares in 3-4 trading days.
The SOEs decision to convert its bonds at HKD 3.00, when Real Nutris stock traded below or at HKD
2.00, resulted in a substantial realized loss. The only reason why an investor would take such a loss is to
get out of its investment in Real Nutri, which is exactly what the SOE did.
Upon conversion, Newport transferred the converted shares (66.67 million) to a nominee, who was
described as an independent third party. In other words, following the conversion, China Shipbuilding,
through Newport, fully exited its position as a shareholder of Real Nutri.
The Company has attempted to spin the conversion as a positive development, but the only way to explain
the SOEs decision to realize a loss by converting at a price well above the trading price is that the SOE
wanted to quickly get out of its position, something it accomplished upon conversion. Investors should be
wary.
10
11
44
VALUATION
We think the most appropriate comparison to Real Nutri is CMED, the US-listed company which defrauded
investors and creditors by fabricating its reported financial performance. When we alerted the market to
CMEDs malfeasance, CMEDs management went dark and absconded with the assets, leaving
shareholders and creditors almost nothing to recover.
In this report, we presented a wealth of publicly available evidence to support our opinion that Real Nutris
sales are 84% less than reported and net income is 99% less than reported to investors and regulators
in the Companys Hong Kong filings.
Given the credible accusations in the local media regarding exaggerated capital expenditures, we also doubt
the reported value of Real Nutris property, plant and equipment. We also believe that the Company has
inflated the value of assets such as its cash balance. After all, if a company is booking fake sales, such
receipts must be accounted for on the balance sheet.
Despite a purportedly healthy cash balance, Real Nutri has inexplicably taken on short-term debt of RMB
884 million, which would be senior to any shareholder recovery.
Given the limited offshore assets available for seizure and the difficulty recovering onshore assets (property
and equipment) under Chinas byzantine judicial system, our price target on its HKEX-listed shares is HKD
0.00.
45
DISCLAIMER
We are short sellers. We are biased. So are long investors. So is Real Nutri. So are the banks that raised money for the
Company. If you are invested (either long or short) in Real Nutri, so are you. Just because we are biased does not mean that
we are wrong. We, like everyone else, are entitled to our opinions and to the right to express such opinions in a public forum.
We believe that the publication of our opinions about the public companies we research is in the public interest.
You are reading a short-biased opinion piece. Obviously, we will make money if the price of Real Nutri stock declines. This
report and all statements contained herein are the opinion of Glaucus Research Group California, LLC, and are not
statements of fact. Our opinions are held in good faith, and we have based them upon publicly available evidence, which we
set out in our research report to support our opinions. We conducted research and analysis based on public information in
a manner that 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 or that we relied on to write this report. Think critically about our report and do your own
homework before making any investment decisions. We are prepared to support everything we say, if necessary, in a court
of law.
As of the publication date of this report, Glaucus Research Group California, LLC (a California limited liability company)
(possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our clients
and/or investors has a direct or indirect short position in the stock (and/or options) of the company covered herein, and
therefore stands to realize significant gains in the event that the price of Real Nutris stock declines. Use Glaucus Research
Group California, LLCs research at your own risk. You should do your own research and due diligence before making any
investment decision with respect to the securities covered herein. The opinions expressed in this report are not investment
advice nor should they be construed as investment advice or any recommendation of any kind.
Following publication of this report, we intend to continue transacting in the securities covered therein, and we may be
long, short, or neutral at any time hereafter regardless of our initial opinion. This is not an offer to sell or a solicitation of
an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer
would be unlawful under the securities laws of such jurisdiction. To the best of our ability and belief, all information
contained herein 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 covered herein or who may otherwise owe any fiduciary duty or
duty of confidentiality to the issuer. As is evident by the contents of our research and analysis, we expend considerable time
and attention in an 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, however,
all such information is presented as is, without warranty of any kind whether express or implied.
If you are in the United Kingdom, you confirm that you are subscribing and/or accessing Glaucus Research Group
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Order 2005 (the FPO); or (B) an investment professional (e.g., a financial institution, government or local authority, or
international organization) falling within Article 19 of the FPO.
Glaucus Research Group California, LLC makes no representation, express or implied, as to the accuracy, timeliness, or
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46

Glaucus Research Real Nutri HK 2010 Strong Sell Oct 21 2015

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Glaucus Research Real Nutri HK 2010 Strong Sell Oct 21 2015

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May you live in interesting times.

COMPANY: Real Nutriceutical Group Limited HK: 2010

Real Nutriceutical Group Limited HK: 2010

Real Nutriceutical Group Limited HK: 2010

Real Nutriceutical Group Limited HK: 2010

PRC GOVERNMENT FILINGS INDICATE REVENUES 84% LESS THAN REPORTED

Real Nutriceutical Group Limited HK: 2010

Ruinian Industry Revenues: Mofcom Financials vs. Reported

Source: Ruinian Industry Mofcom Filings; Real Nutri Annual Reports

Source: 2013 Mofcom Filings Ruinian Industry

Real Nutriceutical Group Limited HK: 2010

Source: 2012 Mofcom Filings Ruinian Industry

Ruinian Industry Operating Profit: Mofcom Financials vs. Reported

Source: Ruinian Industry Mofcom Filings; Real Nutri Annual Reports

Real Nutriceutical Group Limited HK: 2010

Source: Wuxi Biotech Mofcom Filings; Real Nutri Annual Reports

Source: 2013 Mofcom Filings Wuxi Biotech

Real Nutriceutical Group Limited HK: 2010

Source: 2012 Mofcom Filings Wuxi Biotech

Estimated Operating Profit

Source: Wuxi Biotech Mofcom Filings; Real Nutri Annual Reports

Real Nutriceutical Group Limited HK: 2010

Estimated Operating Profit

Real Nutriceutical Group Limited HK: 2010

TAX RANKINGS INDICATE NET INCOME A FRACTION OF REPORTED FIGURES

Health and nutritional supplements

Segment Results (Gross Profit)

Source: Real Nutriceutical Public Filings; Glaucus Calculation

Company Prospectus, p. 81; V-5, I-2; 2014 Annual Report, p. 106.

Real Nutriceutical Group Limited HK: 2010

Real Nutriceutical Group Limited HK: 2010

WE MEET AGAIN, MR. POON

Source: 2010 Annual report, p. 27.

Source: 2012 Annual report, p. 29.

Real Nutriceutical Group Limited HK: 2010

CUSTOMERS ARE UNDISCLOSED RELATED PARTIES

Source: Real Nutriceutical Propectus, p. 147

Real Nutriceutical Group Limited HK: 2010

Real Nutriceutical Group Limited HK: 2010

Real Nutriceutical Group Limited HK: 2010

Real Nutriceutical Group Limited HK: 2010

ON SITE DUE DILIGENCE CONFIRMS EXAGERRATED RETAIL PRESENCE

No. of stores No. of Stores

Real Nutri Retail Stores

Source: Investigator Photo September 2015

2014 Annual Report, p. 6.

Real Nutriceutical Group Limited HK: 2010

Source: Investigator Photo September 2015

Source: Investigator Photo September 2015

Real Nutriceutical Group Limited HK: 2010

Source: Investigator Photo September 2015

Real Nutriceutical Group Limited HK: 2010

Status of Ruinian claimed distributors carrying Ruinian products

Total claimed distributors visited

Source: Independent Investigater Report

Source: Investigator Photo September 2015

Real Nutriceutical Group Limited HK: 2010

Tai Tai Pharm

Source: Investigator Photo September 2015

Real Nutriceutical Group Limited HK: 2010

Source: Investigator Photo September 2015

Real Nutriceutical Group Limited HK: 2010

Source: Investigator Photo September 2015

Source: Investigator Photo September 2015